Diversifying an HYP with a global index

Most PF savers have a stock market accumulation horizon measured in tens of years. I don’t – I realised I was going to take the expressway out of the world of work because otherwise it would drive me round the bend. I was James, not Pat, in this story of how to be a wage slave and play the game, so I did the celibate monk in a brothel thing, saved up shedloads of money and jumped out of the runaway vehicle of my erstwhile career and let it crash.

I was dealt a kind hand by the stock market. You didn’t have to be smart in 2009 to do well out of the stock market. You had to get in it, despite everything saying Wrong Way; it wasn’t easy.  I started building a HYP in my ISA in the eye of the storm that was simultaneously terminating my career. On a 4% SWR on my HYP investment capital I can make up the damage done to my pension from quitting early and losing a third of my pension contributions 1. From 55 which is not so far now I can use a short SIPP to give me a DC pension for five years before drawing my main pension at the NRA for The Firm, so no actuarial reduction for 90% of it.

Nothing comes for free – I had little fun in the last three years of working, and I’ve run down some separate cash for the last two and a half years. Later this year I am probably ready to re-enter the middle class income fray, but hopefully without pissing away my income/wealth on the sort of garbage I used to do when working.  I will spend more, but not at wage slave me levels. There is an interesting perspective from one of the Telegraph’s interviewees about realising a pension that is adequate. I shall never be rich or poor, assuming, of course, that society survives reasonably intact. War and hyperinflation can change that in the blink of an eye, of course…

The Coffee Can portfolio and HYP Rule #1 – do not sell

I started off with a HYP because my experience of stocks have shown me  I am a rotten seller – jumpy and fearful, I will bail too early. With an HYP one of the tenets is you don’t have to do that. Over the years I’ve also learned how to benchmark a portfolio. Unitise the sucker – compared to XIRR and all sorts of other ways unitisation is simple, it’s the basis of how mutual funds work except you are the mutual fund manager and, although I don’t decumulate at the moment, it can track how well you are doing as a manager even through decumulation. The instructions are here. My aim is to beat VGLS100, over my investment period and with what I’ve put in over time, because that’s probably what I’d have bought otherwise. So far I’ve done fine. And I don’t have to sell units to derive the 4% SWR income.

The Ermine is a capricious investor, many would say irrational. I aim to buy in bear markets and when people are rioting in search of decent trainers at a knockdown price (revisionist alternative view that this was a correct response to Not Having Stuff here) and things that people hate. I try and take breaks in times like the last couple of years, just buying my own stuff back tax-wrapped instead of unwrapped. It’s a messy approach. Observing that most of the behavioural biases that clobber my returns are usually on the selling side and taking that out probably helped me.

bunch of contract notes from two years of my dotcom days

Two years of my dotcom days. I have a natural tendency to churn ;)

The Do Not Sell was inspired when I read Robert Kirby’s The Coffee Can Portfolio from 1984 2. That sings to me because my errors were in churning, and here was a way to stop that. I like the standfirst

You can make more money being passively active than actively passive

more »

Notes:

  1. Because of crafty changes made by The Firm to the pension scheme that last third of my working life wasn’t worth a third of the accrual, reducing the amount I had to catch up
  2. the formal reference is DOI: 10.3905/jpm.1984.408988 though I am not educated enough to know what the hell to do with that. A Google Search will be a profitable source of PDFs if you want to read the whole thing
17 Mar 2015, 12:50pm
personal finance
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35 comments

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  • Why doesn’t the middle class understand how bad their situation is?

    Matthew – Assets £700k, age 42, two children, SAHM, GSOH. Wants to meet lifetime income of 40k in 2015 terms to enjoy the rest of his life

    So he’s in the plush City offices of independent financial advisers Ermine, Ermine and Ermine Ltd and there’s a gimlet-eyed white mustelid  sitting behind a big leather desk with oak-panelled walls and one of those green banker’s lamps on it.

    Good grief, Matthew. According to the Trinity study a 4% SWR you will get an income of £700,000 /25 = £28,000 1. That’s not that far short of £40,000, so ease off on the consumerism by about 25%, send that SAHM out to work – those kids are 13 and 15 FFS, and then you can have your well earned break. Next!

    Maybe not…

    Let this book tell you a story about the middle classes, Matthew

    It never fails to surprise me how much the so called middle classes haven’t realised just how deep the shit is that they’re in. Matthew is thinking along the right lines – he’s not that far away from the dreaded 45 so he doesn’t want to rely on making shitloads of money as he was. But there are some unfriendly trends happening, which he wants to think about. He could do worse that listen to the story this book I’ve been reading tells him.

    Broke

    Broke

    The first part of the story is told by the physical book and how it came into my possession. It is clearly a fairly new library book – the Ermine is all for library books, because I can educate, inform and entertain myself for free, and not only that, but I don’t have the problem of storing clutter after I’ve read it. And I borrowed this from Suffolk libraries.

    I had to pay £1 for that, because Suffolk Libraries have stopped buying books to a large extent because of cuts. They have been resourceful, and struck a deal with neighbouring county Cambridge. The computer systems can search across both book collections, but as a Suffolk resident I have to pay £1 to borrow from the Cambridge holdings. Now I don’t mind, in the end I can afford to pay the odd £1 to read a book,  but it’s a tiny metaphor for where things are going. One of the reasons Suffolk council had no money is they pay shitloads to their chief executives, step forward Andrea Hill paid £200k to outsource everything, including the libraries. Eventually the charge will rise until it meets the price of alternatives like a Kindle book/secondhand copies on Amazon and then the outsourced operation will go bust. I am pleased to observe we now pay only £150,000 for the head honcho of the council Deborah Cadman, and intrigued by the implied nepotism of her husband getting the job she vacated at St Edmundsbury council. Jobs for the boys, eh? I’m sure it was all above board, and I’m still puzzled why it costs more to run Suffolk than that Cameron chap costs to run the country.

    In itself the degradation of the library service isn’t the sort of thing that will impact Matthew’s finances, but it is a harbinger of tougher times to come. There is another service that is degrading which most of us get to use sometime. The same outsourceing thinking is applied to the NHS as decribed in “Serco grapples with watershed [Suffolk] NHS contract” [and makes a pig’s ear of it]. I would be very surprised if in 10 years time the NHS were free at the point of use, or so degraded that if you were used to the sort of lifestyle Matthew were used to you wouldn’t want to wait. Some of my excessively large emergency fund is set against that sort of thing – and I am so far in good health for my age, but I wouldn’t want to wait months for a hip operation were that necessary in 10 years time, so I would pay for that sort of thing privately (it’s about £12,000). There are some things you can’t buy your way out of at any reasonable price; in the end you gotta go some time and you may be better off saving the money and letting it go.

    I am about a decade older than you, Matthew, so I will die 10 years earlier. You will experience more of this erosion of public services, so you at least need to think about how you are going to buy your way out of it. Not all of your money is going to go on skiing, holidays and paying your children through university. Some of it will go on health insurance. Hopefully Britain will adopt the German or French method of co-payment rather than the ghastly US system which is fantastic for the rich with the best medical care in the world, but keeps frightened wage-slaves pliant to The Man in fear of losing their health insurance. I believe the ‘free at the point of use’ is part of the problem – there should be a small, flat charge for visiting a doctor, similar to the €23 cost for this in France.

    The rich have always lived longer, on average, than the poor. It’s not stupendously surprising, but Matthew would be unwise to ignore the straws in the wind. Like me, but more so 2, he is on the way down, not up in this fight against the 1%. And that’s just the story told by the library charge, the contents of the book will make you blanch, Matthew.

    Let us purview the rest of your situation. Ah, children, it’s the way the modern world really gets to the middle classes. On the upside, there are only two, which is good. You need to be rich or poor to afford more these days, let’s hear it for poster child Shona and the trouble her four got her into. The time will soon come when the middle classes will only be able to afford one child if they want to keep it in the lifestyle they believe they are entitled to. Let us assume that that nice man Mr Miliband gets in, so your eldest goes to university with £6000 p.a. fees, and let us assume a student needs £4000 p.a. for accommodation and beer these days, making a nice round figure of £30,000 for a standard three year course. You need to find twice that because you have two children, which in my book is a knock of £60k, 10% of your capital assets

    The question, of course, has to be is this a useful allocation of capital? After all, invest it and it’s an instant boost of £1200 a year for her for life, sort of inflation protected. It would be a useful deposit on a house, outside London. You have to set this against the tax-like version of student loans  – see MSE’s discourse on this which derisks the financial case if they take the loans. Bearing in mind that there are the twin massive forces of automation and globalisation tearing middle-class jobs out of the economy, there’s a strong case to be made that university is an unaffordable luxury – basically your children will be less able to build wealth by earning money across their lifetime particularly if they want the lifestyle you had, and inherited wealth is possibly much more important. So if if you want to make sure your children have a decent future then:

    • Don’t have too many, because it splits your estate
    • Have them late, because then they will get the inheritance earlier in their lives, (you will die when they are younger) That also helps damage the career of the primary caregiver less.
    • Teach them the values of grit and determination
    • Don’t autopilot on university. A degree was much more valuable in the 1960s and 1970s when <11% of people went, as opposed to 50%. Looking at some of the illogical thinking, rotten grammar and mush written by university-trained intern journalists now compared to the school-leaver journos of yesteryear the Flynn effect is obviously too slow to have made four times as many people academic in the last couple of generations. We’ve simply lowered the bar, which is a git because now employers can’t tell the bright from the dim bulbs and everybody has to pay because there are five times as many students as there were when the taxpayer supported them through university. I personally would like to see the taxpayer support students through university again, but I’d like to see a much lower percentage go, no more than 15% with full grants for tuition. If you can’t pass the exams, well, I guess there’s nothing wrong in paying for a vanity degree…

    Anyway, on to other things

    Rule 1 on page 1 of the book of personal finance is know thyself. Without self-knowledge you are doomed

    Hmm, so you realise you are “quite risk‑averse”, do you, Matthew? Absolutely nothing wrong in that, and indeed holding nearly half a million in cash would seem to support the assertion. I thought I was mad holding more cash than property, but I tip my hat to your good self. And yet on the other hand

    “waiting for a stock markets crash – after which I would dive in”

    Matthew, me old mate, do you have any idea of just how hard that is to do? I did it in 2009, and I had to fight the primitive lizard-brain every inch of the way. Do you know what it feels like to lob cash into a diving market and see yourself lose 25% of it in the next few weeks, and do you know how you have to practically seize one hand with the other to stop selling back out because every part of everything is telling you wrong way, step back, run for the hills, Gateway to Hell and total oblivion this way?

    That is just not something risk-averse people do. Know thyself. Risk averse people need to be sated with the general long-term lift of the market over many years, which is sort of 5% real though there’s good reason to think it may be a bit lower. Passive, index investing is what you need. Spend the time you save on otherwise obsessing about money with your kids, Matthew, the days are long but the years are short. You’ve already missed five-sixths of your eldest daughter’s childhood and two-thirds of the youngest…

    Mr and Mrs Ramsden also want to invest some of the capital in a business venture together. He’s thought about setting up an auction house but Mrs Ramsden plans a tea room.

    People in business are not characteristically risk-averse. Else they wouldn’t do it, given the ghastly odds of 50% failure in the first two years, more so in the restaurant biz. Cripes…

    There’s hope. A word in your shell-like – cut spending

    Unlike some of the other wannabee early retirees, with a bit of  cutting his cloth to match his resources Matthew could do well. He needs to lose that £40k figure – he’s just not that rich. Half of it, however, he do do without breaking a sweat. If he really has had the experience of

    20 years of constantly working hundreds of miles away from his family

    he is probably used to a high-spending lifestyle while away, all on expenses and making up for the rotten nature of that sort of thing. For a few years I worked on a project that involved international travel about once a month, and that was about right, particularly as I was single at the time so I could use the travel opportunities. But even then, all the married colleagues with kids were frazzled and hated it and were always rushing back. If you are doing much more of that you spend loads of money because, fundamentally, you are bored in the downtime – one hotel room looks pretty much like another, you’re too frazzled from long days to do much tourism  and you are looking forward to the weekend. That’s why such jobs pay well, because they’re a little bit shit in the lifestyle department.

    There’s probably room to spend less but live more. I think he can do it. But it’s not a financial makeover he needs. It’s a lifestyle makeover – a what am I doing, what really matters to me, what are the risks and opportunities ahead drains-up. It’s not surprising he wants to downshift after that. He could also do with harmonising these life goals with his wife – after all in five years his children will be adults. If he and his wife want that £40k then maybe they could consider working at a low level, though the way this is going a 20 year gap it’s not going to look good on his wife’s CV.

    As for those IFAs –

    Okay, they agree with the general principles of the Ermine IFA partnership of cynical mustelids. I found the second IFA to be much more on the mark with the fundamental  issues. Matthew’s primary problem is not that he hasn’t got enough money, it is that he doesn’t know himself, so he doesn’t know what he wants. He knows what he doesn’t want, but ‘anything but this’ is a dangerous way to map your path. You’ll struggle in getting from London to Scotland just knowing you need to get out of London. You might end up in Bognor Regis or the Slough Trading estate.

    Word in your shell-like Matthew, one of the aims of life is to know yourself  else you’ll always be a stranger in a pathless land. Some of what he thinks about himself is inconsistent and incompatible. These are not financial conundrums, and some aren’t even solvable by money. There is serious tension between

    • risk averse : buying in a bear market and/or starting a business
    • seeing more of his kids: starting a business
    • featherbedding his kids: retiring early

    Either way, the odds are that his children won’t have the lifestyle he or in particular his wife had. Broke is a long-form story of how that got to be that way. The short form is that the 1% are eating their lunch, they have the firepower and the deep pockets. The halcyon days of the middle classes were when there was limited mobility of capital and labour, and automation hadn’t greatly dented the need for people in running companies and administering things. University for those kids is a chimera  – the vet may need it, and at least the job isn’t outsourceable which is very wise even if she needs 4 years at university but the “I dunno” is case unproven. The world is changing, and it’s not favouring their future in a First World country. Now if they were Indian, or possibly African, the hope of middle class parents might be more likely to be fulfilled.

    It’s an interesting book, Broke. There be trouble up ahead for people with certain kinds of aspirations… Matthew could do worse than read it.

    One fair question to ask is how much of that wedge is inherited, since the BTL he finds such a PITA to run was his Gran’s flat. I’ve charitably made the assumption he’s earned/saved it. If it is inherited, you need very specific and careful skills. The middle class is going to need to learm the characteristics of old money, and if this is ancestral wealth then it’s not his to spend – it is fossil wealth that should be husbanded across the years to benefit his dynastic line, if he wants his children to remain in the middle class. Old money never eats it’s seedcorn.

    “never spend your principal 3

    That’s why it’s old money 😉 You can spend the income it throws off, but the aristocracy holds its capital in trust for its children. Preferably in assets like agricultural land 4, where old money has negotiated tax-free status for its ancestral wealth.

     

    Notes:

    1. The Trinity study was on US stocks and for a 30 year drawdown. Matthew is younger so there are good reasons to suspect he may need more
    2. because he is younger and will see more of the end-game
    3. The child-free can be more relaxed on this
    4. obviously they don’t get their hands dirty farming their estates, they get contract farmers to do that

    Congratulations to Patrick Pichette of Google, 52 (ret)

    The CFO of Google has achieved something that few high earners seem to do. In amongst all the Sturm und Drang of earning shitloads of money as CFO of Google, he heard the faintest sounds of the distant drum at 52, having climbed Kili. In itself that’s not particularly remarkable. What was remarkable, however, is that he took action. He switched the engine into neutral, and planned his glide path out.

    say cheese, guys

    say cheese, guys

    Now the cynical Ermine observes a massive helping of cheese in this pic. Hopefully that photo is a mock-up – it would really, really piss me off to pay all that money and go to all that trouble to find such a ghastly contraption bringing unauthentic consumerism with a Capital C to a natural place. Las Vegas is fine where it is 😉 But if it’s really there, well, it takes all sorts, eh.

    Be that as it may, and even if it’s a publicity stunt to promote the ailing Google Plus system, he’s outlined the fundamental problem. You’ve only got so much time in your life, and it’s running out 24 hours every day.

    His valedictory post has all the usual things the rich retiree wants to do – travel the world, blah blah blah blah. It’s great- each to their own. It reminds me of the things I thought I would do lots of once I had control of my own money and time. And indeed I may still do. All these things are projected outwards, but retiring well is also an inner journey. I am reminded of the words of the Swiss psychologist Carl Jung

    It seems to me that the basic facts of the psyche undergo a very marked alteration in the course of life, so much so that we could almost speak of a psychology of life’s morning and a psychology of its afternoon. As a rule, the life of a young person is characterized by  a general expansion and a striving towards concrete ends; and his neurosis seems mainly to rest on his hesitation or shrinking back from this necessity. But the life of an older person is characterized by a contraction of forces, by the affirmation of what has been achieved, and by the curtailment of further growth. His neurosis comes mainly from his clinging to a youthful attitude which is now out of season….

    Carl Jung, 1929 CW 16, para 75

    Translated into our times, in youth the ego is expands in strength and influence. Although the West has few rites of passage, the ego follows a well-signposted path, projecting and gradually gaining force and influence – job, career, relationships/marriage/kids. All this is promoted and is in the symbols all around us.

    We don’t have many symbols for success after the turning point – look at the ads around you, they are to hang on to youth, to beauty, most commercial symbols of ageing are negative. The ads assume we want to look like we are between 25 and 29.

    I lived some of Carl Jung’s neuroses in my 20s  – the young Ermine lived in a rented room in London, putting salt around the room to keep out the black slugs. I was in a decent job, 25, but I couldn’t buy a house and seemed stuck in all aspects of life other than work. I did finally sort my shit out and make changes. It wasn’t just me – the mid twenties seemed a really tough time for several of my peers too. Maybe it’s a London thing, or Imperial graduates. Maybe it’s birds of a feather sample bias. I have experienced worse lows in life since, but none as protracted. Bollocks to all the ads, I never, ever, want to be mentally again in the place I was in my mid to late 20s. For all the lows and the fortunately modest losses I have so far had since, the highs deepen and colour in with experience. That runs against the narrative of the Western Myth, and it is important to be prepared to surrender some of what was valuable in youth in order to deepen and grow. So far I have found Carl Jung’s map to be more true that that held up to me by the consumer society around me.

    I did not dodge the midlife crisis 1 – arguably the forces that pinged me out of The Firm were stronger because my inner values began to diverge more an more from the values of my younger life. In particular I found it harder and harder to suck it up to The Man’s stupid metrics and bullshit ways – little empires of small desperate people doing what their immediate higher-ups said despite it being often wrong (in engineering terms) or simply against common-sense, nature and experience. The misery of mendacious measurement and metrics enforcing mediocrity and digital Taylorism continues unabated, but at least it isn’t my problem any more. There are some who simply carried on turning the handle, and good luck to ’em. I wanted to determine how I spend my days. And while I probably have the edge on Patrick on some of the inner changes, he has lived more intentionally, choosing to throw the switches of his life in a controlled manner, unlike my uncontrolled derailment from the Work strand of life. So hat tip to Patrick – a great exposition in how to retire well.

    But a word in your shell-like Patrick, from someone else who retired at 52. Remember the question posited by Erich Fromm in To Have or To Be. What you do may matter less than what you become. Much heartache and angst waits for those who listen to the messages from their inner world with the coarse equipment that listened well to the messages from the outer world. We don’t help ourselves with that second half of life by trying to hold on to outdated forms. I liked this article on the adventure inward  – this passage speaks to me

    In youth the ego is expanding in strength and influence. Typically, it follows the well-posted paths of society, perhaps gathering accolades along the way. But at midlife the ego is challenged to become a servant of the larger personality and soul. This is why men often encounter a feminine guide–and women, a masculine guide–in their dreams towards midlife. These figures are manifestations, or symbols, of the soul 2. They invite and would guide us to an understanding of our deeper nature and a more personal spirituality. Thus, we could say that in youth the ego is educated mostly by family and society, at midlife and beyond, by the soul.

    One of the characteristics of the last two and a bit years is that I see that I made far too many simplifications in my model of the world and how it worked, they had served me okay in work and career. But they blinded me to faint signals from within, and also faint signals from the future too. I come to know much more how much I don’t know, and learning from others becomes easier to do but more daunting as I see the further mountains to climb in the search for wisdom.

    To take one example – writing this blog has helped me, both in the obvious way that articulating something makes it clearer and throws light on inconsistencies, but also I have learned from many of readers in the comments – sometimes I have been plain wrong, but all too often there are nuances I may have missed, things I’ve been unaware of and it is always good to refine my mental models closer to the territory.

    In this time I have perhaps focused on the inner journey. Maybe the time will come that I balance this outwards, though I’ll probably pass on Kilimanjaro, a quick google search still gives me the feeling of pumped up consumerism

    If you’ve ever wanted to do something truly amazing, something that’s as far removed from a lazy beach holiday as possible, then Mount Kilimanjaro is calling you! Join the great explorers and mountaineers in scaling Africa’s highest peak, hiking through lush rainforests, alpine deserts and glaciers that have been there forever. With our Kilimanjaro treks, you can take on a challenge and do something awesome in Africa.

    STA travel

    It seems a fave for mid-life crises – a fifty-something I know did it to make himself feel better after a divorce. Good luck to y’all, whatever floats your boat.

    For some reason I’ve focused on the inner journey in the first couple of years, but life has an ebb and flow. Maybe the time for travel and looking outwards is soon to come, to integrate some of the changed perspectives, to play across the strands of life. Patrick’s message is cheering, because it runs against the Calvinist Work is Good for you meme. Work is a means to an end, but it’s also good to know what enough looks like – when to consider a switch from having more to being more. Happy retirement!

    Notes:

    1. I don’t really understand Jung’s chronology he termed the years from c. age 56 to c. 83 the “afternoon of life,” using the analogy of the passage of the sun through the sky from morning to night. This kind of sits ill with the typical allotment of three-score years and ten.
    2. The translation of soul from German into English is hard. It has religious connotations in English which I don’t believe are in the German original

    The cash conundrum

    Cash is a terrible ‘investment’. As far as I’m concerned it isn’t one -though there appears to be one period over which it outperformed the FTSE100 TR. If you were dumb enough to sit on a shedload of cash and invest it all in one go in December 1999 then you’d have been better keeping it as cash for 15 years. Well, yeah, but who saves for a pension in cash over half their working lifetime, chucks it all on red and then goes home? If you are such a soul, you deserved all you get. Most of us save for a pension as we earn, albeit at varying rates through our working lives. In general, if you suddenly have a whacking great lump like that you haven’t earned it, so tough luck if you came into an inheritance in late 1999 and blew it all into the dotcom bust. Easy come, easy go…

    £100, waiting to be turned into booze, Harry Wraggs and Sky TV vouchers

    £100 will remain £100 but won’t be worth £100 as time goes by

    In theory private investors can give up part of their lives to moving cash about between the latest best-buy accounts for years. You’ll be working hard for a lousy return, but at least no volatility.

    Cash is not an investment. It is a mediocre store of value but a great medium of exchange

    At the moment, interest rates are low. There is a lot of grousing about this, which I don’t have a huge amount of fellow-feeling for. I have never regarded cash as an investment. It’s a proxy for a claim on work in the future, and medium of exchange. It is crystallised power. It is symbolism, it is not procreative in itself. It still surprises me when people think they can get a real return on cash.

    The stories your parents told you about saving cash and it growing were largely a lie. They were right that if you add £1 a week you end up with £52 after a year, it grows as you add to it, rather than in and of itself. You still have to work for that. If you want it to grow in value by itself, well, that, indeed, is why you invest. Indeed, the story of the talents I was taught at school is a much more accurate portrayal. If you want your wealth to grow you have to put it to work in doing something. Merely digging it into the ground, sticking it under the mattress or putting it into a bank account isn’t good enough. You can put it to work in the stock market, you can put it to work in a BTL house portfolio, you can put it to work in building a business or buying productive capacity, be that training of yourself or machinery and plant to make better widgets. All of these need skill and judgement calls, and involve some element of risk because what you think should happen doesn’t always happen. There be dragons.

    If you want relative security of cash, it ain’t gonna grow – you will largely be running down your capital in retirement. There’s nothing wrong in that. It is what I am doing at the moment. It is what an annuity does. Everybody panics when they think of not getting an income. They want the security that the number at the bottom doesn’t change without their say-so. Clearly they’ve never read Lady Windermere’s Fan, in which Oscar Wilde summarises the problems of conflating price and value,

    a man who knows the price of everything and the value of nothing

    In doing that they miss that the value of that number slowly degrades with time, but that’s a different story.

    more »

    Working for The Man post 45 is a risky business

    The Man is an unreliable dance parter, the hazard is in relying on working for The Man into middle age. The LA times has a mini series on the shrinking middle class. Unlike the British middle class whinathons and SAHM child benefistas and grizzling journalists that I’ve taken the piss out of earlier these guys are closer to the manufacturing industry end of things, and they seem less culpable than our lot with school fee ambitions for their progeny. All these guys seem to want is a house, two cars and a dog –  one of them sums up the feeling

    The promise that your kids would have a better life than you, with the house, the two cars, the dog and everything else, it’s gone.

    In fairness to the promise it  didn’t go away, it moved eastwards with globalisation. They were probably chuffed with how cheap DVD players and iPhones are these days… But it’s tough to feel good about that when it’s your end of the boat that’s sinking. Two things are common to all their stories:

    They relied on an employer in some form or another. The other is just like me, they failed to lift their eyes to the distant horizons, though they had fewer savings than I had.

    I don’t know the stats for the US, but in the UK most of us work for an employer. Fewer than 10% of us were self-employed when I started work in the early 1980s, rising to 15% in 2014.

    The Man seems to like ’em  25-35…

    You could could be lucky, get all the way to retirement working for him in one form or another. But The Man prefers younger models usually – they’re cheaper, probably more pliable, and in some industries like tech there’s the Zuckerberg doctrine of which more later. For occupations that need some skills he doesn’t like ’em too young, because he can’t see track record, but I’d say late twenties to mid thirties seems to be his favoured the age bracket, old rich favouring the young is not just a dating problem.

    There’s more change in technologies and ways of working now. Pretty much everything a young web designer starting now knows will be hopelessly obsolete in thirty years’ time, and this trend devalues and depreciates skills quicker than before. On the flipside things often improve faster now and we will probably be able to do more with less in those thirty years, whatever the equivalent of the Internet will be then. For consumers and users this isn’t all bad at all. There is a corollary of this.

    Your peak earnings are probably coming earlier in your career than for previous generations

    This is a terribly difficult one to tease out of the statistics. The ONS published this report that seemed to indicate this is true –

    1410_onswages

    more »

    SIPP opportunities for DB pension workers who want to retire early

    Pensions are the Cinderella of personal finance because they only deliver when you’re old, and the people who can do most about their personal finances are those who are still working. People’s situations vary much more when they have a lifetime of working life behind them. Most people who leave university and have a job have a shedload of student debt, and hopefully a shedload of human capital. Those coming up for retirement have had a working lifetime of  variation between having some of that money stick to the sides or all being used for living plus incurring debt, they may or may not have a partner, they may or may not have had kids, they may have been buffeted by the vicissitudes of Divorce, Disease or Death (of close family), the divergence in circumstances just goes on an on. So pensions are terribly hard to generalise about, and much of what you would do has been made even more complicated with Osborne’s pension freedoms.

    I know a few employees of The Firm read this, and it’ll loosely apply to others coming up to early retirement (55 plus) with a defined benefit pension – most public sector workers, and a fair few private sector workers if they were in scientific/technical roles and haven’t changed jobs for 15 years or more…

    Note that pensions are complex, hard to generalise and vary from scheme to scheme. Employees of The Firm – take up the Wealth at Work seminars that are offered for free – and everyone, DYOR and consider taking independent financial advice before making irrevocable pension decisions.

    A DB pension is valuable because it is defined. It lacks flexibility because it is defined

    A typical DB pension is quite accurately defined, but the other side of that coin is that it lacks flexibility. One of the great things that seems to be have happened over the last five years or so is that more people are thinking about when and how they want to retire. I have to confess that I never did think about this – I joined The Firm’s pension scheme over 25 years ago and from that point I thought I would retire at 60, which happened to be the NRA of that scheme. Job done, end of thought. It was a total intentional living fail. That was excusable in the late twenty-something Ermine because like all young people I was never going to get middle-aged never mind old 😉

    But the years did pass, and this fail got less excusable. I failed to address one of the most important things a wage-slave can think about – which is in the great balancing act between time and money that we have in the flight of the sparrow through the mead-hall that we call Life 1, is the balance right for me? It is the age-old balance between the important and the urgent, where all too often the urgent gets all the attention and the important gets lost.

    DB pensions were children of times when spending a large part of your working life at a single company was normal. Those times were more stable, and some might argue staid, and one of ways this is expressed is that retirement is not very flexible in a DB pension without taking massive knock-on costs. You can usually draw your pension early in a DB pension, but there is a reduction to account for the fact that it will be paid for longer. In itself that is fair enough, but the reduction usually disfavours the early retiree disproportionately more than other members. Obviously if you are going to retire before NRA you ideally need some money to pay yourself up to NRA.

    Until about this time last year a SIPP was useless for that because they were meant to be a pension for life

    because you either had to buy an annuity of go into drawdown at a modest rate that was designed to last a lifetime (typically 20 to 30 years), unless you had over £20k of guaranteed pension income p.a. in which case you were sorted. What you really wanted was a pension you could flatten over a short time, capital and all – the few years your early retirement until NRA. It doesn’t matter that you flatten your capital before you die if another pension comes along and picks up the heavy lifting. In my case that period is 55 to 60, on other cases it may be 55 to 65. In future it will be for 10 years (5x to 6x where currently x will go to 7 in a few years)

    So in the past ISA savings were the priority for DB early retirees

    There is no capital base behind a DB pension, but the estimated capital amount is valued by HMRC by taking the pension payable at NRA and multiplying by about 16. You can take up to 25% of the pension as a pension commencement lump sum, but this is hard to qualify with a DB pension – the amount of pension you lose to fund that PCLS is often disproportionally high.

    However, The Firm’s scheme allowed me to build up a defined contribution component called an AVC – I targeted this to be a third of the estimated DB capital amount, so the entire AVC could be taken as the 25% PCLS. There’s nothing stopping DB pension holders taking out a SIPP, but then you can only take out 25% of the SIPP as a PCLS which isn’t as good as the AVC deal.

    The reason for using pension savings was purely to get the tax benefit – the savings from not paying 42% tax/NI or even 32% tax/NI are too large to ignore. If I give up £58 and end up with £100 that is a return of 42/58 or 72% ROI. You just can’t ignore that if you are within a few years of getting it. But I couldn’t use it to retire early without losing part of the main pension due to drawing it early 2

    But to pay my way until NRA I also saved into ISAs. Freedom from The Man was important enough to me to do without all the consumerism fun for three years. The great plus of ISA income is that it is not set against your personal allowance.

    A short SIPP is now a great alternative as long as you don’t pay tax on it

    The personal allowance is about £10,600. Many fifty-something people I know have BTL income with the deep religious significance of property in the British psyche, which is apparently taxable income. The Ermine gave up the property religion many years ago, so I have the full £10,600 available to me, because all my income is investment income. Although some of it is unwrapped that is still tax-free for these reasons. As it is I am still running down cash because I saved a shitload of cash before retiring so that gets reinvested.

    Five years is a short time, there’s no need to wrangle with equities. So if you are retiring soon at 55 or later, load up a SIPP for as much as you can draw out tax-free before your DB pension NRA. If that’s 10 years you might consider holding some equities for the later years

    How much can you draw out tax-free from a SIPP?

    Take the number of years you will draw from it, until NRA. At that point your SIPP will be empty – the aim is to flatten it 3

    In my case that’s easy – five years, because the vast majority of my DB pension was based on a NRA of 60, and the earliest I can draw on the SIPP is 55. Each year I can draw tax-free £10600, so if I could put 5*£10600 = £53000 into the SIPP I wouldn’t pay any tax on taking it out.

    But there’s more. You can take 25% of the money out right at the start of drawing it down as a PCLS. So the money I draw year on year is three parts out of four, so I can add on a third more, about £17600, making a total of £70600. The first tax year I draw £17600 + £10600 = £28200 and the subsequent four years I draw £10600. All tax-free. I have therefore turned a profit of £70600/5=£14120 because the taxman will add in that much, meaning I only have to save £56480.

    The computation is simple – take the personal allowance × the number of years you want to draw the SIPP for until NRA and multiply by 4÷3 to allow for the 25% extra PCLS. That is the upper limiting case of how much you can save in a SIPP and get a guaranteed no-strings attached 20% return on your cash, less fees and inflation. It will cost you 80% of the total amount if you are a basic-rate taxpayer, less if you are a higher rate taxpayer or 45% rate.

    Beware the annual limit

    of about £40,000 or your entire salary whichever is lower. If I were working – I would be wise to save this over two years, £28240 one year (ie becomes £35300 in the SIPP)  and the same the next. DB pension holders also need to knock off this the effect of any pay rise that raises their DB pension – this HMRC guidance note is your friend. It is easy for moderately Big Cheeses towards the end of their careers to fall foul of this. Imagine Mrs Roquefort on £50,000 with a pension payable at NRA  of £25,000 and she’s in the last couple of years before NRA. If she gets a 10% pay rise on a she’s up for a £2.5k*20 = £50k lift so she’s SOL.

    But I don’t have that much cash!

    Bearing in mind that you will get the 25% PCLS and £10600 back as soon as you turn 55, you might consider borrowing it 😉 Even if you have to use the entire PCLS to pay the loan back you are still up on the deal by 20% less loan interest less fees. You should never borrow to invest, but this is not investment return – it is a return of the money you earned that was taken from you in tax.

    Both borrowing money and having enough annual limit are easier when you are still working, so you probably want to play this game in the last couple of years of working.

    Beware the Pension Recycling Rules

    Note – this is my opinion, it is not advice. DYOR etc…

    Another point in favour of spreading yourself out over a few years is this HMRC guide. Basically HMRC consider you are taking the piss when all of these apply

    1. the individual receives a pension commencement lump sum,
    2. because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be. Further guidance about what is a significant increase in contributions is at RPSM04104940.
    3. the additional contributions are made by the individual or by someone else, such as an employer,
    4. the recycling was pre-planned. Further guidance about determining whether the recycling was pre-planned is at RPSM04104930.
    5. the amount of the pension commencement lump sum, taken together with any other such lump sums taken in the previous 12 month period, exceeds 1% of the standard lifetime allowance , and
    6. the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at RPSM04104950.

    Condition 5 is a PCLS of £12,500 or more (before Miliband gets in there). In future from Osborne’s changes you will be able to forgo taking a lump-sum PCLS and spread it out as you take the pension (ie take out 25% of your yearly SIPP income tax-free – this would equate to an annual tax-free SIPP amount of £14133 if that were your only taxable income) which would avoid that restriction because two amounts in the two-year scanning window is £8266 which is below condition 5.

    It’s also worth noting pension recycling rules are all about the pension commencement lump sum. If you restrict your PCLS to £12,000 which invalidates test 5 and you keep your annual withdrawals below your personal allowance you still get a 20% boost to your money even if you premeditate, borrow the money and ramp up your contributions at the last minute 😉 There also is no law saying you must take the full 25% PCLS

    Even ermines of independent means can do something here

    I use this with Hargreaves Lansdown. Because Osborne made his changes after I had stopped work, I save purely in cash but because I am economically inactive I am limited to £3600 a year, I don’t think I can use my investment income as the level of income, it seems only selling time for money sort of income counts. Hargreaves Lansdown are piss-taking bastards on their fees for funds and equities, but as it happens for SIPP cash savers they don’t charge a holding fee (presumably they get interest on your cash). There’s a £354 account closing fee if the account is open for less than a year or  £30 if it’s been open longer.

    Because of the lousy imitations on what can be saved I’m not going to be in danger of pension recycling.

    What are the risks?

    There may be a change of Government in May. Miliband has already staked a claim on pension tax relief, and possibly dropping the annual allowance to £30,000. Although stories about abolishing the 25% PCLS do the rounds regularly before Budgets it hasn’t happened yet, and it forms a part of so many people’s pension planning it would be a little bit surprising if a politician wanted to pick a big fight like that. But it is a risk.

    The Lifetime allowance continues to come down, Miliband is proposing £1m, and it is possible that this would spike the guns of people with a FSP of more than £50,000 at NRA (I have scaled HMRC’s £62500 down by 1.25 because the current lifetime allowance is £1.25 million). But to be honest if you’re earning a six-figure sum and coming up to retirement then damn well pay for pensions financial advice here because you will probably find it worth the fees 😉

    I wouldn’t count on being able to use this  ruse in five years time. But usually once you have started a pension even if Governments do piddle about with the rules they allow you to grandfather your existing rights, usually in return for not being able to contribute any more to a pension.

    Sundry Government and HMRC meddling – this is always the problem with pensions. I’d be surprised if the Osborne pension freedoms are largely scaled back. The most obvious target in my view is higher rate pension relief. There are already calls from Miliband to ice that for 45% taxpayers and from Lib Dem Pensions Minister Steve Webb and Michael Hoban (a senior Tory) to flat-rate tax relief at 33% for all.

    Mark Hoban, former financial secretary to the Treasury, said the present system, which allows savers to claim tax relief on pensions contributions at marginal rates as high as 45 per cent, was “skewed to the interests of higher earners”.

    FT

    But in the end if you are a higher rate taxpayer then you may want to consider paying clever people with detailed knowledge to advise you 😉 Others will only gain from that change.

    Notes:

    1. Venerable Bede , Ecclesiastical History of the English People
    2. This is no longer strictly true though it was when I formulated the plan. I could and may move part? of it to my SIPP to make it up to the £70k described later. Before last year I would have had to have taken it as an annuity.
    3. the exception to this is if your DB pension is below the personal allowance – in which case you may as well aim to top it up tax-free in the SIPP
    25 Feb 2015, 6:11pm
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  • others are greedy and the Ermine is fearful

    You want to be greedy when others are fearful. You want to be fearful when others are greedy.

    Warren Buffett

    Much brouhaha about the FTSE 100 at last closing above the level of its 15-year old dotcom high in December 1999. The rational investor will tap a copy of his efficient market hypothesis, sigh and wonder what all the fuss is about. Trouble is the market isn’t efficient, it’s all about the madness of crowds in the short term. And it means they’re greedy 1. I haven’t worked out what the hell we are doing up here for a couple of years now, and I’m still puzzled. As for the Americans, they’re drunk on it.

    And I can’t help a shiver go down the spine, because unlike whippersnappers like this, I was there in the early days of the Web, with an ESI account (eventually bought out by Charles Schwab and then bought out by Barclays). A group of us late thirty-somethings  dreaming at work – I still remember the welcome note the young Ermine sent out when I set up the internal company share discussion board

    “The aim: to make us rich. Very very rich”

    Asshole. Sorry young Ermine – you were at least circumspect enough to not risk money you couldn’t afford to lose. There was a heady and peculiar feel about it all. One fellow did do very well in 1999. Which was a bastard when it came to paying the capital gains tax on that lot the next year and his total portfolio was worth less than the CGT bill! Time to remortgage – it’s not meant to be like this… I was a timid Ermine, mucking around with no more than about £10,000 in total so I was spared that sort of slaughtering. £10k cash is worth about £15k nowadays. It was also worth more to me then because it was a larger proportion of my salary than ten years later.

    Looking back at the paper records of that time, the Ermine wasn’t as hammered as much by the dotcom bust as I thought, because I withdrew a lot from my trading account in ’99. I’m not sure why. It felt rough because I knew Mr  CGT cock-up personally – I was awestruck by the total abount of money he was trading but didn’t have the balls. It was a stupendous amount of money  – only fifteen years later have I seen that amount of valuation in an account summary of my own 2. So I knew a few people who got hurt big, whereas I just had the black tip of my tail pulled in comparison.  I’d really like to be able to claim I saw the denouement coming but I probably wanted to go on holiday with DxGF and also to start funding my ISA, which does show the classic dotcom story (I don’t have all the portfolio valuation statements but I put £7100 into this over a couple of ISA years before losing interest)

    The Ermine dotcom ISA - £7000 into about half that over three years

    The Ermine dotcom ISA portfolio valuations – cash in of about £7000 into about half that over three years

    I got good value out of the experience, because I learned what not to do. Do. not. Churn. For God’s sake, just don’t

    bunch of contract notes from two years of my dotcom days

    bunch of contract notes from two years of my dotcom days

    One of the great things about investing in those days is that it was so much more tactile – you got contract notes in the post each time you bought and sold. I filed mine, and spread the suckers from two years out. One of the obvious failure modes of my early investing days is right out there in plain sight – each one of those tickets cost at least £10 I think on the turn. Yes, volatility was shocking in the dotcom tech days and you could cover the cost of churning in the runup to the bust. But to be honest it didn’t really matter what you held then, so why trade all this shit when it notched down and buy something else that was racing up. These days if you want to trade over days and weeks go spreadbetting young man. Better still tune out of the wall of noise and chill. I keep these contract notes as a memento mori. Do. Not. Churn. If you’re not a daytrader then if you aren’t prepared to hold it for six months then don’t damn well buy it, and if you are a daytrader then you are Frankie and The EscapeArtist wants a word in your shell-like.

    On the other hand, like a good little regular index investor, I started investing in a virgin Tracker ISA ( I believe it tracked the FTSE All-share but could have been FTSE100. Had a good-for-the-times TER of 1%)

    Virgin tracker ISA

    Virgin tracker ISA

    I was buying until 2000 (the dotcom ISA took over from then 😉 The pattern is not shockingly different – everybody got hurt in 2000 and may of us quit investing by 2001. From the looks of these charts I guess learning that cost me about £5000. When you look at the cost of numbnuts trying to charge you for sure fire courses on how to be a top trader the cost of attending investing school at the University of Life isn’t so bad. The lessons for me were –

    If you’re gonna stop investing regularly in the stock market, go on strike at times like 1999 or maybe now, don’t go on strike in the bear markets. That’s easy to say but still hard to do. It gets easier to do after you’ve seen it work. It’s one of those gut things.

    Do not churn. If most of your holding periods are less than a year you are a churner 3 A lot of your return is in the waiting.

    Don’t chase momentum. If it all looks high, look for something low. And still check the bastard out – sometimes it’s good to sit tight. Unlike chuck Price you don’t have to get up and dance, and at the paltry levels of interest these days holding cash in a S&S ISA (or even in a Cash ISA, not that that’s really worth the candle either) is a reasonable thing to do. Low inflation/deflation is the cash-holder’s friend. It’s not gonna last

    Note from my index investing career that index investing will still not save you if you are Dumb Money and chase momentum. Index investing is a method, not a solution.

    So what is it about now? Look all around you and the highway is littered to the horizon with cans kicked down the road by politicians eager to make it all go away for another five years. There is stupendous wreckage in the eurozone. The Chinese, Japanese and everyone else seems locked in a deadly embrace to trying to outprint money and make it some other sucker’s fault. Trade has slowed to the extend that we have overcapacity in world mining, commodities of all sorts and the oil price had tanked for  lack of demand due to a lack of economic activity. Warmongering sociopaths from Putin to the vexatious nutcases all over the Middle East are working out their childhood traumas on unfortunate legions of their fellow human beings. Grexit has been postponed, not resolved.

    Apart from that everything is dandy. I know that you shouldn’t be a doomster but that doesn’t mean you have to empty the Kool-Aid in one go. The valuations of the developed world seem mad given the state of the place. Let’s hear it from Citi’s Chuck Prince in 2007

    When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

    All those damned kicked cans littering the highway, too, piling up and getting under people’s feet and making things more complicated. The ermine is fearful. Not fearful as in 2001, having lost a shitload of money and wanting to sit out the next dance. Fearful as in 2015, trying to work out what the hell to do with the coming years of ISA allowance because all those other blighters seem greedy.

    The market can stay irrational for longer than I can hold out selling my own stuff back to me. I only have another three years of CGT holdings to liquidate, and then I am going to have to start putting real money into my ISA as opposed to selling my unwrapped holdings back to myself, I hope this one’s gonna blow before 2018…

    There’s also a sneaky little corollary to that. If an when it does blow, don’t just load up my ISA. Load up an unwrapped trading account too, to sell back to myself in the Kool-Aid euphoria years like now. What did that fellow Greenspan call it? Irrational exuberance. His countrymen are doing that right now IMO.

    Notes:

    1. well, it also means our govenrments have printed a shitload of money that needs to stick to something I guess, and in the UK housing and equities is as good as any.
    2. I am lucky this is largely in an ISA
    3. There’s nothing inherently wrong with churning though your costs start to rise. But I have learned that I am absolutely crap in that mode. so I don’t do it – I favour being catatonic when investing.

    A fun farrago of middle-class folly

    The heady aspirations of the middle class wannabees over at the Torygraph often tickle my fancy. Last week with was the numpties who wanted to become BTL landlords and have some impecunious other suckers pay for their three babies, this time let’s hear it from Rik Thomas who earns £55k and wonders if he can pay for private schooling for his one year-old son and get to retire at 50?

    Deconstructing this folly quite interesting. Although ambitious  it wouldn’t have been totally unreasonable for his father’s generation. Lots and lots of things are so much better now than they were a generation ago, but unfortunately for Rik it is increasing inequality that is turning this into a farrago. Some of the goods and services that people associate with the middle class are goods priced on perceived value, and while Rik’s salary is twice the average national household income and probably does put him in the middle class, he has been foolish with the purchase of one and his ambition of the another will cost him more of his lifetime salary than it did of his father.

    Can Rik pay for private schooling and retire at 50? No. Maybe the Ermine is being a sourpuss here because I didn’t get to retire by 50, but really. Just. No. Not quite the wrong city but definitely the wrong ballpark in the wrong part of town. This fellow is saving £100 a month against school fees of about £8,000 p.a. He wants to pay for private primary school, indeed, so the problem is urgent, I believe children go to primary school at 5 in this country. I didn’t realise that private primary schools exist, but there we go, how the other half lives, eh. Anyway. Oxford degree or not the problem is clear and it’s in the arithmetic – his savings rate is way too low. Okay, maybe his good lady wife (warms the cockles of the cynical Ermine’s heart that there are two people involved in this grand ambition) will return to work when the sprog is parked in the primary school for most of the working day and may be able to make up the deficit, but whatever. Must. Do. Better.  – and sharpish.

    By the time he is 35, he hopes to be earning £100,000. With the oil industry’s current woes, he is unsure if he will get a bonus this year.

    The old triumph of hope over experience, eh, somehow the ‘unsure you’ll get a bonus this year’ doesn’t necessarily bode well for mahoosive future pay raises but I have to agree with him and that Mark Carney fellow that the current oil price doldrums will probably look different in seven years’ time, so let’s take this at face value. I do note, however, that project management is eminently offshoreable – The Firm has been outing project managers for years. He’s 27, so time is on his side, his son should be off his hands and making his own way in the world by the time dad is 50, though observation shows that this whole moving out and making your own way in the world seems to be an early 30s thing rather than the early twenties thing that it was in days of yore.

    Let’s zoom out and take a look at the bigger picture.

    Fee paying schools are a Veblen Good

    In days of yore, bank managers and doctors , accountants and engineers sent their children to public school, because there was not such a disparity of incomes. Nowadays most of us have more Stuff, better heating and better cars than our forebears had in the 1950s and 60s, but there are some goods that are priced on perceived value rather than the marginal cost of production. I would classify public schools as Veblen goods, along with designer handbags, luxury cars, jewellery etc. You buy these for the message they give to other people. In the limiting case an oligarch doesn’t need a yacht, other than to make himself feel better than other people who don’t have one.

    Only 7% of Britons go to public schools 1. The promulgators of independent schools dress it all up with ethos and values and cobblers like that. However, the fact that 93% of Britons get dragged up in State schools and the country is still in the top twenty of GDP per capita  shows that this is not a need. It is in the top three of Maslow’s hierarchy

    1402_Maslow's_Hierarchy_of_Needs.svg

    and you do it to be part of the group of Well Off People. There are practical advantages, of course – public schools teach their pupils how to be leaders of men much better than State schools, so as a result the well-off but dim will have a good place in society. But a large part of the spending on public schools is to show that you can. It performs the same role as the iridescent feathers of the peacock’s tail, an inefficiency you carry to show that you have the wealth to spare.

    I have personal experience of this. I went to a State grammar school, which chose to become independent in my last year because otherwise it would have been destroyed by the wreckers of the Labour Government in ’76. Let’s hear it from Anthony Crosland.

    “If it’s the last thing I do, I’m going to destroy every fucking grammar school in England. And Wales and Northern Ireland”

    I must go and piss on his grave sometime. He caused my parents a lot of stress, because they couldn’t afford to pay and hadn’t expected to. As it was the ILEA grandfathered existing pupils and paid the fees in the last year (my sixth form).

    Grammar school worked for me. I was the son of a blue collar worker and a SAHM, and I benefited from upwards mobility. At a guess working in industrial research and design was a middle class career. I was eventually able to see the argument that several teachers repeatedly put to me, that by skimming the able the grammar schools impaired the ability of the secondary moderns and early comprehensives to achieve balance, because they were teaching the less able. Aspirations are lowered and people learn to labour. So the grammar schools had to go. Their existence was inequitable to some extent.

    Because my parents weren’t rich enough to do independent schooling, in a comprehensive system my end of the boat would have gone down, but overall the common weal would probably have improved. It’s easier to say that now that I have benefited from this and don’t have skin in the game. It took me until my late forties to finally surrender and accept the intellectual premise because I found its logic probably passes the balance of probabilities.

    My personal experience of mixed-ability schooling is limited to primary school, and I very distinctly remember being in class where those who could read had to sit beside those who couldn’t and help them read. It was tedious, excruciating and hard work, and it wasted my own time at school. I had normally finished the school books for reading in about a quarter of the time allocated, largely because I didn’t have to vocalise as I read. In that year I realised the Ermine was never going to be a teacher, because I was unable to understand or to empathise how people could not pick up the rudimentary meaning and grammar of English. And as for this reading out loud lark, WTF was up with that? Seriously, don’t ever do that to people. Speech is about five to ten times slower than visual reading, if you teach people to read out loud and then only understand by listening to themselves you condemn them to a lifetime of sub-normal reading speed, because it’s hard to unlearn.

    I was taught to read by my mother before I went to primary  school – English was not her first language. So while I accept that mixed ability schooling is probably overall for the best, as somebody who would (and had) lost out in it I’m never going to be an enthusiastic fan, it definitely falls into “the needs of the many outweigh the needs of the few” territory, and that sucks if you’re one of the few. But I can understand that State schooling has to aim for the greatest good given the limited resources 2.

    Parents never like to think their children are stupid or even below average, though it must be happening 50% of the time. Independent schooling addresses this in two ways. One is it throws more resources at the problem. A stupid child with excellent teaching can probably be brought up to the level of a mildly above average child with average teaching. That’s the easy part. The second way is that independent schools are far, far better at teaching their pupils to be leaders of men. Presumably they don’t go round telling people everybody is of the same worth and ability, which seems to be a given in State schools despite depressing evidence to the contrary in terms of ability. The Ermine only learned to address crowds of a couple of hundred people in the second half of my  working life, and I learned elements of command presence by having to take decisions in public leading people because I had specific skills for the job. I was never taught this, and had to research  how to carry people with me by watching others do it, by reading some military descriptions and with Google.

    My ability to do this is still a pale reflection of the typical public school alumnus. They were taught command presence. 3. I was taught subjects at school, but not how to lead people. I don’t find it that surprising that those who went to public school are much more likely to be in positions of leadership across the country, as evidenced in this Government report. And summarised by John Major in 2013

    “In every single sphere of British influence, the upper echelons of power in 2013 are held overwhelmingly by the privately educated or the affluent middle class,”

    I can see why parents like public schools. It softens that 50:50 chance of having to face up to having a stupid child, and you can still get them ahead of the 93% rabble, because leadership is a well-rewarded occupation. You don’t need to be bright to have command presence. The other area where public schools probably do well is where a child has an unusually unbalanced set of strengths and weaknesses. State schooling has to be one size fits all, once Crosland destroyed the grammar schools that specialised in academically biased pupils. We don’t want to pay the taxes that would ensure no child is left behind – it has to be good enough, not excellent, since we can’t afford excellence.

    I am not saying people who went to independent schools are dimwits – probably on average the intake is a little above average, purely on the slight heritability of ability combined with cultural factors. But independent schools can probably make more of the academically challenged than State schools, which must be comforting for parents who want the very best for their child regardless of their natural ability compared with the 93% lumpenproletariat 😉

    The trouble with Veblen goods is they have to be dear to be exclusive

    And this is where Rik is SOL. He went to public school, so he thinks of this as the norm, but 7% isn’t a norm. The whole point of public schooling is to get ahead of the 93%. If we take a butcher’s hook at the Independent Schools Council’s report we can see that the cumulative rise in pupils in independent schools since 1996 is 8% (roughly when Rik was at his public school from 1993 to 2006). Since 7% of children now go to public school, my grammar skool edukayshun lets me estimate about 6.5% of pupils went to public school in his day, since the ISC report indicates the cumulative change in total pupil numbers is very small. However, with increasing inequality all those richer people are driving up the price of public schooling, and as a Veblen good they don’t just make more public schooling to meet demand. They’ll make a bit more to soak up the demand profitably, but the 0.1% is getting richer faster than the Riks of this world.

    Britain has only so much space for dimwitted leaders  – we couldn’t have a 50% independent school population without some of the advantages going away. If we assume that half the intake of an independent school is below average, we can probably find space in the leadership structure of Britain for that 3.5%, whereas finding leadership positions for 25% of school leavers is going to be tough. And as conspicuous consumption, it has to be exclusive even if there weren’t technical reasons why it had to be. Imagine a world where all of us wore Manolo Blahniks, drove Rolls Royce SUVs and had Lear jets. The cognoscenti would have to go and find something else to make themselves feel special.

    Public school is like that. It is a status symbol, it does have quality and does buy you favours and particularly for dimwitted rich kids 4 it keeps them in the style they were accustomed t because leadership is not widely taught.

    I owe it to Prospect magazine for the official definition of these rich dimwits. They are the ‘second bananas’ identified in The Fall of the Sloane Rangers and they owe me a new keyboard. Apparently in the past according to the Torygraph

    Public schoolboys married girls in pearls and settled down to an upper middle class life in the bosom of the Establishment. Diana, Princess of Wales was their poster girl.

     

    Girls in pearls? WTF is this they speak of? Why was I as a student living in a Knightsbridge basement wannabe photojournalist shooting gritty Tri-X black and white pictures of the soup kitchens under Charing Cross railway arches and being accosted by jumpy coppers where I could have been using Kodachrome on girls in pearls…

    Anyway, Prospect supports the thesis of Rik’s dad having it easier than Rik, although the Sloane Rangers were the London cream of the second bananas. To wit, the ineffectual toffs used to be the 5%. They are being nuked by New Money

    Most of the old Sloane groups were originally somewhere in the top 5 per cent—it’s difficult to quantify a stance—and some of them at the ragged lower edge of the 1 per cent, where the household income threshold is more than £3,000 a week now.

    “The Sloane population of the City was winnowed out—now they were competing with other types and other breeds from other places”

    The combination of 80s Tory government and home-grown New Money—much of it smart, tough and well-educated—looked at first to most old Sloanes (instinctive Tories) like just what the doctor ordered. But they set about destroying the fixed points of the Sloane world—particularly the Old City at Big Bang (1986) and after. And then New Money started cherry-picking the trophies that Sloanes valued. The attractive London houses in SW3, 1, 7, 10, 6 and 5 (in that order), the prettiest rectories and miniature statelies in the best counties, the best university places. Big Bang reshaped the City and set the foundations for 21st-century financial London. There was a storm of acquisitions before and after 1986 in which a roll-call of familiar Old City names like Rowe and Pitman disappeared. Then their buyers were gulped down by still bigger fish. The familiar merchant wankers of a thousand Sloane jokes—the delicious histories, the panelled rooms and word-is-my-bondism—were replaced by global investment banks with soaring atrial offices in Broadgate and, later, Canary Wharf. The new players were American, French, German, Swiss and Japanese banks. The top bananas were toughs and technocrats from absolutely everywhere—people who didn’t know or care about subtle semantic class indicators or the significance of milk-in-first and who didn’t care if their suits looked a bit Charlie. People who didn’t know the Sloanes’ dads. The new bosses wanted “top talent,” wherever it came from.

    I fear the obsidian Ermine heart fails to bleed…

    But while Rik’s dad could afford to do this public school stuff, Rik can’t. He needs to choose now – public school, or early retirement. He can do one or the other, not both. And if he wants public school, he needs to suck in his gut and start saving, because he has 15 years of laying out £10k p.a. plus starting in four years time. Yes, his wife and lodgers may make up some of the shortfall, but public school gets dearer at secondary school.

    The best laid plans get sucker-punched by lifestyle inflation

    Now Rik will be doing better than I did, and he lives in Aberdeen rather than the Great Wen. But he’s already collected airs and graces at 27. Living three people in a five-bedroom house, FFS. At 27 I was renting a house with four other guys to save money because rent is throwing money away. I had yet to discover how much money you can throw away buying a house at the wrong time! At least Rik is figuring to rent out a room for £6k p.a. Call me an antisocial git but living in a house owned by the bank  with strangers is not my idea of living the middle class dream even if it does have five bedrooms and Italian hand-made tiles in the kitchen, but each to their own. Exactly how well it works for a lodger with a one-year-old in the household beats me. I’m assuming that Rik’s desire for early retirement will make him circumspect about adding extra mouths to his household – the late Cynthia Oti’s secret for a secure financial future was to

    “never take financial responsibility for something that eats.”

    which may be taking it a little bit far, though I recently heard reports of one lady friend whose children are sort of off her hands declaring

    “I’m not surprised people get themselves into money trouble, they accumulate accessories like dogs, children and stuff without thinking about how much it all costs”

    so maybe Cynthia was onto something :) The five-bedroom house of course says Rik is Mr Big and worth something, but he only needs three bedrooms and all the rest will continually bleed him, needing heating, decorating, repairing etc. Let’s hope that North Sea Oil will confound the Hubbert peak and still be bringing in shitloads of money at least until he can downsize.

    Either way, the problem with retiring early is that of course Rik can lob his salary over about 43k into his SIPP and that’s all very sensible, but that kinda clips his net income to £32k (corresponding to gross of about 43k, anything over goes to his SIPP). Of that he wants to spray £8,000 on school fees in the near future leaving him with £24k. Computing everything in today’s terms and anticipating that equity gains will at least compensate for inflation, if he wants to retire at 50 then he needs to have enough in an ISA to run him from 50 to 58, at £25,000 p.a which my trusty calculator makes £200k. He can run this capital into the ground because he will have a decent SIPP income for afterwards, and he has 23 years to do this starting tomorrow. He also owes £200 k on his house. Let’s say he saves into an ISA £10k p.a. and his mortgage costs him £4,000 pa @ 2%. Let’s ignore the tedious concept that you are supposed to pay down the capital on a mortgage, this family now needs to run two adults and a child in the style public school people like to live on  – on £10,000 a year 5. TFS has an example of what that looks like and it probably suffices to say that this is easier in theory than in practice. Now the Ermine household could do that, but I am almost twice Rik’s age, have no mortgage or public school spending. Your mid twenties to forties are the worst time for calls on your income, and this goes in spades if you have children.

    Early retirement is doing different – and to do different you have to be different and live different

    One of the observations I made at The Firm was that those who cleared off in their early fifties and retired were the child-free. As long as they had managed to avoid the D word parents were on their way about five years later if they worked at it. Everybody was retired at 60, because that was the normal retirement age.

    The original fellow who gave me all the sage advice to save into AVCs is still working for The Firm, despite being well over 50 and his younger self declaiming “you’re stupid if you dont’ save into AVCs and retire by 45″. Why is that then? Well, his wife and kids took issue with the grand plan – basically they wanted to have this nice middle class lifestyle and that doesn’t go along with dropping your salary even to the 40% tax threshold. Whoops. Nice plan, Stan. They preferred daddy in the office behind a screen where he belonged 6 so they could could have it all because they were worth it. Early retirement fail. If you want to retire early, you have to live differently to your peer group. In particular you have to spend less!

    Earning more doesn’t help most people, because as a rule to earn more you have to push yourself more until you reach CEO level. At board level to earn more you simply have a word with your mates on the non-exec remuneration board to loot the real owners of the firm more and award yourself a pay rise, but for grunts you normally have to do more or eat more stress by doing unpleasant shit. So you get to earn more, but then you are in the circle of more spendy people and you may be more pissed off with work so you need to spend more to make yourself feel better. So while earning more seems the obvious way to go it only works for some people. Less than 1% I would guess 😉 If earning more were the answer, footballers would never go bankrupt.

    The fellow who taught the younger Ermine all about tax-advantaged pension savings was right you’re stupid if you dont’ save into [pension savings like SIPPS] AVCs – but not right for himself. His words gave me hope that there was a way out of there and the plan was put into action with extreme prejudice. It’s not a barrel of laughs, I can tell you, driving one’s salary down to a whisker of the minimum wage threshold and saving into pension AVCs using salary sacrifice. And then trying to save into an ISA. Because if you save so hard you can’t do shit because you have no bloody money left. When that shit is fast and furious desperate holidays because you’re so worth it cube slave, two weeks of respite in return for 48 of humdrum existence then one can do without it when the win is the rest of your life on vacation. Gets more challenging as you drive out of wanton consumerism and then start moving down Maslow’s hierarchy. It’s the in-between bit that suckers First World cubicle slaves. They want the trappings of their peers that cost money, but then they are trapped by the trappings.

    Rik is gonna run into the same sort of problem that my colleague at the Firm ran into. His family are going to want holidays in Tuscany and somewhere exotic. They are going to want kitchens with handmade Italian tiles, a butler sink and matching luggage. They will probably want something German on the driveway. How did the ermine get round that?

    I went on fewer holidays. I have less house than my colleagues 7. I drove my cars into the ground – two of my last four cars I took to the scrapyard personally. I spent less than I earned. But make no mistake – my colleagues had more holidays, Italian handmade tiles and all sorts of other goods and chattels to show for it. On the other hand, this week one day I got to go out and look at this in the Suffolk sunshine

    bloody hell, what's that noise - ah - incoming Brents at 2 o'clock

    bloody hell, what’s that noise – ah – incoming Brents at 2 o’clock

    Yesterday I went up to a recording studio in Norfolk to be a judge in a sound competition. While my former colleagues were looking a Microsoft Excel on their screens, or filling in their objectives. You pays your money and you takes your choice. I don’t have fancy tiles in the kitchen and haven’t been on a plane since 2007, whereas some of them go on five city-breaks a year.

    I don’t think Rik has jumped to this. To live different you have to do different. Not only that, there’s a second problem in town.

    Increasing inequality means you must be richer than your parents were to give you children the same class experience your parents gave you

    It’s those Veblen goods again. The trouble is there is one asset class that’s in the needs category that is typically the one single biggest part of most Britons’ net worth, provided that we overlook the inconvenient truth that they usually have it on borrowed money. Until 1979 Britain had a workable housing market where renting was a perfectly reasonable option, but since ownership has been promoted over renting. Even if the ownership is not for occupation. I found it brave of the Guardian to tackle this emotive issue and remind us that owning your home wasn’t widespread for an awful long time and isn’t the natural order of things. Indeed, home ownership is increasingly ill suited to modern working patterns where you may need to move to follow work. Most of the people at my grammar school were in rented accommodation, but in contrast to Generation Rent they had better security of tenure – many of these families were in council houses.

    More of Rik’s lifetime earnings will be consumed by housing than his parents’ earnings were. Should he go the public school education route, more of his lifetime earnings will be consumed by that too, relative to his parents. He is very unlikely to be able to retire early if he wants to indulge in such conspicuous consumption, although to him it will look like the normal spending of his peers. That is because most people spend as much as they earn, if they are lucky. To retire earlier than the norm, Rik must spend less than the norm. With his five-bedroom house and his public school aspirations, he is not on the right path. Something has to give. Pick any two of the three, Rik. Peer-group middle class lifestyle, school fees, early retirement. You’re just not rich enough to do all of them.

    Notes:

    1. for any confused logical Americans, public schools a.k.a. independent schools in England are the sort your pay money for, as opposed to State schools that are funded from general taxation
    2. I would now counter that we should focus State schooling on teaching the basics of the three Rs and then target the brightest because our economy will have few jobs for those of average or even slightly above average ability. The quid pro quo for that is that taxation needs to be enough on the winners so that a universal income can be paid, and also that adult education in the Victorian sense of bettering oneself and general education should be free and promoted via MOOCs and free libraries. The whole point of State education has changed through my working life but this does not seem to be acknowledged. It taught the thee Rs so you would have life skills and subjects so you would be a cog in the industrial machine. The latter is becoming redundant for many future non-employees, and in a world with Google general learning is much easier to be had for free.
    3. I have never been a paying independent school pupil. I offer this Guardian article into the stylistic differences between aims, and personal observation shows me that people who have been to public school are more at ease in leadership positions and generally giving direction
    4. clever rich kids would do okay in State schools as long as their parents taught them values
    5. £32k less £10k ISA less £8k public schoolery less £4000 IO mortgage
    6. I don’t know enough about his domestic circumstances to know how much his wife added to the household economy though from his talk I figured he happened to be the larger part of it
    7. but it is mortgage-free, which is rare amongst my colleagues
    12 Feb 2015, 2:15am
    debt economy:
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  • Zorba the Gr€€k is still skint after five years

    As the euro continues to fall amid disappointment that the EU has not come up with a solid rescue plan for Greece, Zorba makes an appearance

    Patrick Blower, Feb 2010

    It was five years ago to the day that I saw this livedraw on what was then the Guardian’s Comment is Free 1. Only one of the leaders in the cartoon is still standing after the five years, – five years is a really long time in politics.

    In those heady days, a nervous Ermine was still at work, but had roughed out a flight plan for the exit. All this turbulence in the market seemed hazard and opportunity, and I was convinced the Euro was going to blow, the internal contradictions of a finance union without a transfer union, the lack of common cause.

    None of these things have changed, but I underestimated the doggedness with which people cling to old forms, and of course perhaps the preparations the rest of the eurozone felt they needed to do to bolster the creaking edifice against Grexit. Even now it’s hard to say – will I look back at this in five years time and wonder how nothing has changed? Exactly how long can the markets stay irrational while the entirety of the Eurozone grinds its way into insolvency.

    Just like then, it feels that the forces are gathering for a showdown. It is in points of change that opportunity arises and destruction threatens. The five year anniversary seems to be a good one to invoke the spirit of Zorba the the Gr€€k once again. The world has still not recovered from the 2008 financial crisis, there is still too much capital chasing not enough productive assets. Greece is a symptom as well as a cause – the Eurozone serves two masters. As Lincoln observed the problem in a different field

    A house divided against itself cannot stand. I believe this government cannot endure, permanently, half slave and half free. I do not expect the Union to be dissolved — I do not expect the house to fall — but I do expect it will cease to be divided. It will become all one thing or all the other.

    Abraham Lincoln, 1858

    So too with the Eurozone, it lumbers endlessly from crisis to crisis, and it is time for it to become one thing or another. It has crushed too many dreams already, and it needs to shape up or to start to cut away the dead wood, and become small enough to for a political and transfer union to hold. Or the United States of Europe needs to be constructed.

    To call in another American view on the fiasco, I was glad to hear Greenspan finally call it out in public

    “I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognises that parting is the best strategy.
    […]

    The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”

    Until that comes to pass or the whole misbegotten enterprise disintegrates from its internal inconsistencies the rotting corpse that was wounded by the original financial crisis will endlessly stink up the place and ruin Europeans’ lives – particularly young folk by the looks of it.

    As a young man I was unlucky enough to graduate into Thatcher’s first recession in 1982, but although deep it recovered relatively quickly compared to the 2008 recession that seems to be combining with other strategic shifts in the workplace. In Britain although these problems may be affecting the quality of jobs, in the Eurozone and southern Europe there seems to be grinding youth unemployment as well as a general protracted recession – five years of that is a serious hit on one’s working life. No wonder there is a Greek youth brain drain.

    Can’t pay, won’t pay

    The Greeks are never going to repay the debt in Euros. Writing the debt off which is what Syriza seem to want isn’t going to help them in the long run either. They are yoked by the Euro to people that like to live in a different way. Let’s see what happened in the past. I hit up these guys for some historical USD to GDR, GBP and DEM from 1990 to 2001. I then normalised everything to a value of 1 on Jan 1990. Basically you needed 2½ times as many Drachma to buy a US dollar in 2000 than you’d needed 10 years before. Germans, who didn’t exactly have a great 1990s needed roughly the same and even in Blighty we only needed about 20% more GBP to buy that dollar. You can quibble as to what sort of store of value a US dollar represents but the difference cancels that out. There’s something different about the way Greece likes to do things and its currency reflected that.

    As time went by you needed more and more drachma to buy that US dollar

    When Zorba the Gr€€k was drawn, roughly the same distance as is covered by this chart had elapsed after the drachma was crash-locked to the Deutschemark’s proxy the Euro. Now it’s 1.5 times the space covered by this chart. There’s no point in resetting this to zero now, it’s a structural difference. In a true currency union like the United States, rich parts continuously transfer money to poor parts, else a New York City dollar would appreciate against a Detroit, MI dollar – in the chart above you’d need a lot more Detroit dollars to buy a beer in NYC at the end than at the start.

    The Greeks may be the canary in the coal-mine

    Those Gr€€k €uro debts ain’t gonna get paid. There’s a history lesson in this for the rest of us too. In the good times it’s easy to believe in financial promises, but in the end a lot of finance is just that, promises. A lot 2 of my ISA is also promises, so are all those British mortgages taken out of overinflated house prices at low interest rates by people who will never earn enough in a lifetime to discharge those debts unless something changes. At the moment the lens is focused on Greece, but it can move, and maybe zoom out. Odd things are happening in the economy – we have created a lot of money to buy off the day of reckoning in 20o8 and after seven years it’s still not finding things of value to stand proxy for, companies are hoarding cash because they can’t invest it to make things people can/will buy more of. It’s not necessarily all bad. Maybe it is the final denouement of consumerism -the Post Carbon Institute’s Richard Heinberg in a curiously upbeat mode

    The practical result of declining overall societal EROEI 3will be the need to devote proportionally more capital and labor to energy production processes. This is likely to translate, for example, to the requirement for more farm labor, and to fewer opportunities in professions not centered on directly productive activities: we’ll need more people making or growing things, and fewer people marketing, advertising, financing, regulating, and litigating them. For folks who think we have way too much marketing, advertising, financialization, regulation, and litigation in our current society, this may not seem like such a bad thing; prospects are likewise favorable for those who desire more control over their time, labor, and sources of sustenance (food and energy).

    […]

    The energy glut of the 20th century enabled us to embody energy in a mind-numbing array of buildings, infrastructure, machines, gadgets, and packaging. Middle-class families got used to buying and discarding enormous quantities of manufactured goods representing generous portions of previously expended energy. If we have less energy available to us in our renewable future, this will impact more than the operation of our machines and the lighting and heating of our buildings. It will also translate to a shrinking flow of manufactured goods that embody past energy expenditure, and a reduced ability to construct high energy-input structures. We might find we need to purchase fewer items of clothing and furniture, and fewer electronic devices, and inhabit smaller spaces. We might also use old goods longer, and re-use and re-purpose whatever can be repaired. We might need to get used to buying more basic foods again, rather than highly processed and excessively packaged food products. Exactly how far these trends might proceed is impossible to say: we are almost surely headed toward a simpler society, but no one knows ultimately how simple. Nevertheless, it’s fair to assume that this overall shift would constitute the end of consumerism (i.e., our current economic model that depends on ever-increasing consumption of consumer goods and services). Here again, there are more than a few people who believe that advanced industrial nations consume excessively, and that some simplification of rich- and middle-class lifestyles would be a good thing.

    I grew up in a simpler London, and when I look around me at the shocking waste and inefficiency of consumerism compared to only 40 years ago I do wish we could distil the many great and genuine innovations and improvements from all the destructive busywork and tat that takes away.

    Why? For crying out load, why?

    Consumerism. Why did this misallocation of resources happen?

    Perhaps Greece rubbing up against the evil heart of darkness in the common cause assumptions of the Euro is reminding us that in the battle of illusion against reality the latter tends to win out over time. We tell ourselves many stories round the virtual campfires weaving meaning into the flickering shadows on the wall. Although these myths are symbolic, not all of them are true. It is going to be an increasingly difficult task to find a way of turning cash into usefully productive long-term assets against a background of secular stagnation, and making easy assumptions is probably not the way to do it. Much of the appreciation is asset prices like shares and houses doesn’t reflect an increase in underlying value or future income stream in the case of shares. It merely reflects the increased amount of QE money chasing those assets. Anybody could be a great investor over the last few years with that sort of tailwind, though the day of reckoning seems to be getting closer with the help of our Greek friends shining a light on what unrealistic claims upon the future look like.

    The Greeks want to live with a currency that depreciates faster than the Germans. It is called the drachma. Possibly if Northern Europe wants its money back from the repudiated € loans, sue Goldman Sachs who aided the Greeks get into the Euro under false pretences, and good luck with that. It’s always good when seeking repayment to pressure people who actually have some money, and the Vampire Squid would seem to be where a lot of the money ended up 😉

    Goldman Sachs arranged swaps that effectively allowed Greece to borrow 1 billion Euros without adding to its official public debt. While it arranged the swaps, Goldman also sought to buy insurance on Greek debt and engage in other trades to protect itself against the risk of a default on those swaps. Eventually, Goldman sold the swaps to the national bank of Greece.

    The drachma is dead. Long live the drachma.

    Notes:

    1. Sadly along with it’s other faults the Internet is not forever – because meaning is held on the transitory relations of bits of spinning discs and network switchery that somebody has to pay for the rust that is linkrot  never sleeps. Analogue media coded information in what they were and didn’t need a constant supply of power and rent, though they had their own decay mechanisms. I was surprised to find this was hard to get hold of again after only five years. For me at least the Guardian’s link doesn’t play, but the artists own livedraw site still has it. I used a youtube link
    2. okay – all of it – a solar flare/EMP would vaporise the lot, but even without that some promises are more hand-waving than others
    3. energy return on energy invested – how much energy you have to invest in getting energy
    4 Feb 2015, 11:12pm
    personal finance
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  • Why UK retirees may prefer dividend income – putting the personal into finance

    There was a spirited discussion over at Monevator as to why on earth retirees focus on dividend income – in a rational world investors wouldn’t give a damn about where their return comes from – an appreciation in the share price or dividend income or some mix of the two. Total return is where it’s at. The Greybeard was advocating a shift towards companies with a tendency towards stable dividend payments like income investment trusts and met with some resistance to the idea from people who I would hazard were largely in the accumulation phase. I’m one of the greybeards favouring income too.

    Bogleheadism is a comforting creed. Take the return the putatively efficient market gives you for your particular asset mix of choice. Adopt your previously determined safe withdrawal rate (SWR) – typically 4 to 5% though mistersquirrel and RIT advocate lower levels, then sell off accumulation index fund units to realise your SWR.

    How many years do you have to average out the market noise to detect true value?

    Benjamin Graham said that in the short term the market is a voting machine, in the long term it is a weighing machine. It’s a pity the old boy didn’t give us an integration time to average out the noise signal from the voting machine bit, but we can get a feel for it by two bits of indirect evidence. One is the boom-bust cycle, and the other is the integration time of the Shiller CAPE index.

    The BBC counted 25 bear markets in the 20th century, with typical drawdowns of up to 40%.

    The Shiller CAPE index takes an integration time of about 10 years. That’s a bastard. It means if you start your retirement, say in 2007, you could have to wait a long time – over five years – to start to observe whether the engine of industrial capitalism was misfiring and trending towards secular stagnation, in which case you want to rack back your 5% SWR assumption and follow RIT down the 2.5% rat-hole. Trouble is, you’ve been overdrawing your retirement capital at twice the safe withdrawal rate for the last five years.

    So you decide to be a bit more jumpy and respond more quickly to the headline value of your networth. That’s now going to be feast or famine – one year you’re on caviar and flying First Class, the next year you’re on Pot Noodle and taking the Megabus to Blackpool.

    The working saver can take a nonchalant approach to market crashes. They are either getting a lot more shares for their money, or if industrial capitalism is doomed anyway then they are hosed like everyone else. If it turns out the 5% real return on investment was a quirk of the postwar period then they can defer retirement and save more money, unwelcome as it may be.

    If you lose or give up a job in your late 40s or 50s you often find it hard to match your previous salary, so once you pull the big red ejector handle you better be sure your plan is workable. Both in terms of academic correctness and in terms of being something that you can actually do without being stressed out into daft moves should the market throw a hissy fit on you.

    Dividend income is less volatile than the capital value of shares

    You can go get historical data for the FTSE 100 (UKX) index price and the UKX Total return from the FTSE here.  Unfortunately it only goes back to 2012; I munged the data to rebase both to a value of 100 on 1 Nov 2012. Then I took the quarterly change in the UKX from the previous period and calculated the dividend 1 (from the difference between UKX and the UKX-TR, bearing in mind the TR accumulates the dividend over time which needs to be compensated for).

    The chart shows a 4-point moving average of quarterly change in networth based on 100, ie each point is averaged over the previous year. You’re taking the piss if you live off dividend income and don’t have at least a year’s worth of buffer. The smoothed quarterly variation is +2.5% to -1% so the range sweeps a good portion of a typical +1.25% SWR 2, and it doesn’t even cover a particularly exciting period in the market. It’s a bumpy ride – about half the quarterly values are below the nominal steady SWR

    less variation in the divi than the capital value

    The dividend value varies less over the periods than the capital value. It’s also always a positive number (even in the pits of the recession some of the FTSE100 paid a dividend). It isn’t as much as the typical 1.25%/qtr SWR but the FTSE100 does generally increase capital value over decades, if you exclude the irrational exuberance of the dotcom boom.

    Passive investing is still a set of axioms – you are modelling the behaviour of a chaotic system subject to known random stimuli as well as human frailty and the madness of crowds. It may well be the best game in town for a host of good reasons, but you must live with that rough ride and the long and unspecified delay of filtering the voting from the weighing, to decide what your SWR is. What exactly is the value of your portfolio on which you base that SWR? It’s not like you can stop investing 10 years before retiring and do a Shiller CAPE on it.

    Imagine this kind of ride on a intercontinental flight

    You’re the pilot of an aircraft taking off from LAX. You observe your plane has massive fuel tanks, about 10x your fuel consumption, but they start off low. After a bumpy takeoff they seem to fill steadily from nowhere. For five thousand miles you overfly land, at a steady speed, sometimes you have outages in the fuel income but the increasingly full tanks help you ride these. Halfway through your journey, you reach the East Coast and the open sea, the tanks are almost full, and your flight engineer says let’s switch to the alternative powertrain.

    All of the sudden the power approximately halves, and gets rough, not only have you lost 50% of power but of what is left you’re facing a 2:1 variation in the inflow. The tanks never refill and the fuel gauge is going nuts – much of the time is shows a gradual and manageable decrease with sudden plunges to half of the previous level and back.

    It’s gonna make you jumpy and fearful. Particularly bearing in mind that people retiring now often had an experience of a steadier work income than is common in a less secure employment environment now. I have left five jobs (discounting crappy university infill stuff) but four of the leaving dos were in the first seven years of my working life. These people are going to be ill-suited to managing such a variable income compared to many people working now. They’re just not used to it.

    capital value/networth is a bad metric for people with high equity exposure – it’s feast or famine

    Ermine’s networth in marked to market terms. The date line is the zero axis

    This is an ermine’s networth, as it was in numerical form at the instance of the time on the x-axis. It shows cash and equity investments I can get hold of, and excludes things like my house value, main pension and AVC savings. If I can’t sell it in 30 days Quicken 3 may track it but it doesn’t show it. So at the end of the graph I have a 70% equity exposure. At the start I had very little, and obviously I was earning. I was a salaryman – there was no variability in my earnings, which you can see in the steady and monotonic climb at the left-hand side. All the variability was in my spending, and I had driven that down as much as possible.

    I left work in 2012 – the jump reflects two things, one is the redundancy money but for tax reasons I tossed a lot of that into my pension AVCs, not shown. There was a bunch of Sharesave shares vesting and therefore coming onto my books.  Quicken is able to update equity prices with a whole load of scripting fun and games, this chart therefore shows what the liquidation potential of my financial assets at any point in time. I stopped earning in 2012 – you can see this because the slope of the chart falls off. But also look at the increasing random variation on my networth, which is the result of the increasing equity exposure. In May 2012 I could have given a reasonably accurate answer to “what is your networth”. Whereas now it would be, well, search me, guv. There’s a 10% random noise figure on it as it is, and if the Greeks pick a fight with the Germans then that 70% equity networth could easily be marked to market at half its previous value, ie my networth would be hammered to 65% of the current value on the right-hand side 4. The month on month change is more than I was saving when earning, it is more than my monthly running costs, and this is the normal variation of a market that I have moaned about for two successive years that it is boring and tedious. I suspect we are due some excitement soon 😉 My ISA is more diversified than the UKX in terms of sector, size and geography, but that doesn’t eliminate volatility, just reduces it.

    So if you’re spending x% of your annually evaluated networth, you could be eating a 50% variation in income year on year. If you want to see what that looks like check out the bellyaching about the GAD rules in 2011 as people in drawdown had to cut their spending for very similar reasons – and that was only 8% because the GAD window time spanned several years. Now retirees have usually got shot of the children and paid down most of their mortgage, so their fixed costs can be less of their income proportionally to their working selves. That’s a good position to be in, because they can then adjust their spending to suit. Still not going to be fun!

    The age-old choice – speed or comfort, Sir?

    In my view you need to hold about three years worth of running costs as a cash float to live off dividend income anyway. It seems many people think that’s too much – so they may be prepared to pay a bit more to have someone do that smoothing for them. Which is where the investment trusts come in – although valuations make it harder to do this now than when this article was written the time will come again. To wit –

    The pick of these trusts have paid regular dividends for decades, with the income rising annually for well over 20 years. The very best have grown their payouts for more than 40 years

    You are paying for the smoothing – in risk as well as slightly higher fees. The efficient market hypothesis says so. Nevertheless, if they have a track record of growing their payouts for decades then if you determine the amount of payout you get now is good enough, you may feel better about relying on it more than that SWR% of your net worth.

    You can do the smoothing yourself – just how much cash do you hold? There are other ways of smoothing – you can shift your portfolio towards bonds. How much? It really helps to know how long you will live for. You can take the Logan’s Run approach to putting an upper bound on that, for for some reason this isn’t a particularly popular option.

    Logan's Run

    Logan’s Run

    That’s the trouble with retirement planning. You have to make a judgement call on your own death, it’s not something a living system really likes to do. The Cyclopes of ancient Greek mythology traded one eye for knowledge of the future. They weren’t that chuffed to get in return the foreknowledge of the date of their own death 😉

    That’s why this retiree likes dividend income. Taking the efficient market hypothesis as an article of faith is a lot easier when you are young and retirement is far away. When I was looking for a way to top up my pension to allow for the fact that I was going to work for shorter than the original time I had expected, I started in the teeth of the recession. While this indicated to me I was starting at a good time 5, I didn’t want that rough ride on income that a fixed SWR would represent, even though the income was for wants, not needs. It’s very easy to imagine future bear markets when you are in one 😉

    When I read “there’s a way of profiting from holding shares that requires no selling at all, by receiving the (generally) twice-a-year dividend” I figured this was a good way to go to match my requirements and temperament. It’s got harder to do that, and I have given some nod to the EMH and diversification by using index funds for non-UK equity investments. I have seen my target yield fall as a result, though not my unitised portfolio value. At the moment because I reinvest dividends I am converting dividend income to ISA capital gain. I accept that I eat about 1% costs on the dividend in trading costs to invest it again.

    If I had 30 years of accumulation I would use continuous drip feeding. But I just don’t have that long. And I’m prepared to accept the consequences, because my risk profile is abnormal – this is not the main part of my retirement savings.

    Adjusting spending upwards is easy. Adjusting it down is hard

    I’ve had experience of trying to reduce spending incrementally. I read this book by Guardianista Polly Ghazi, probably in ’97. At the time I was looking to move from the first two-up-two down I stupidly bought in Ipswich for vastly more than it was worth in 1989 to the current place. The only small problem was icing the negative equity first, which meant kissing goodbye to roughly half the interest only (endowment backed) mortgage. There’s only one way to do that, every month you take a shitload of money you’ve earned by selling a load of your time to The Man and you throw it into a black hole of debt, money which you could be spending it on holidays, meals out, or even another house.

    Let me save you that £11 book price. You don’t downshift in any meaningful way by switching to value brands at Tesco. You don’t do it by switching to ecologically favourable washing up liquid – because it doesn’t work as well as the sort of thing that says ‘kills fish’ on it 6. If you need Ms Ghazi to tell you it’s cheaper to hang your washing outside rather than use the dryer you need a check up from the neck up. You don’t save money by going part-time. In short, you very definitely don’t go about it in the way described by these two Guardian journalists, I didn’t realise journalism had already been taken over by aristocratic interns that early. They had no bloody idea. Yes, if you’re spewing money away on John Lewis housewares and shop at Waitrose then maybe you can save enough money to matter. But if you’ve already put some brain cells to work in cutting down you need revolution, not evolution in your spending habits. Keeping hens in the back garden of your Islington pad ain’t gonna cut it.

    “Do or do not. There is no try”.

    It sounds outrageous, but if one is trying to jump across a chasm, it makes no sense to focus on first jumping half way across and then on jumping the rest of the way. Aim to jump all the way or don’t jump at all.

    Yoda and ERE

    Adjusting spending downwards is like running into a brick wall. Then getting up and bashing your head against it until it doesn’t hurt any more. Best done all in one go and you have at least six months of hell where you go “Why can’t I do [insert piece of stupid consumerism that you used to do but was vaguely enjoyable, though not as much as the hours of sucking up to the Man to be able to pay for it]?” The trouble is if you don’t go cold turkey the losses you feel in one piece of consumerism denied will simply go into jacking up some other piece of consumerism. If you try and nail that you now had two areas where you feel mildly pissed off but you still haven’t saved a useful amount of money. The meek shall not inherit the earth in this fight. Consumerism delivers the message every day “buy this. It will make you feel better ‘because you’re worth it'”. Lots of really clever people are paid lots of money to pound that message into your skull, and there are many of them and only one of you. This is not a question of balance, it is a case of terminate with extreme prejudice or go home and enjoy the consumer lifestyle and suck up to The Man. Incrementalism works a treat on upshifting but really blows on downshifting. Humans are loss averse – the downshift hurts way more than the upshift delighted. You’re just built that way.

    Dear ex-girlfriend and I never managed to save money the Ghazi way. We stopped going out for meals. Stopped going abroad for holidays. We decided what mattered to us and what didn’t. and I poured endless money down an endless circling drain to go fix the most monumental personal finance error I have ever made. There is absolutely no fun it that at all.

    Buy to Let = early retirement?

    You see the scars from that cock-up in all the grousing about residential property on here. It is in the value of my house 7 being less than a third of the networth chart of a subset of my total assets. It is in the fact I am not a BTL investor. The Ermine Does. Not. Do. Res. Property. Everybody else in the UK thinks residential property = money tree.

    London. 40k income. Wants to retire to pursue creative arty-farty stuff. Can I make enough money gulling tenants to pay for my three babies on top of that? Oy Vey...

    40k income. Wants to retire to pursue creative arty-farty stuff. Can I make enough money gulling hapless tenants of my Rachmanesque estate to pay for my three babies on top of that? In London? Oy Vey…

    I look at this pair of blessed tossers asking “Will income from a £750k buy-to-let empire pay for our three babies?” The ermine stares into the crystal ball and as it shatters with the intense flow of the clients’ emotion of Greed and he walks away with a cynical baring of the teeth and a note to charge these dudes for the trashed glassware. “There is nothing I can do for you in the face of such folly”. The Guardian tells you the cost of raising a child × 3 is over half a million pounds, and you both want to retire 8 by 40, live in London, raise those kids on an asset base of £750k while servicing a mortgage of £430k? He was lucky enough to make £300k on his house so he believes in BTL, like 99.99999999% of British people – I am the sole exception to that in this benighted country it seems. Let’s see – three kids FFS – you already have to be rich to be able to afford to have three kids in Britain these days. Props to them for ambition, wanting to retire before having children. Good luck with that. Hope it works, because the taxpayer is underwriting the downside of this triumph of hope over experience. BTL can be money tree. In the right hands. These are not the right hands IMO:

    “Property makes the most sense to me as an investment – I’ve spent a lot of time trying to understand stocks and shares, and it feels quite counterintuitive, although I bought shares in Royal Mail and Gap and I did all right.”

    Horizontal and vertical diversification, asset classes, risk management, all that tosh… Even though I hate on the asset class I have some property in REITs and HHP index crap.

    What you don’t want to do is upshift and downshift repeatedly

    So the second time in my life when I had to save a load of money was to quit work eight years early I knew what to do. Cold Turkey. It’s the only way IMO. When you are looking at downshifting for the rest of your life you’d like to at least qualify the option, and for that you need an answer to ‘how much income will I have in retirement’, and preferably not one that flaps about 50% down in a rough year or few.

    Take a look at the Ermine’s networth. Why am I still standing on the brake of spending, indeed have done for 5 years now – after all that networth is actually creeping up, and it represents less than half the much less volatile resources I do have? I am standing on the brakes because I know how hard it is to reduce spending, and I don’t want to have to do it again, or – shudder-  go work for The Man again. I’ve done with that for one lifetime. That’s why, when I look to win an income from an equity portfolio I favour dividend income like The Greybeard. It’s why when you go on TMF-UK you see people talking about high yield portfolios so much. It’s worth smoothing the income because if you’re going to have to downshift because you upshifted in the good times it’s probably going to feel better to not upshift in the first place, because the hurt of the down is more than the joy of the up. A smoothed income lets you minimise these changes. It’s between business class and economy, rather than business class and Megabus.

    The Boglehead way is probably great, but the ride absolutely sucks because of the unknowability of the true value of your portfolio. It’s for the young ‘uns with decades of investment ahead of them, and they will probably do very well out of it. Those of us with more aged bones prefer the gentler ride, and are often prepared to surrender performance for smoothness.

    Once you’ve had the experience of downshifting a couple of times, you really don’t want to do it on somebody else’s terms. It’s tough enough to do to achieve a positive goal like freedom from The Man 9. So I’ll favour conservatism, and inflate when I feel far enough away from the brick wall to have some space from it. Yeah, I could go to work, but I don’t have the taste for it, because I have gotten used to owning my own time. They still aren’t making any more of it.

    Notes:

    1. dividends are paid less frequently than quarterly so I will pick up sampling error, but this will come good in the 4Q/yearly boxcar average as quarterly shortfalls will be carried forward
    2. one quarter’s worth of a typical 5% annual safe withdrawal rate
    3. Quicken is the 10 year old program I use to track money. Unlike young pups like theFIrestarter or even mistersquirrel I don’t do cloud, I’ve taken the shaft too many times by providers closing business, and there’s the whole ‘if you’re not paying for the service then you are the product‘ problem.
    4. computed at 70%÷2+30%
    5. market timing is deprecated by the cognoscenti, for reasons I confess I don’t really get, valuation is one of the few signals that does seem to have a correlation with future returns. Even the Boglehead gurus at Vanguard say so.
    6. I jest. Slightly. There is no point in using things like Ecover toilet cleaner. If you are going to be less environmentally hostile use vinegar for glass and vitreous surfaces and baking powder (NaHCO3) as a degreaser/deodouriser. Neither of them work as well as Unilever’s finest but they are cheap. Bleach is not particularly bad as it breaks up as it gets diluted.  MMM can help you address the supply side of this problem
    7. most UK PF readers are from London. In the provinces houses are a tenth of the sort of prices you are used to
    8. sorry, both “focus on their creative careers without worrying about paying the bills”.
    9. I’m not sure if freedom from something is positive. But it feels good
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