17 Jul 2015, 10:21pm
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  • Windfall for tourists as Carney trails interest rate rise

    The Grauniad tells us it’s a good time to be a British tourist, all thanks to that Carney chap trailing an interest rate rise. I can’t help feeling that empty promises of  rising interest rates are just like a lasting solution to the Greek predicament, this is a movie that we’ve seen before and will see again – announcement of interest rate rise only to welch on the deal when push comes to shove. But a lot of people seem to buy it. Or perhaps they’re pissed off with the Grexit shenaigans. Either way, we’re back in 2007 again in relative terms to the Euro, though we are all still flat on our financial backs with stars going round in front of our eyes. And that’s before you even think of Greece.

    1507_eurogbpNow an Ermine could take the opportunity to hit Eurotunnel, duel with the myriad desperados and striking Frenchmen, and join the massed ranks of British wage slaves on their annual family two weeks in the sun, or I could think to myself maybe I’ll pass on that. I’ve always avoided school holidays for travelling anywhere because it’s damned hot and the price goes up and, well l’enfer c’est les autres avec leur fractious rugrats on public transport in the heat of summer. After 30 years of avoiding this sort of fun I’m not about to start now.

    Nevertheless, perhaps I could take some of my ISA for a summer holiday. Last year I was a forced seller and sold IDJV 1 for about £16 because it had fallen to what I had paid for it. It was unwrapped, I’d already maxed my CGT allowance so I couldn’t sell any of the rest of my holdings at a profit even though I needed the cash, hence I had to borrow some. Now it’s still a bit higher than that at £16.91, so I’ve told TD to let me know if it falls to a bit below what I sold at, because then I can effectively bed and ISA this over six months.

    All sorts of other foreign stuff will get cheaper. Now the other side of the coin is that all the foreign stuff that I already own will go down the toilet a bit. As it is this isn’t a hugge issue for me as I am hopelessly unbalanced worldwide

    Ermine total equity distribution

    Ermine total equity distribution

    because my HYP is the largest lump and it’s UK biased. Index True Believers would sell off half of that and pump up that devxUK and EM. I’m okay with buying EM and have done some of that already, and it bleeds now of course 😉 I’m not touching the US at current valuations but I would quite like to see some of that IDJV, in my ISA this time thanks very much. I’m not in a great hurry – 1550 would do me well. I should probably knock it off on the EM and lift some bombed out dev world. The problem is that as the ISA gets larger the annual steering wheel of new contributions gets smaller compared to the overall size. Since I don’t sell and I bought a lot of the HYP in the bombed out years of 2009 to 2011 I’m going to have a hard time balancing this out a bit. But a high pound and a low Euro helps…

    So you can keep your sea, sun and sand. I’ll get my summertime kicks on the market, particularly if the Greeks go and scare the horses a bit more. I like hot lazy summers of snarl in the markets.

    Notes:

    1. IDJV is basically Eurozone big fish.
    15 Jul 2015, 11:00am
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  • UK government pensions consultation

    I shouldn’t think there’s anyone reading this who doesn’t read Monevator, but there’s apparently a consultation on about UK pensions. Props to The Accumulator for trying to sift the mutually contradictory desiderata in the comments thread into a narrative suitable for Her Majesty’s Government, who will probably file the results in the round filing cabinet on the floor.

    Nobody actually does a consultation to find anything out, they do it to put a veneer of faux democracy on the decision they are going to take anyway. Most of the motivated commenters are richer though not necessarily wealthier than I am 1, so the issue of the life time average and the annual contribution limits exercise many. I would have been sore about the annual limits as set now but I didn’t have £225,000 handy to put into a pension when I was going for it so I was okay. This isn’t my problem any more, because once I am 55 I won’t have space to avoid paying tax on pensions, so more pension saving isn’t useful to me. In the unlikely event that I decide to become a wage slave/productive member of society again I’ll just have to suck it up and pay tax, as my personal allowance will already be eaten up by existing income. Which is obviously a disincentive to putting my shoulder to the wheel of raising Britain’s dreadful productivity, though I will show later that it appears the Government has already decided I am over the hill in contributing to STEM activities, so it’ll be making knick-knacks on Etsy for me then. Bollocks to that, Iain Duncan-Smith. That’s the joy of financial independence – being able to issue that command.

    I paid less tax in my last three years by using pension saving than probably at any time throughout my working life even though I was in theory a 40% taxpayer. Yes it would be nice if I could save more than £3600 p.a. into a pension now and get back the tax, but so what.

    The straws in the wind are that the Government want to do for the 40% and up tax relief on pensions, perhaps making it about 33% for everyone, because the people they want to incentivise are basic rate taxpayers, higher rate taxpayers are rich enough to sort themselves out. It’s worth observing that a basic rate taxpayer can get 32% tax beneift if you can save into a pension by salary sacrifice, because the contribution comes off your pay before NI and tax are charged. But that’s for some future budget. Let’s just say that I am not yet putting my £3600 into a pension because if I can get 33% rather than 20% relief it will cost me £2400 rather than £2880. It’s not a huge amount of difference but it’s worth waiting till March 2016 for.

    The overall feeling seem to be that the well off and the rich have been making hay on the pensions front and this will get screwed down. In some ways pensions are an odd incentive – the government is encouraging people like me to leave the workforce early, some 8 years (relative to The Firm’s NRA) to 15 years (relative to my State Pension Age), while at the same time hollering that the country is short of scientists and engineers. I am tickled by the casual ageism of the Government’s report on High Level STEM Skills – supply and demand

    However, it is the inflow of new STEM graduates that is more likely to help ensure workers have knowledge of the latest science and technology – retaining older individuals does not do this.

    That’s the trouble with those old dogs – you just can’t teach ’em new tricks 😉 Bless. What they are saying is that we need young scientists and engineers – the Zuckerberg doctrine at work.

    away with ye - dead wood in the white heat of technology

    away with ye – weed out dead wood in the white heat of technology

    I have heard the theory that while the artistic side of CP Snow’s Two Cultures deepens and matures with age Zuckerberg may have a point in technology that young people are just smarter –  it seems echoed at GOV.UK 😉  I also observe that companies can’t be bothered to train young people in their specialisms these days – to wit:

    A representative of one of the major engineering companies noted, “For mechanical engineering, I would agree [there is no shortage]. However, for electrical / electronics, there are simply not enough graduates with the right degree and employers are trying to recruit from a small pool of those with the right degree content (i.e. higher-voltage direct current is a pre-requisite for the transmission and distribution industry: there the supply of graduates is inadequate)”.

    You, Mr Representative, are the problem, because of the fecklessness of your company. When I joined the BBC, with their specialism of colour TV, they damn well trained their graduate entry for a few weeks into the intricacies of the subject at their training facility in Wood Norton. You go to university to learn how to learn, and grasp the high-level aspects of your chosen field. Exactly what part of investing in people does this damn company not understand?

    The upshot seems to be that the Government wants to spend less on pensions tax relief, and in particular less on pensions tax relief for the well-heeled. This was also a theme of the Coalition government before this one. The Tories clearly have the interests of old money at heart with their fondness for inherited wealth and the iniquity that goes with that encouraged in the Summer Budget, but they are perhaps less fond of the nouveaux riche and their tax avoidance through the pension system. Hence the double targeting of the lifetime allowance, aiming to limit tax-advantaged pension income to about £40k (SWR of 4% on a lifetime allowance that seems to be trending towards £1,000,000, currently £1,250,000) and limiting the annual contribution rate to £40,000. The combination seems a bit rough – elementary arithmetic shows a young pup in the finance industry could just about make it, if he gets his running shoes on and saves the full £40k every year from graduating at 21 to becoming a greybeard at 52 (how many 52-year olds are there in finance?) but he better not want to buy a house, he needs to be prepared to eat ramen in those first few years and not inflate his lifestyle. In practice it’s not quite as bad as that, compound interest typically doubles the real value of savings over a 40-year working life, but it’s not going to be easy to reach the lifetime allowance with the annual allowance.

    I don’t understand the double whammy. There’s a case to be made for the lifetime allowance – there’s no need to tax-favour pension incomes of more than twice the median wage, but I don’t really see the point of the annual allowance limitation. And I certainly don’t agree with having both limits in place – one of the other seems okay. People’s careers vary much more than they used to, and the lifetime allowance sets a target of saying ‘this much income can be saved tax-advantaged, no more’. The annual allowance arbitrarily limits the capacity of the feckless Johnny-come-latelys to fix their pension savings in their forties and fifties – not everybody is a Steady Eddie on this.

    Notes:

    1. you are rich by the size of your wad and/or income. You are wealthy by how much of your income is committed/how many years your wad will maintain your lifestyle – open-ended for the financially independent. There is correlation but not necessarily causation between the two, because of the astronomical variation in lifestyle costs

    China doesn’t really seem to get this stock market thing

    While our eyes are focused on the slow train crash that is Grexit, over on the other side of the world there is an interesting example of King Canute seeking to hold back the waves. In China they seem to be of the opinion that their overheated stock market, having gained over 100% in the last year, is supposed to stay there. If you’re one of those capitalist running-dogs that is going against the story looking to sell, well, you can stop what you’re doing right there. Hardened Western investors who went through the dot-com boom might ask themselves what the good reasons were for last year’s 100% heft in a generalised index 1

    from Bloomberg

    Shanghai Composite Index from Bloomberg

    So they stopped people with a 5% or more stake selling, and the government lends money to people to buy shares :) There’s something about the point of this whole stock market thing that is being missed here. The Chinese stock market is also a young market, it seems compared to other world markets there are a lot of retail investors buying shares on margin – what on earth could go wrong? This is classic New York 1929 bucket-shop trading. Maybe in a few decades they will  become sober index fund passive investors, but first they have to get the momentum-chasing speculator out of their systems.

    China’s investing culture remains backward and immature.

    Howard Gold

    Markets elsewhere have been on a roll of a long time, and while Grexit is unlikely to hurt too much outside Greece this one could be the second shoe dropping. There seems to be a lot of ruin in China as it tries to reorient itself from its early 2000s economic model to something that matches the post Lehman-crash world. There’s a lot of ruin in most economies, and it doesn’t necessarily lead to trouble, but by its sheer size China could have big knock-on effects.

    Better to be a dog in a peaceful time, than to be a man in a chaotic period 2

    There haven’t been tremendous buying opportunities in the markets for two or three years now. But interesting times lead to interesting opportunities. There’s still too much zombie puffery inflated by easy money after the 2007 crisis. Emerging markets are probably where it’s at in 20 years’ time, and perhaps we will have more opportunities to pick ’em up cheap in the next few years if this sucker goes down. Of course, associated with that will be all sorts of other misery. I’m not doing a Dubya and saying ‘bring ’em on‘. China has big challenges ahead with the whole get rich before getting old thing, and I personally have avoided investing in it 3 because I have no feel at all for the country – my preferences in emerging markets lean towards India, Latin America and Africa from a demographic point of view. Howard Gold is quite right to describe EMs as having gone down the toilet, but I’ll be surprised if they stay there for the ten years he is calling out. I don’t have enough EM exposure, because in the years after 2009 I was building a HYP. And I don’t want to be a dog…

    Notes:

    1. this question being, of course, the one they failed to ask themselves in 1999 – ain’t experience and hindsight a wonderful thing?
    2. May you live in interesting times is a good line, but not Chinese, so it’s not right to to use it for China ;)
    3. other than in generalised index funds

    Don’t be in thrall to Total Return

    Poor old Greybeard over at Monevator has stuck his head above the parapet again saying he will use actively managed investment trusts to smooth his retirement income and make it easier to manage. Meanwhile Insourcelife has paid down his mortgage in his late 30s, some ten years earlier in his life cycle than I paid down mine in my late forties. 1. Paying off a mortgage early is an opportunity costThe Accumulator sensibly decided to invest instead. Here are two people giving up some Total Return, OMG, that’s nuts!!!

    The world of personal finance seems to be moving towards an intellectual materialist rationalism that favours Total Return over all else 2. Now if you are a 20-something with 35 plus years before you can get a hold of your pension savings then yes, I agree TR is what it’s all about in those pension savings taken in isolation. If you are a retiree who wants to featherbed your adult children because you think the robots are coming to take way their middle class jobs then TR is important too, because although you can’t take it with you they will and a little bit of you will live on, enabling you to do the whole terror management theory thing of living beyond death. Beats having your head frozen, I guess.

    The trouble is that life is a balance, and often maximising one aspect above all else has undesirable consequences. Money is crystallised power, a claim upon future work. You can prioritise one aspect of it like total return, but then you will have to deal with being exposed to massive volatility. It’s easy to sit back at 30 and say I’m cool with that but you need to have gone through a couple of stock market crashes to know if you are cool with that really. Maximising TR means you should run towards that sort of fire :)

    The Ermine is not a Total-Return maximising rationalist

    I have done some dumb things in personal finance. I retired 8 years early – the gross money I would have earned in the remaining eight years probably roughly equals my total networth 3. Oh no – hundreds of thousands of pounds kissed goodbye to-  how crazy is that? Well, I don’t know – the world of work was driving me round the bend with it’s stupid metrics and micromanagement – I am ERE craftsman, not gamesman. The view is a hell of a lot better, too:

    giving up a six-figure sum to see this

    giving up a six-figure sum to see this

    or this

    or this

    instead of this

    instead of this – hell yeah.

    I paid my mortgage off early – even at the time I knew this was a teeny bit irrational, and took a whole year with it dropped down to to about £1000 4 mulling over whether I should pay it off. Then I did, and although every so often I observe that I take an income suckout between leaving work and getting hold of my pension savings, faced with the same I’d do it again, because at that time I wanted peace of mind that if I got iced from work I could lock down and make it through.

    There’s a time to maximise your total return, and that’s probably when you’re young, because you aren’t usually putting much in. But as you go through life, beware of black-and-white thinking. Sometimes you have to consider throwing some red meat to The System and giving up some total return, particularly after you have retired, because it is about the ride, not just the money. Otherwise we are in the danger of becoming that “man who knows the price of everything and the value of nothing” Oscar Wilde warned of in Lady Windermere’s Fan.

    I’ve given up a very decent six-figure sum, pasting my potential Total Return by about 50 to 25%. I  did it because it is more important to live to see another few decades with health intact, and sometimes you have to take chances in life. It is nearly three years since I left work, and would I do it again if I had my time over? Hell yeah – because the aim of the game is to maximise Total Life Experience, not total return. It’s a balance thing, not a single variable.

    For sure, I’m poorer for it in money, but I am richer for it in Life. Money is not the only thing you can run out of…

    The Escape Artist put it this way

    Why behave as if this one life we get is just a dress rehearsal?  If you are one of those people and you carry on working in your all consuming City or Corporate job, then you are wasting your life.

    If maximising total return is stressing you out in retirement as you see your capital eroded which is reminding you of the Grim Reaper’s call then give up some total return. Use investment trusts, have a plan to annuitise at some stage/stages, give up the fight slowly for an easier ride.

     

    Notes:

    1. Insourcelife is American so paying off a mortgage may be an easier ask as houses are less expensive relative to wages I believe, certainly from looking at US real estate windows on a business trip in 2007 where I could have easily bought a house cash, but impressively Insourcelife has done this with children which probably more than offsets the difference!
    2. I’m projecting some of my own prejudice here, but passive investing is still a belief system IMO. Any belief system has axioms, and I am uncomfortable with some of them, in particular the ‘valuations don’t matter’ one. My perspective is different, however – I don’t have 30 years of investing without extracting returns ahead of me like a young Boglehead starting out would have
    3. the opportunity cost is in fact a fair bit lower, I was a HR taxpayer and couldn’t have extracted anywhere near the gross amount because of limitations on pension contributions introduced since I retired.
    4. it was a flexible mortgage so I could have ramped it back up at will up to the original repayment track
    24 Jun 2015, 3:16pm
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  • Passive income from ebook writing isn’t passive – reflections from Avalon

    Funny old game, this passive income lark. I personally define it as income that you get regardless of what you are doing. The classic dream is steady income paid while you are lying on the beach. Wikipedia defines it in somewhat US-centric terms as

    Passive income is an income received on a regular basis, with little effort required to maintain it

    I spent a few days soaking up the sun in the atmosphere of Glastonbury, enjoying a chilled time and exploring the place.I came just before the well-known festival, to appreciate the summer solstice – the closest I have come to the festival was a distant view of it 7 miles from Glastonbury Tor.

    1506_tor_P1070296

    Unlike the festival-goers I had decent weather. I was looking for some of the background story, bought some books, but I have a predilection for books in electronic form these days. Following up the Glastonbury connection, passive income is the Holy Grail of the idler, and there are an awful lot of Knights of the Round Table chasing it. It’s bad enough that people who have at least earned the money first behave like teenagers in love:

    People looking for investment income home in on bad ideas like Premier League footballers sniffing out WAGs with loose morals.

    Dunno what he’d say about the wretched river of humanity out of Eden seeking the Free Lunch without Consequences, but the old boy Mephistopheles is in business in different garb offering Passive Income to the penniless, the poor, and the pecuniarly challenged.

    Sometimes I wonder if these good people would use their time better getting a job and saving some of their hard-earned, but then I think that any time I stand in line behind somebody buying a lottery ticket in the Co-Op. There is something irresistible about the concept of something for nothing. It’s been there since time immemorial in the search for the Philosopher’s Stone 1 that turns lead into gold. The story metamorphosed into the search for the perpetual motion machine in the Victorian era, and turns full circle in the search for a passive income, that turns the leaden hours of the idle into a stream of gold. I’m hassling the Calvinist work is good for you doctrine there – I for one don’t find the workless hours leaden and indeed I would regard humanity’s development of robots to do all the work leaving us to a life of leisure the pinnacle of engineering success, if only we could build a human society that didn’t start to look like a winner-takes-all Gilded Age which seems to be where we are headed at the moment.

    The ebook proposition – wresting the medium and the message away from Facebook. Into Amazon – oh boy…

    One of the tragic things about the Internet is that the original open platform has been taken over by corporations like Facebook, Google and Amazon , who drove out the universality of the end-to-end principle because we readers are idle, want a uniformish UI, and are suckers for attention-grabbing trivia that the platform can monetise the shit out of. In Web 1.0 ISPs tried and failed to hold customers on their ‘portal’ to save you the graft of looking for interesting stuff, but now we hire Facebook and Google to do that very job. Once upon a time it was possible to get a copy of vi, grok some HTML, create a website with useful information, serve some ads and make a modest income. I still have some website real estates from the 1990s that even after 20 years do provide a modest income this way but the trend is long-term decline. Some of this is, of course, that the topics age – let’s face it what was newsworthy/interesting in 1995 is often less riveting twenty years later on, the effort to maintain some of these with other people dropped away around ten years ago. One of the sites performs a technical service which still seems to have some fans judging by the pleading to fix I get if my web hosts changes the version of PHP and it goes titsup, it seems to have got embedded into the processes of some communities. I even tell them they can get the facility easier and more prettily using OS getamap but they don’t switch 2. It provides enough revenue to be worth Googling the error code and fixing the code or third-party library to keep people happy.

    It’s harder to establish a modest website on a topic now – the Internet is much larger but there are also winner-takes-all effects that raise the barrier to entry, so it’s basically a go-large-or-go-home world. The Amazon ebook seems to be the place where some of the small fry information providers have gone to, if the topic is suited to a write once read many and non-interactive format. For many to many discussions we used to have forums (before that we had Usenet and email mailing lists, but the latter scale terribly), but with the demise of the medium-sized website vis-a-vis the big beasts many of these are dying out, moving to Facebook groups

    I don’t regularly use Facebook, and it’s a source of sadness for me when a forum I’ve used goes down for some reason and the topic migrates to Facebook. Facebook fosters the narcissistic and the voluble, there seems no threading or fine topic capacity, and to be honest I’d rather read people’s thoughts on the topic rather than endless trivia about their children, pets and minor ailments. As the old forums die, the wall of noise increases. Life is too short to strip out the tales of lives of quiet desperation from a Facebook group topic feed 3

    more »

    Notes:

    1. I am aware that there are many esoteric personal transformation aspects to the story of the search for Philosopher’s Stone, but it is the profane rather than sacred that fits my narrative :)
    2. correctly, it seems – I was there before getamap and may be there after it’s been deprecated
    3. Facebook is designed to narrate everyday trivia and that’s fine – but trivia seems to pollute group topics to a degree that it never did on forums and bulletin boards, these usually had a separate section like MSE’s Money Savers’s Arms off-topic section.
    31 May 2015, 12:17pm
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  • Briefcase and The Hardest Grafter – spectacles pitching the poor against each other

    Ah, the taste of bread and circuses, harbingers of decadence in the declining imperium bereft of leadership, vision and ideas. The ermine is not a bleeding-heart liberal. I even believe in making the distinction between the deserving and the undeserving poor which is beyond the pale in right-thinking circles these days, because I believe Britain is probably rich enough to assist the former whereas the latter will expand to consume all resources – witness the bizarre goal of eliminating relative child poverty of the Labour administrations, which is going to lead to serious misery in this.

    1505_briefcase

    I am out of touch with pop culture, and loathed the concept of ‘reality TV’ ever since DxGF tried to make out there was some merit in the original Big Brother that she was addicted to – I stuck about 10 minutes before deciding this was shite robbing me of minutes I’d never live again. The description of two current/proposed ‘reality’ TV shows gives me a chilling feeling that we are going back to the days of cockfighting and circuses having dwarves and other sorts of gawpery that I’d thought we’d left behind decades ago. There’s nothing wrong with reality TV exploiting people who are compos mentis and who have other choices when they sign on the dotted line. Violating the latter condition for spectacle makes me queasy for what it says about our respect for others.

    I know part of the point of art is meant to hold up a mirror to us, so that the ideas and thoughts can resonate with the messages locked behind the firewall of our subconscious, transforming unvoiced fears into safe signals so we can know ourselves better. One of the drivers behind the search for financial independence is the fear of becoming poor. It pushed me to go through a period of elective privation to escape the Man, and underlying many of the tradeoffs in FI/RE is elective privation now against unelective privation later.

    It’s not surprising that after a period of economic retrenchment mining this seam of fear is rewarding for story pitchers. Take the American CBS show The Briefcase, where two families short of cash are given a briefcase of ~$100,000 and instructed to share it with the other, as sort of financial version of the Prisoner’s Dilemma. Over on this side of The Pond the BBC is looking for Britain’s Hardest Worker – to pitch a bunch of these against each other and the winner gets £15k. At least our American friends are both more generous and in theory every participant can win!

    According to the Beeb

    The series will tackle some of the most pressing issues of our time: why is British productivity low? Is the benefits system providing many with a reason not to work or hindering their working opportunity? Is the hidden truth about immigrants simply that they work harder than Brits – and we need them as much as they need us – or are they simply prepared to work for a lower wage? And have the young simply not inherited the work ethic of older generations or have working conditions just got too hard? Who in Britain still knows how to graft? It’s time to find out.

    The Ermine Bullshit-athon failed scanning this because it isn’t designed to process a signal more than half ordure so I had to take it in manual

    “You lot on the couch out there – you know that jobs are getting worse and many of you fear in falling out of a comfortable living in this generation or the next. Projecting your fears upon others is an easy way to relieve the pressure. Let’s take your mind off the fact with this exploitative drivel where we pretend hard unskilled work is the route out of poverty, because as we all know that is so true these days 1.”

    Now the PR release does raise some interesting questions. As Merryn Somerset-Webb describes in the FT (h/t Monevator for the link)

    The 16 hours bit is because that is the number of hours our system insists that you work in order to claim in-work benefits, something that has nasty implications for UK productivity

    […]

    If you incentivise people to work part time you get a lot of part time workers with unsatisfactory careers (and low productivity). And if you use the tax system to show that you favour housing above all else you get very expensive houses and as a knock on, possibly lower levels of productive investment than you would like.

    so the BBC’s thesis that the tax credits in-work benefits system that helped Gordon Brown get unemployment down might have pole-axed UK productivity has friends in other places. It may even be true – the endless special cases and indeed the historic pro-natalism of the tax and benefits system creates some strange distortions in what types of lifestyles it promotes – witness the truly bizarre spectacle of comfortably off people bitching ‘S’not fair’ 2  to Osborne’s removal of child benefit from higher-rate taxpayers some five years ago.

    I’m not at risk of being subjected to either programme, and I’m very happy to say that I’m not paying for the BBC version of it, but I feel uncomfortable with the divisive image that’s being held up to me by these programmes and the popularity of other poor-shaming TV shows like Benefits Street. One of the changes that I see in British society is an increasing stratification by income, though in other ways we have become far more tolerant and accepting of diversity.The most egregious example of this stratification is shown in the proposal for the city-state of London, where an Ermine was born and raised. This  is a place where people figure you need an income more than 10 times the UK average income to live. I grew up in an (admittedly south of the river) part of the city in Zone 2. Although I could buy a flat in the area I’d struggle to buy a house.

    These programmes feed on the fear of falling down the financial pecking order, as some of the distortions we have enjoyed relative to the rest of the world are being flushed out by globalisation and automation. We need insight, analysis and leadership to navigate these changes as best we can. Not bread and circuses to distract us from it. Yes, I’ve taken the piss at length from the middle class who have been acting dumb selling off their house for school fees and holidays, and carping they can’t afford Silly Bandz for their children. That’s because one can live perfectly well without school fees and Silly Bandz. But I draw the line against going further in the line of entertainment. In an increasingly financially stratified society I suspect that many well off people never come across people who are really poor, because we live increasingly separate lives. That’s fair enough, but to gawp at such fellow humans on TV without having the humility to remember that there but for the grace of God you go seems to be a retrograde step. The poor may always be with us, and I don’t know the answers – mindlessly throwing money at the problem doesn’t work, but taking the piss by gladiatorially setting some against others in the name of entertainment demeans both the watchers and the watched IMO. A respectful philosophy is good – NoMo PoMo.  Merryn Somerset-Webb’s analyisis and the positing of questions, yes. Cheap TV, er, no. Nietzsche has some sage advice for prospective viewers

    when you gaze long into the abyss. The abyss gazes also into you

    It’s always good to be open to alternative points of view, so here is a Torygraph article telling us that this is an excellent insight into the heart of darkness that is the feckless poor that we should ogle not because it says something about us but because it says something about the reality of the human condition in Britain. Maybe a couple of hours with the Trussell Trust would be a better way to get the inside skinny rather than sitting on one’s backside being ‘entertained’ by other people’s desperation. And since everybody else writing about this sticks up a picture of the Jennifer Lawrence I am going to too, even though I haven’t read/seen Hunger Games :)

    1505_jlaw-2060x1236

    Rupert Myers of the torygraph doesn’t seem to understand the role of having choice in whether something is exploitative when he compares this with other reality TV. If The Hardest Grafter rings me up offering a place they will be met by a long string of the finest Anglo-Saxon cursing them and the horse they rode in on. If they ring up someone poor enough for it to be an attractive option then that someone doesn’t really have a choice. The reason all those Lefties draw the analogy with Hunger Games is not that the participants of this show have to kill each other. It’s that they don’t really have any ‘king choice as to whether to volunteer for the spectacle, because the chance of an upside win compared to a zero is worth shooting for. Compared to that, all the other reality TV bozos who ended up eating kangaroo testicles electively chose to do it among other good options of spending their time. I presume that when Rupe read Law at Emmanuel College Cambridge he was introduced to the role of metaphor and allegory in a narrative. Heck, as a decent writer he’s been known to indulge. Don’t be a punk, Rupert.

    Notes:

    1. The JRF indicate (PDF) that work is a route out of poverty for about half of households – low skilled work and having dependent children don’t seem to be conducive to that
    2. to save anybody the bother, yes, ‘snot fair to SAHM households. In a similar way that finding myself subsidising my well-off colleagues’ family holidays through their universal child benefit across 28 years of my 30 year working life wasn’t fair.

    Middle-Class inflation – it’s big, it’s bad, and it’s eating your lifestyle

    Brought to you by the Ermine department of first-world problems  this Torygraph article ruminating on how terrible middle class inflation is gives me much to sink some needle-sharp teeth into on so many fronts. It misdiagnoses the problem, the sense of entitlement is risible, and hell, there’s opportunity for much fun. Let’s take the headline and standfirst

    How ‘middle class’ inflation is threatening your standard of living

    An extensive Telegraph Money study into our readers’ spending habits reveals the alarming rate at which “middle class inflation” is taking hold

    Telegraph

    Dudes, your lunch was eaten, digested and shat out t’other side years ago. How come you only just noticed? People have had the time to write books about the problem. Ermines have written posts on how the middle class needs to wake the ***k up and get ready to take the sucker punch, middle class families on the brink, savoured the come-uppance of Shona Sibary stupidly selling her house in bits to fund her excessive lifestyle then discovering she doesn’t own her house anymore. The middle class threw the poor and the working class under the bus by voting for neoliberalism in the 1980s 1 that destroyed blue collar jobs, without asking the questions about where this was all going to lead. The Guardian was drawn out with a riposte along the lines of what part of we’re all in this together did you not understand…

    So what is this lifestyle-eating inflation you speak of, Mr Telegraph? Well, the cost of some desiderata has been going up faster than average wage increases – to wit

    increasing cost of luvverly stuff going up

    increasing cost of luvverly stuff going up

    Let’s take a butcher’s hook at what these essentials are. School Fees – despite every child being entitled to free education in the UK and indeed this is wot drug up your ‘umble scrivener that’s not enough for some people, and all those hard-working furreners are bidding up the price. Health insurance. Eh? We have the NHS, and if you are rich enough to be middle class then if you want to jump the queue for your hip replacements then take the Ermine line. It’s about 15k to pay privately. Things like that are what the middle class used to save for before they discovered home equity lines of credit to buy consumable shit. They knew a thing or two, your grandparents when they saved for rainy days, ‘cos they’d seen hard times… Dental care, well, yes, it probably is increasing, but it’s what, £200 a year. You’re not middle class if a 100% increase in that is going to make you sweat, and stop giving your kids sugary shit advertised on TV, at least after they have changed out their milk teeth. Holidays – the middle class used to have one foreign and maybe a UK holiday a year. Now you’re deprived if you don’t have four. The enemy is consumerism, and the enemy is within – lifestyle inflation.

    What are we comparing this with? Average wages covers a multitude of sins, but most jobs created in Britain since the mid 1990s have been  at the lower end of the scale. These are not middle class jobs where people aim to send Tabitha to public school. Some of these are jobs where people aim to make last week’s rent. These are some of the people that you, Middle Class Boss Person Sitting in your Corner Office, downsized or outsourced or just plain fired. You would have to compare middle class wages for this to have meaning. In fairness, the poll of their subscribers’ income indicates times are getting hard for them. Again, there could be sample bias – Telegraph readers are not spring chickens  – indeed a fair number may have retired between 2007 and now time because they’re not picking up da yoof.

    The Daily Mail and The Telegraph have the largest percentages of over 65s, making up almost half of their audiences – at 45 and 46 percent respectively.

    themediabriefing

    One item shows just how damned ungrateful the middle class is. The price of the average new car driven by Telegraph readers is £13,456. When I first read this I went WTF? you can get a new car for that little? The last car I bought second-hand in the early 2000s was ~£5000. These Torygraph readers presumably buy a new car every three years because that’s what one does if you haven’t been educated otherwise. Given that they therefore spend on average a shade under 10% of their gross wages, roughly £4000 p.a. on new cars and this big-ticket item gets 6% cheaper than the last time they bought it you’d think the blighters would show a bit more gratitude.

    A word in your shell-like, Mr and Mrs Middle Class. The good times ain’t ever gonna roll again, because you are in competition with the whole freakin’ world now, rather than a third of it. And most of the rest of the world is generally poorer than you, they’re ready to work harder, because the extra wedge will make a bigger difference to their lives. They want to eat your lunch and your nice sinecures where Mr Wealthy but Dim used to cling to the pipes of capitalism like slime-moulds slowing down the system a bit. Your kids may actually end up richer in absolute terms but feel far poorer and less secure, because being middle class is all about relative status.

    How did we get to such a sorry pass, eh? Let’s take a look at history, shall we.

    A history aside

    We have to go a long way back, to when the definitions of a middle class lifestyle were defined – roughly meaning owning your own house in the ‘burbs outright by retirement, a decent middle-management job, sending up to two kids to private school 2, owning a car and having a foreign holiday a year, though the latter were children of the 60’s and 70’s. This was the deal struck by Whyte’s Organisation Man 3

    Way back in time, there was a hell of a bust-up called the Second World War. Shitloads of capital got destroyed and a lot of people got killed and hurt. The British Empire that had coloured in most of the map of the world pink imploded, because so much of the energy that was used to rule other places had to be recalled to defend the homeland in an existential struggle that is still now worthy of admiration and I am grateful that a flame was kept alive in Britain while the lamps went out all across Europe, twice in 50 years.

    The British Empire in 1915, when the sun didn't set on it. Sic transit gloria mundi and all that...

    The British Empire in 1915, when the sun didn’t set on it. Sic transit gloria mundi and all that…

    In the aftermath of this the world divided into power blocs with different ideologies, glowering at each other across iron curtains and Berlin walls and suchlike – they drew clear borders and so it came to pass that Russia and China were outside the global trading system as perceived by Western middle class consumers and the firms they worked for. And the green bit didn’t endanger Western jobs either.

    First, second and Third worlds. Decoding the colour scheme should be clear enough :)

    First, second and Third worlds. Decoding the colour scheme should be clear enough. You’re with the blue team :)

    Communications were expensive and computers were dear, hard to use and few and far between. 4 There were no useful databases  – there were shocking levels of basic admin work and most middle management couldn’t type – they dictated their memos for others to type out for them. In 1979 at university in one of the premier science institutions of Britain I looked up books in the library using the high-tech solution of…6×4″ index cards in polished wooden cabinets.

    What a database looked like 30 years ago

    What a database looked like 30 years ago

    Cold war capitalism’s world was smaller, productivity stank by modern standards, far more people were employed and there was far more work for people at lower end of the ability spectrum.  People had children earlier, and jobs were more stable – the residual defined benefit pensions were a carry-over from this era, when employers sought to hold on to staff (and in the case of scientific and technical jobs, invested in training people).

    There is an argument to be made that the number of scientific and technical jobs were artificially inflated during the Cold War compared to what the economy needs which is why there was a push to educate some of the lumpenproletariat in grammar schools and free university education provided you could pass the tougher exams of the time. Again, I am personally grateful for this – I gained from the grammar schools and free university places, but when I entered Imperial College 7% of school leavers went to university. We could afford free university education then, and I would be all for making it free again – provided the entrance criteria were made tightened up again so that these free places went to, say 10% of school leavers. 5

    Then in the 1990s along came the Internet improving communications enormously, the Iron Curtain came down because it turned out that the problems of communism showed up in economic breakdown earlier than the problems of capitalism show up in economic breakdown 6. The Chinese decided they would like to join the party on their own terms.

    This means that a UK worker at the start of their working life now is competing with three times as many people as I did in 1982; the odds are in fact worse because the world population is higher 7 and better communications means that the pool of workers that can be drawn upon is far larger by at least an order of magnitude than it used to be. On the plus side you live in a far richer country, healthcare is better, opportunities for the talented are far-far better, which is the flipside of the better communication, so the average post-Gen X reader of this (if there are any :) ) has probably progressed a lot further in their career than I had at the same age. Many such have travelled and worked abroad and had a wider experience that I have. I’ve worked in international teams but never based abroad – it was by no means impossible but it seems much more prevalent now. 8

    Living standards are normalising worldwide. So far this is a win for humanity but a lose for Mr Daily Telegraph and his kids

    So, roughly boiled down, the problem with the middle class is that they are in competition with a lot of their worldwide peers, but they normalised how rich they expected to be relative to other people in Britain in an era when they were only in competition with the rest of the First World. Globalisation is reducing inequality worldwide, but increasing it in the First World 9. When it comes to specifically their children and their dreams for them, then not only are their children going to face far worse competition than their parents in the employment market did as communications get better. The birthrate in the UK isn’t as high as it is in places that can supply the competing workers which amplifies the competition. It is patently clear to me that middle class parents who want their offspring to have a middle class lifestyle need to start getting on the side of capital for their kids unless those kids are both brilliant and driven. Leave them shitloads of money, because Dim Rich isn’t going to find sinecures like they used to in a more competitive world. Even Halfway Average rich ain’t gonna get ahead through hard work faced with those odds.

    Alternatively they could adjust their expectations of how rich relative to other people they want their children to be. Mr Money Mustache’s takes the battle to the enemy as usual – if you don’t want your kids to join the rat race then maybe teach them not to race rats, which is broadly what the current charade that passes for ‘education’ goes for. We need to teach children to learn and adapt in a changing world, we aren’t making factory units any more. Then there’s the whole automation and Humans Need Not Apply thing. Just like Dustin Hoffman was urged to get into plastics, Capital is your best hope now – don’t buy shit you can’t afford and identify yourself with what you spend money on.

    Seeking validation in what you are as opposed to what you have is also a potential win here- Erich Fromm posited the question in the 1970s. If you’re rich enough to be reading the Telegraph article and thinking ‘that’s me’ then you have the choice – clearly if you are a single mother working five zero-hours jobs to pay last week’s rent you don’t really have this choice, but that’s a different problem from grizzling that the price of wine and holidays is so expensive these days, dahlink.

    Living standards will go down for the middle class – they need to keep an eye on quality of life

    One of the problems the middle class seems to have had is they lost their historic values of thrift and deferred gratification. Once upon a time they knew to put money into healthcare and schools before blowing it all on holidays, wine, eating out and going to the movies. The middle class had annuities to look after them when they got old (before those DB pension) because they saved for it, no doubt encouraged to do so by seeing what happened to the poor in the poorhouse.  Then they got soft.

    Living standards are going to go down because of the shift of power from labour to capital. Mine is, yours is probably. The smart response is to roll with it – because although there’s some correlation of quality of life with living standard, if you deliberately change attitudes to the changes ahead of time you can do more with less, your quality of life need not go down with your lowered living standard. This is because many aspects of quality of life (autonomy and being able to express free will) are not a function of stuff or resources. It won’t be easy but fortune favours the adaptable.

    The middle class are locked into the school-university-job loop. It’s broken for the middle classes – an ever increasing money pit that is less and less likely to pay off for the next generation anyway. Mr Money Mustache nails the problem succinctly

    It may be that most parents of the very-upper-middle class are still operating from a scarcity mindset. If they are addicted to a high consumption lifestyle, earning $600,000 per year but still making car and house payments, they will assume that their children will need to earn and consume just as much in order to be happy. This of course dictates a job in the top fraction of the top percent of the economy, and education with enough prestige to secure such a job.

    There’s a lot of conspicuous consumption in the Telegraph’s list. The school fees etc are all passing on the image of replicating what worked in the past. Fingers crossed that past performance is a guide to future returns despite the rapidly changing world, because if not this is a dramatic misallocation of capital. Above a certain level, quality of life and standard of living are different things. That rings hollow if you’re poor, because it isn’t true for you. But if you’re griping about the price of wine and foreign holidays over the canapes like our DT readers, then you still have choices. Use them well, before you don’t have any choices because you can’t tell the difference between what you want and what you like.

    Notes:

    1. That’s a slightly harsh charge as technological progress would have done that job a little bit later, but they didn’t  help people change, since the postwar consensus was nuked around then
    2. this seems to be a peculiarly UK aberration, I haven’t detected in from US writers for instance
    3. that old  ideal cast a long shadow on the ermine, because I did not grow up in a middle class background, I learned some of this from books and inferred from the values of those around me, particularly those at university, who were mainly from a richer background than me. The deal started to fall through in the early 1990s, paradoxically just as Thatcher was defenestrated. This distorted model jammed my vision to seeing what was going wrong. I learned from my mistake – the OODA loop is a description of how to stay on guard against being trapped by a mental model becoming obsolete. There are many assumptions about the modern world that may unravel – and the principle of being able to preserve value in financial instruments and the SWR aren’t immune from that
    4. When I started as a professional electronics engineer in the eighties there was a single VAX computer for circuit simulation accessed by green-screen terminals via 9600 baud serial cables and all the output was in Courier text – shared across the entire facility of a couple hundred people. Most of the time you did your circuit simulation by building it in the lab and measuring and messing with components – I can do all this at the same time on the same machine as writing this now.
    5. I’m not against those that don’t make the bar paying their way as now – if you want a vanity degree or have an insight that you will get a return on investment knock yourself out
    6. harbingers of trouble with capitalism seem to be the destruction of the middle classes that I’m writing about, rapacious consumption of natural resources to produce worthless tat and increasing inequality leading to revolution as the rough trajectory capitalism is on, so it won’t necessarily end better. A capitalist consumer economy needs consumers and rising inequality is running consumers out of town, a process slowed by rising debt.
    7. when I started work in 1982 there were 4.5 billion of us compared to 7 billion now
    8. As a simple example, I admire and am gobsmacked by Early Retirement Guy who had the bad luck to graduate into the credit crunch recession and took the enterprising solution to take off and travel and see if the dust would settle. I left school after the Winter of Discontent, worked as a kitchen porter over the summer and started university in September. Gap years were for rich kids in those days ;)
    9. A view from the City of London’s Gresham College – the words of Christine Keeler ‘well they would say that wouldn’t they’ spring to mind, but the case is made well. Similarly the Social Affairs Unit and this paper seem to support this view

    How important is a steady income flow to retirees?

    When I was working, I got a steady income. As two decades rolled by The Firm shifted about 10% of pay towards an annual bonus predicated on a stupid bunch of metrics to reduce pensionable pay, I always treated such bonuses as windfalls for investment – primarily in reducing the mortgage or as ISA feed later on. So I lived off a steady income.

    Reading Monevator’s post on investment trusts there is an assumption that retirees need a steady income flow. I’ve always made the same assumption, but on reflection I think this assumption should be challenged, because a retiree’s life is different to their working predecessor. Two things change in a big way:

    No dependent children

    Retirees don’t usually have dependent children under 18, though this assumption is probably more true for people coming up to retirement now that those planning it in 20 years time. In this country people tend to have children between 20 and 35, with a peak at 30 according to the ONS. People 1 had children earlier in the past, often in their 20s in the 1960s and 70s. It surprises me quite how nonchalant some people aiming for FI are about phasing this. For all the joyful Kodak moments etc, most people don’t deny that children are a big financial cost, and the sooner you get started the sooner you’re done with it – and indeed you will enjoy their company for longer too. A 25-year old having children will be 43 when the child reaches 18, a 35-year old will be 53. For the common two kids with two or three years gap that spans 46 to 56.

    people are having children later in life (Jefferies, 2008, image linked to source PDF)

    people are having children later in life (Jefferies, 2008, image linked to source PDF)

    There seems to be a recent tendency for children to remain financially dependent beyond 18 2– if they are dependent through university these ages move to 46/49 and 56/59. The early starter will be more employable, while the late starter could be well finished at fifty and in trouble financially if they want to retire early. They will need more money compared to the early starters just at the start of early retirement, at a time when money is particularly short because they can’t use pension savings – the earliest call on a SIPP is drifting up to 57 from 55 now. There is of course the opposing case to be made that having children impacts one’s career early on so you might accumulate more by delaying. If you’re okay with slightly early retirement (60 and up) then this may work out well, as you are into SIPP territory then.

    Lower general running costs including housing

    One of the things that clobbered me in my twenties was moving so often from one rented place to another – the Guardian’s Jenn Ashworth griped about this but I also had 14 addresses between leaving home and this house. I preferred flat/house-sharing, but that gets less possible as time goes by, because your pals tend to pair up, work elsewhere and so on. The instability of young life is expensive – you can’t accumulate tools and kit and you are always having to adapt – one place has enough kitchen paraphernalia, another doesn’t, all this incidental Stuff adds up.

    Then acquiring the first house – you need tools, you need to learn a modicum of DIY, everything is dear. I have all this stuff now – I don’t need new lawnmowers and saws and shit except to replace what’s worn out. With housing I’ve paid down my mortgage. The costs of running Ermine Towers is so much less than it used to be, because there’s little capital spend. Depreciation on a house is about 1% of the capital value or a bit more – if I factor in that about £2000 of utility falls off the house every year in terms of Stuff that Wants Fixing or upgrading it is about right, whereas renting it would cost £7000, though obviously the landlord would get to eat the £2000 operation and maintenance costs 3

    When I left early I looked at what my pension was going to pay after working for 30 years for The Firm (I made nearly 24) which was half final salary and targeted that as The Number I had to make up. Half to 2/3 of salary was a typical assumption of DB pensions and presumably this came from some acknowledgement that retirees would not have some of the big costs of their working selves. Often the pension commencement lump sum was there to clear the mortgage, though along with the kids dragging on their coat-tails into what used to be considered adulthood is a knock-on trend for people to have bigger mortgages later in life.

    Does all of  this income need to be steady?

    Up until very recently there was a big assumption built into the UK pension system that a pension needed to be steady – hence you had to buy an annuity on retirement. In Broke, I read that this was the historical way the middle classes dealt with the income on retirement problem – the destitute poor ended up in the poorhouse.

    Of my pension income I’ve lost about 25% by leaving work 8 years early. Unthinkingly, I fixated on a target income set by other people a long time ago. I lost my way in the details, and accepted two hidden assumptions, simply because that was how retirement was meant to look. One was that the amount needed to be half my final salary, and the other was that this needed to be a steady income.

    And then I went on a crash course on how to eliminate unnecessary spending between 2009 and 2012 because I wanted to get out and never have to work again. Freedom was that much more valuable to me than consumer doodads and rushed experiences. It was tough, but in that experience I learned what mattered to me and what didn’t.

    Discretionary spending

    Discretionary spending. Nice, but not essential

    I used the experience to drive waste out of my non-discretionary spending 4, but there has been a corollary – it skews the ratio of discretionary vs non-discretionary spending upwards. The former is more than half of the total. I have no income, so I am running down some cash savings. If I knocked out some of the discretionary spend I can easily meet TFS’s £10,000 a year target – this is largely because of the reasons given earlier – my running costs are lowered by fossil savings from my working life, particularly in terms of housing. I don’t have to pay rent and I don’t have to pay 32% tax and NI on earning the money to pay for the rent.

    Despite this I am going to invest in delaying my pension to secure a more fixed income, front-running it with a 5 year SIPP. The 5 year term means I can use cash for that rather than equities, which then takes me to the thorny question of my equity investments. They were designed to make up the difference, but my HYP has already reached the target amount thrown off as dividends 5. The surrounding globally diversified passive index shell I can’t qualify in terms of productivity – it increases my networth but it contributes little to my investment income. Theoretically you can take income either by natural yield (the principle behind a HYP) or by selling off units from a fund that is giving capgain, but the problem is ‘how much of this damned volatile capgain may I spend this year’ which is a tough call to make.

    Greybeard describes one way of smoothing the income across the business cycle. This is attractive to me, but since it turns out my equity holdings are entirely aimed at the Wants and not the Needs I wonder if I need the stability. Because I am child-free I have an option not open to those who want to leave money to their children, and that is of taking a joint annuity in 20 years time. Annuities get better value when you take them older because they’ll be paid for less time. This would address the stability problem, I would be in my seventies.

    On the other hand, I might want to leave money I haven’t consumed to better the world somehow. There shifting to investment trusts in 15 to 20 years may make sense – it is a low-maintenance approach, something like luniversal’s basket of eight would work. Yes, I would be paying something for the management and the income smoothing across the business cycle. But not paying  as much as for an annuity, which destroys all the capital in the interests of a steady income.

    These are not decisions I have to take now. In general, in finance, I’ve come to the conclusion that it’s best to keep options open. Things change over time, unforeseen shit happens.

    what I'll see as I go out of the park to reach the library. Beats wrangling Excel for a few years IMO, not everything going wrong stays wrong...

    what I saw as I went out of the park to reach the library. Beats wrangling Excel for a few years IMO, not everything that goes wrong stays wrong if you keep your options open…

    After all, I wrote this before wandering through the park to go to the library to pick up a copy of Nate Silver’s the Signal and the Noise precisely because shit happened but it broke me out of a rut where I could have been spending the next six years at The Firm staring at screens and every quarter having to dream up meaningless crap and lies to keep the performance management system happy because the top brass decided to manage by numbers and wouldn’t trust my boss to know if I am doing a good job or not. After leaving, had I closed off other options drawing my pension early, I would have been sore when Osborne’s changes altered the landscape giving me the front-running opportunities I can take now. Options are good, as long as they don’t depreciate the asset too much.

    Or split stable and volatile incomes – and spend electively going with the flow

    There’s a case to be made that a retiree should look for lower volatility income for their needs, and let the wants go with the flow. On a 100% DC pension that might favour investment trusts (and later on an annuity) for the needs part of the portfolio, with a decent amount of headroom for the unforeseen rises – after all any retiree quitting now really ought to allow for an increase of about 10 times in the real cost of the oil price across a 30-year retirement, with a corresponding knock on cost in domestic fuel.

    The wants part of your income could be invested with a higher equity exposure – anything from stockpicking to a world index tracker, and here you sell off units/shares each year to cover your next year’s elective spend. If the stock market goes through a rough patch then go on fewer holidays and more staycations, if it does well then salt away a bit to live larger in future and take more exotic holidays and eat out more. A retiree is in a great position to vary their wants spending according the the volatility of the stock market – to some extent you can also manage needs by shifting running costs along the Châteauneuf-du-Pape with caviar 6 <-> tap water and ramen axis.

    This sort of thinking probably benefits the extreme early retiree – quitting the rat-race at 40 or mid-forties. If you can live with the volatility, and let’s face it most UK extreme early retirees had some connection with the finance industry so are probably better qualified for this than the likes of me, you can probably do better spending electively with the ebb and flow of the market than going for stability across the whole income stream.

    Smooth the volatility with a 3 year cash pipeline

    If you don’t like the investment trust option you can soften the ‘how much of this damned volatile capgain may I spend this year’ question by pipelining it through a multi-year cash buffer. The only indicator you have is the market value – tie your elective spend to x% of that 7 and one year you are partying in Sydney, the next you are in a tent in North Wales.

    Lovely place, Wales, but I still don't want to have to use a tent to save money ;)

    Lovely place, Wales, but I still don’t want to have to use a tent to save money ;)

    I could use a three-year cash buffer and drip x% of the market value in at one end and spend a third of the buffer each year – that would make a three-year boxcar average which would probably soften the worst hits (bear markets tend to fall faster than bull markets crawl out from the wreckage, but three years is a long bear market. Just don’t mention Japan, okay?). That would be a lot of dead money if this were three years of my entire income but if it’s a part of it that’s not so bad.

    Using Ishares ISF as a proxy for the FTSE100 a 3 year buffer gives me an easier ride in the year on year change

    Illustration of buffering using Ishares ISF as a proxy for the FTSE100 a 3 year buffer gives me an easier ride in the year on year change – a 15% variation rather than 30%. Note ISF is not a total return fund, but the dividend yield is a lot less than the YoY variations. I have deflated the ISF share price by RPI relative to 2001

    Does the three-year pipeline being in cash cost on average more than the investment trust premium? Say you start with £1,000,000 8 Your cash buffer, at three years of 4% SWR is £120,000

    After all, let’s say on average equities give a real return of 5% and you lose 1% to the extra IT costs giving you a 4% p.a. real return with no cash buffer, or a 5% return on 88% of your capital, let’s be charitable to the Bank of England and say inflation is 2%, so you eat a 6% loss on the 4% going through your three-year buffer as it falls out the end. You therefore have to put 12.7% into that buffer, so in reality you’re getting 15% return on 87.3% of your capital.

    Each year on average the ITs turn your £1M into 1,040,000 and you get to spend the 40,000. With the buffer, each year your index funds returning 5% p.a turn your £878,000 into £921,900, of which you now take 4.2% to top up your buffer, leaving you with £885,000. Although I confess it wasn’t the answer I expected, you’re better off using the cash buffer and keeping fees lower, as your capital slowly creeps up in real terms or you could spend a little more. Over two decades this ends up in a doubling of capital reserves taking the buffer route as opposed to the IT route.

    Of course you can spend your retirement opening a bazillion current accounts and yomp the cash through the latest best paying account du jour to improve the return/lose less to inflation. Or pass the cash buffer through Zopa and a couple other P2P joints – don’t reinvest what your borrowers pay back but keep adding every year – this makes a pipeline well suited to the 3 year term and you will get your money from 3 years ago back, with interest.

    Decumulation is a bastard to get my head round. Initially I am going to decumulate cash, and that isn’t particularly challenging. In the equity part I can take the natural yield of the HYP section easy enough. But working out what to do with the foreign index stuff I’ve used to diversify the HYP isn’t clear to me at all, so far the 3 year pipeline through 1/3  Zopa 1/3 some other P2P operation and 1/3 cash 3year term account is the best I can come up with for that. Fortunately I don’t have to start doing this on equity savings for another 5 years, some clarity may come out of the murk by then.

    Notes:

    1. these people are women, the stats don’t track the guys
    2. The torygraph is pumping this up a little bit. In the 1970s many more children left school at 16 and could find decent jobs, it isn’t so surprising that more children were financially independent when they start earning at 16 rather than at 21 – 11% of school leavers went to university when I was 21 compared to about half now. It isn’t so much the dependent children at 25 that flabbergasts me, it is the late twenties to early thirties crowd
    3. These costs are shockingly lumpy – you need about five years of savings to smooth the costs. Presumably this afflicts BTL landlords too, particularly amateur landlords with just one BTL property – the statistics improve as the number of owned houses rises
    4. non-discretionary spending is on Needs, discretionary is on Wants
    5. This is because I won’t draw the pension early, so the difference to make up is less
    6. yeah, I know you’re a barbarian if you have Châteauneuf-du-Pape with caviar, but sod it, being your own person is one of the joys of getting older – if Jenny Joseph can wear purple and red then if you want to drink red wine with caviar just do it
    7. where x is your SWR of choice – typically 4 to 5%
    8. to make the numbers easier, for illustration. Consider paying an IFA if you start with that much – your time is worth more than mine
    18 May 2015, 7:39pm
    personal finance:
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  • front-running a DB or State pension with a new Osborne style SIPP

    I’ve written about this before, but it is getting close to doing it for me, hence a worked example. This is particularly useful for people with a legacy DB pension although the technique also works to smooth your income between retiring and getting the State pension, which is another defined benefit pension 1.

    A DB pension is defined only at a particular retirement age, usually 60 or 65, or use this calculator in the case of the State Pension. With a company DB pension you can often retire earlier, but you will take an income hit called an actuarial reduction if you retire earlier than the scheme NRA. In my case the NRA for most of my DB pension is 60, I will eat the loss from ‘retiring five years early’ for the last three years accrued when it was shifted to 65.

    When these schemes were designed in the 1970s and early 1980s there was more goodwill between companies and their workforce which was seen as more of an asset than now, the pension was part of aiming at staff retention, which is largely gone in a faster-moving, possibly more efficient and definitely more dog-eat-dog employer/employee relationship now 2. The actuarial reduction is rarely defined, and gives companies wiggle room to reduce their costs. As a result it’s usually best to take a DB pension at NRA, because it’s nailed down what you get. Individual circumstances can sometimes mean you’re better off to take it earlier, but that’s usually more to do with paying off debts with any tax-free lump sum.

    What to do if you want to retire before NRA?

    What you ideally want is a short pension to front-run the main pension until its NRA. This pays out between the date of your early retirement and the DB pension NRA. If you want to retire before 55 you also need to save enough money in an ISA or unwrapped to  pay your way to the earliest date you can draw pension savings, currently 55 but scheduled to rise to 57 and further – a gotcha to watch.

    When I retired in 2012 a short pension wasn’t an option – if I had used a SIPP I wouldn’t have been able to draw it down, but all this has changed now. So the question is now how much can I save into a SIPP such that I can run the SIPP flat in the (for me) 5 years between getting hold of it and the pension NRA, without paying any tax. There’s not much mileage 3 in a basic rate taxpayer saving tax on the way into a SIPP only to pay tax on the way out, although any sort of higher rate taxpayer will gain a useful amount drawing down a SIPP even above the tax-free personal allowance up to the 40% tax threshold.

    Put another way, I want to know how much can I put into a SIPP, such that I can withdraw the 25% tax-free lump sum up front and then a personal allowance worth each year, for (in my case) five years, from 55 to 60. With a NRA of 65 that would be 10 years. It’s reasonable to hold a five-year amount in cash, a ten-year amount would need to have some investment component for inflation protection – either some exposure to equities or some fixed interest bond-like stuff.

    more »

    Notes:

    1. a company DB pension is defined after each year you work for the company – they can change the terms for future accrual but not retrospectively for defined benefits already accrued. Whereas the State pension is defined by government and can be redefined – as has been the case recently
    2. until you get to the parasitic executive level, which seems to featherbed a ‘because we’re worth it’ layer of scum to loot shareholders more and more, because of course you have ‘pay the going rate’ to recruit top talent despite the fact that CEO pay used to be about 40 times that of the grunts (US study, Table 6), compared to over 200 times now and there’s been no notable increase in company profitability since then
    3. but there is some – even if you pay 20% tax on all of your SIPP income the 25% pension commencement lump sum saves you a quarter of the BR tax you’d otherwise have paid
    15 May 2015, 11:32am
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  • of savings rates, metrics and goals

    Over the last couple of years the UK personal finance blogosphere has expanded massively – it is a great thing to see many more people taking their financial future into their own hands, and asking themselves what they want out of the whole work-eat-play-sleep tradeoff offered in a post industrial consumer society. One of the great things is that there is more awareness of these options – and that there are choices to be made, at least for some of us.

    Most PF bloggers seem to be in the accumulation stage, although there are a few who have passed across the event horizon to the other side like me – The Escape Artist for one, and I greatly enjoyed Living A FI’s post on crossing the Great Divide. My summary of the changes looking back on work to non-work is here. I feel different to most writers, not only because I am looking back from the other side, but also because I lack much of the laser-like analytical focus. It’s been just over five years since I started. I have changed, the world has changed, perhaps my work is done here.

    Of measurement, and metrics, and goals

    Many of us are quite analytical employing metrics and goals, tracking progress against these goals reviewing them and keeping score. In particular the notion of the savings ratio clearly works for most people. I’m a lazy barsteward and don’t do any of that. I had no idea what my savings ratio was – all I knew is it wanted to be as high as possible to shore up the defences against an earlier exit from The Firm than I had planned. I guess I took RIT’s £0 target and considered anything else a fail.

    Metrics never worked for me steer savings. For starters the whole goals and metrics things was one of the things that really pissed me off towards the end of my working life, I have no desire to gamify my life, and I lose the big picture easily if I focus on the details. I have never forward budgeted like you are supposed to – I have always tried to satisfy the Micawber rule by looking in the rear-view mirror and the shape of the road behind me in what I have spent, and adjusting the direction to keep the line on the right side of the Micawber threshold.

    The one exception is I track investment dividend income and capgain, benchmarking total return against VGLS100 and the FTAS, unitising every year. I probably need to rethink the benchmark as I am diversifying geographically. Maybe benchmark the HYP against VGLS100 and FTAS and the overall portfolio against some sort of passive world index fund.

    It’s difficult to work back and see what it had been when I was working – it was probably in the order of 80% for the three years as I ran out. This was easier for me than most because as I had discharged my mortgage. In theory saving has now switched into reverse – I don’t have use of pension savings yet and I don’t use the proceeds from my ISA. And yet one thing puzzles me – I look at how dramatic the contributions of Saving Hard make to RIT’s networth and wonder what is different. It might be as simple as I am ten years older and therefore the stock of accumulated resources was higher than the flow of savings, but on the other hand I didn’t have huge savings when I started in 2009 because I had favoured paying down debt in the form of the mortgage. I don’t count the value of my house in my networth because its value is more income-like in the rent I don’t pay. Shona Sibary is the cautionary tale of considering home equity as networth and spending increases in it. If you want to make money from residential property do it on other people’s homes, as a BTL landlord. I don’t do BTL and I don’t eat the seedcorn, so res property doesn’t show on my networth chart.

    I only have investment gain at the moment to carry things forward until first my SIPP gives me an income that I run down over five years and then my main pension comes in, paid at the normal NRA of 60 for The Firm for the vast majority of my time there.

    Ermine networth

    changes Ermine free cash and investments networth – ignoring house equity and any pension savings

    The stock market has been on a tear pretty much from when I left work, I have been lucky with that. This would have been tough had things gone the other way – as I crawled from the crash-landing of my career it would have been difficult to look at a gradual networth decline and not extrapolate that to a feeling of general wipeout and fail 2.0. Personal Finance is as much about the personal as it is about finance. The numbers circumscribe what is possible, but what matters is how you feel about the numbers and where they are going. That’s not always acknowledged – this is symbolic, it is part of the myth 1 of one’s lifestream.

    Not everything that counts can be counted, and not everything that can be counted counts.

    Albert Einstein William Bruce Cameron

    About half of these assets are in cash – I would have reached the other side (getting to 55 to use pension income) before the cash ran out even if the market had wiped out. But it’s as much about how it feels as about how it is. I fought against the fears of a fall in networth as I retired, but in the end Lady Luck smiled upon me – governments pumped stupid amounts of money into inflating asset classes, the oil price fell holding the inflation that would normally create at bay for a few years. I was fortunate enough to have invested in the right things, though over the last few years you just had to show up in the market and be reasonably spread out across sectors. Of course I would like to say that I was a stupendously brilliant investor. But that would be bullshit. So thank you, madcap governments who pumped up asset prices with fistfuls of funny money – I feel better set to face the coming crash than I did in 2012 because I will soon have pension income and once again an answer to that Micawber fellow…

    1505_this-too-shall-pass-bracelet

    Some of the government activity that made things look better in the markets may turn out bad in the end – perhaps as the decades roll by the centre cannot hold and it will all fall apart in a doom and death spiral. But so far, despite endless prognostications that the world was going to end including some of my own it hasn’t. Maybe it will end with a series of whimpers rather than a bang – after all the middle class is slowly being destroyed in the West and the whole experience of work is getting increasingly insecure, ugly and marginal for many 2, although a small number are making hay. Indeed, apparently by taking my engineering skills out of the workforce, I am a hazard to the economy and destroying Britain’s productivity. 3 To which I can only say f**k that – if you want humans to work longer then stop being stupid with metrics – as Liz Ryan summarised

    To hire talented people and hobble them with bureaucracy is the height of stupidity and poor management to boot.

    In the long run this too shall pass, indeed. More and more jobs are being controlled, measured and rammed into a rigid structure. I rose four levels up the greasy pole at The Firm – when I started as a young pup I could authorise £500 spend before needing authorisation from the next level up, when I left as a greybeard I had to get authorisation from two levels up get a train ticket to London. The only correct response of humans to that sort of ossification of processes and systems is to get the hell out, and let the devil take the national productivity :) Work is supposed to sustain your life, not replace it.

    I am an outlier – much less analytical, and I don’t subscribe to some common PF shibboleths

    Maybe because I never worked in a management consultancy, I’m weak on the whole PDCA thing here. Philosophically I just don’t have the faith in in it when it is applied to complex and interactive systems, because it is hard to separate the variables properly, and also you are typically an observer rather than an active experimenter (unless you’re the Fed). As for the check part, the problem here is the dreadful uncertainty of some key variables – obsessing about the exact value of a variable with an inherently massive uncertainty leads to short-termism and massive over- and under- compensations. Lord Kelvin is all very well in his place but mistaking precision for accuracy can turn meagre knowledge into precisely incorrect beliefs.

    I’m with Mr Fox here rather than the prickly one – read widely and cover much ground, and read lots of stuff I don’t believe in (the efficient market hypothesis) as well as echo chambers of my own predilections and prejudices. I should know why I disagree with something, what the counterarguments are and I should have the humility to accept that I may be currently believing something that’s wrong simply because sometimes I know jack shit and sometimes see things wrong. I try to  at least do common memes the honour of trying to understand their premises. Nevertheless, I’m big picture fellow rather than streetfighting the details. I leave it to others to determine the details worth fighting – lower fees, yes, all the way, but I still can’t get excited about trying to win a return on cash.

    There are a number of common tenets in the PF community – passive investing, an ultimate ~4% SWR, the efficient market and some of the consequences of that hypothesis, that I don’t find common ground with. So be it, I have no desire to push what may simply be my ignorance onto others. So far I have survived six years of investing reasonably well. That’s still not a huge track record and it doesn’t span multiple market cycles. The job I had to do was much simpler and lower risk that for many – I wanted to top up my works pension to compensate for the missing eight years of working, which is easier than establishing a complete retirement fund for 30-40 years of working. I have largely done that now – the HYP pays enough dividends now to make up the shortfall, and being tax-free as ISA savings the target was 20% lower. I will half split future funds, half to build the HYP and half to built a more globally diversified index ETF section of the portfolio to insure against something currently unknown about the HYP philosophy going bad in the decades to come.

    The trouble with networth is while financial stock and flow are related, they aren’t locked together, and the variation is called volatility, and afflicts the stock value – the income flow is much less volatile. It was with great difficulty that I finally broke out of the instinctive association of volatility with risk. At some point, to become a successful investor, you have to do the Dr Strangelove thing with volatility 4 and learn to love it. It gives you your opportunities as well as your challenges.

    How I Learned to Stop Worrying and Love volatility

    How I Learned to Stop Worrying and Love Volatility

    Although volatility is sometimes associated with risk, it doesn’t stand proxy for it. For someone with a high proportion of capital in equities the volatility makes the savings rate/rundown rate unknowable over short time-scales of less than about five years, particularly if they are adding to their equity holdings.  I exchange some of my cash savings for equities rate limited by the annual ISA allowance. It is possible to derive some statistical estimates for the income from equities – after all the 4 or 5% SWR principle is derived from a Monte Carlo analysis of historical (US) data. However, the history of statistical analysis on equities is littered with some extremely big fails.

    There’s an implication that I have a positive savings rate at the moment despite having no income, because the networth is still rising, though the value is volatile. It’s a bizarre carry-on that investment capital can increase at a faster rate than I spend it, I guess this was the thesis of Piketty’s Capital in the 21st Century, and of course there should always be the memento mori that the stock market has been going absolutely bananas for three years and really cannot go on like that. It’s not like the world has suddenly become free of financial hazard. Presumably it would also be possible for a working saver towards FI to have a negative savings rate even if he were saving as much as he could, in the event that his investment capital were high enough for a stock market crash to diminish his networth faster than he is saving.

    This seems to be a problem with some of the common PF metrics – they start to fail you and become noisy and erratic as you approach the destination, because of the uncertainty of the value of equities. The rising uncertainty of the value can be seen as the increasing erratic trace of my networth as time goes by. This is characteristic of any equity based DC pension savings – and mine are buffered by about half the holding in cash.

    There will be two more jumps in the networth when my DC pension savings appear in the total – one when I get to 55 and the other when I get to 60. After that the fossil savings from my working life will be mined out, other than my pension after 60 which is deferred pay, a flow not a stock. The implication of that networth chart is that once I get these extra funds/income I will be underspending. That’s what happens when you shoot the demon of consumerism. There are many people who fixate on replicating their income when they were working, and want to be able to buy a new car every three years etc because that’s what a prosperous middle class lifestyle looks like, and good luck to them. My income will be less than when I was working, though it is possible that my disposable income will be a little bit more. The working me put a lot of money into the mortgage, and a lot into spending on rubbish, and the focus needed to get out in three years still serves me. The lesson stuck – consumerism involves a lot of spending that doesn’t necessarily lead to enhanced quality of life. One of the metrics the consumer sucker uses is comparing their Stuff and lifestyle with other peoples Stuff and lifestyles, rather than their own requirements. Busting out the TV and other instruments of consumer mind control like Facebook and social media in general help shift the balance closer to following my own needs and wants rather than those of the admen.

    Notes:

    1. myth as in psychological legend, not the alternative usage myth as in fictitious
    2. Lousy and Lovely Jobs: the Rising Polarization of Work in Britain, Maarten Goos, Centre for Economic Performance, LSE
    3. there seems to be much head-scratching as to why Britain’s productivity is falling, and early retirement isn’t fingered by Peston, for example, who seems to point to governments spiking the guns fired by Schumpeterian creative destruction
    4. hopefully without the drastic ending!
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