economy living intentionally personal finance simple living: early retirement escape plan
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Like anyone aiming to quit paid employment, my escape plan has a large financial component to it. However, reading Dreamer’s inspiring story of how she has made her plan real, reminded me that there is also a non-financial part of it too. People do not live by bread alone, and I have consolidated a lot of the intangible parts without considering them as an escape plan.
You have to take a view on what the future holds to execute an escape plan. The reason is that leaving paid employment means an enormous loss is power and direction – relying on capital rather than income means my trajectory is largely determined by what I have when leaving. There is little chance to make mid-flight corrections.
My vision of the economic future
I have a quandary here, because my view of the future is at significant variance with a lot of people, including some people whose view I respect. I am not sure I am right. The general view, which is that the turmoil of recent years has been a temporary aberration of the sort that occasionally afflicts capitalism and normal service will be resumed shortly, is at variance with my feeling that the myth of our time, continuous growth, is about to fail us.
Worse still, I have insufficient information to get a feel of when I expect the increasing world middle class population’s demand to exceed the limiting effects of peak oil.
I may retire, grow old, see a few more economic cycles and hopefully die peacefully in my bed before world demand overwhelms peak oil. We may solve nuclear fusion before then, though energy security is not the only hazard humanity faces. Something else might turn up – one of the bewitching aspects of the continuous growth myth of our time is that just when things seemed lost, so far something has turned up, like the mid-20th century energy-fuelled Green Revolution in agriculture.
In that case, investing to set myself on as best a path to deal with peak oil is a serious opportunity cost. I need a stake in business as usual too, so I choose to play both ends – invest effort and skills in the post-peak ready scenario and at the same time I hedge this by investing assuming that Britain is booming again – or at least not taking on too much water.
If you want results fast, use great force with extreme prejudice
Yoda, he of the sticking out ears in the original geek-fest Star Wars was a plug-ugly sucker, but he had a point when he berated somebody “do or do not. Do not try” If you want to retire early, you aren’t going to be living an Ozzie and Harriet lifestyle. You’re just not going to get there clipping coupons and skipping lattes at Starbuck’s.
I realised in 2008 that working in an office is not the way I want to spend the rest of my life. Some events before then had made me re-evaluate things, but being targeted by some punk at work to make up his numbers showed me that the world of work had changed somewhat since I started. I wanted results, and I wanted them in years, not decades. Months would have been even better
Extraordinary results demand extraordinary efforts. That means cold turkey on consumerism, it means less is more all round. You need a lot of capital to retire early, in the order of about 20x your outgoings. None of the ways I can think of doing this don’t involve a serious hit on lifestyle compared with most others. The secret is to spend less than you earn, big-time. It means saving well over half my take-home pay, and a fair amount of my pre-tax pay too.
Young people may want to consider working in some unpleasant environment abroad for a year or so; these are usually financially rewarding to compensate for their unpleasantness or cultural dislocation. There are plenty of people that made their fortunes in the oil service industry, or working in the Middle East, where as long as you can avoid trouble and stay off the hooch then you can be made in a year or two. In the past, the military offered opportunities to break the mould, like this report of working 19 months on the Cold War Distant Early Warning Line.
The common thread on all of these is that if you want to build up the cash to do something different to most of your fellow men then you have to live in a different way to them.
The same applies to me. With two-thirds of a working life behind me, I have built up some capital, by living differently to many of my colleagues – my house is a semi where most of them live in detached houses, and I paid off my mortgage over the years rather than extract the equity to buy more house or go on holidays. But it’s not terribly different from the typical middle-class lifestyle. So if I want to retire early, then I have to hit the financial goal hard. Jacob from ERE tells us that it is possible to achieve early retirement in five years. With similar determination, therefore, in theory it would be possible for me to achieve it in less than two years; I already have 2/3 of the amount saved up in the conventional way plus a paid-off house.
Non-conventional investment – the tin hat portfolio
So my escape plan has two parts. The tin-hat portfolio finds a good meeting with DGF’s life-long dream of becoming a commercial grower using sustainable, low-carbon permaculture. I don’t understand it at all, I was born in a city, I am not into the digging and planting and harvesting side of things.
However, I can invest some skill and energy in the construction of things that every grower needs, like cold frames, buildings, energy control systems and temperature control. As well as the satisfaction of creating something tangible at the end, a reward absent from too many modern jobs, it improves the efficiency of the land use and effort.
As well as this some capital assets like polytunnels and the like which extend the growing season or make exotics possible give me a return on capital, which is the hardest part of turning savings into income these days. Businesses can turn capital into income. From a tin hat POV this particular enterprise hedges some kinds of hit to the food supply and rocketing food prices. I would find life as a vegetarian lacking the finer gastronomic things in life, but it would keep the wolf from the door. It also takes us out of the money economy for some our own consumption. Obviously in normal conditions it puts us more into the money economy from the produce sales, which is the right way to be in the money economy – a producer, not consumer
This unconventional part of my portfolio therefore also does something for me, even if I am wrong, Peak Oil is a chimera and things carry on as usual. It will also be interesting, practical and fun at times.
The general problem with saving money, turning it into a non-financial capital asset such as a business or property, and trying to live off the return on the capital is that many capital assets come in large illiquid lumps. These have to be sold to realise any gains. Take, for example, a house – it may have gone up to £100,000 but to realise that you have to sell it to someone; even if it’s a buy-to-let property there are serious transaction costs. If you just happen to need £20,000 then you have a problem, you now have to find a smaller property to preserve the £80,000.
This is why most people use financial assets to do this job, but under certain scenarios those financial assets get written off to virtually zero. I do not feel that the probablility of those scenarios is vanishingly small over the next 30 years.
I used to know a very old person in Germany who had lost their life savings in financial crises – twice. When you hear the tone of voice of someone who has known that, you get a different kind of knowledge from reading about it in a book. You understand that the thin line that holds the edifice we call finance has its limits, and under certain kinds of societal stress it may fail under the load.This is usually more of a problem for people who have capital in financial assets than those living on earnings.
This collective memory underpinned the peculiar German abhorrence of inflation and the preparedness of the Deutsche Bundesbank to pay almost any price to keep inflation of the Deutsche Mark low in the 1960′s and 70s when other European countries let it rip – all the way to 26% in the case of the UK.
In the West we have been fortunate to have lived through a benign financial environment since the Second World War where this hasn’t happened recently. However, it has happened elsewhere in the world over that time – Argentina, Zimbabwe, the USSR, the Asian financial crisis in the 1990s.
The conventional portfolio
The second part of my portfolio is more conventional. It consists of a mix of ETFs, ETCs and investment trusts. I struggled with the latter, as these are actively managed and I have endless repetitions of the passive investing mantra to get over.
FWIW I’m unconvinced that continual pound-cost averaging works. Circumstances and luck have made me a pound-cost-averaging buyer when the market has been low and a forced seller when the market was higher than average. However, until I had a need for an income I found the index fund approach the easiest to have success with.
However, investment trusts have a good track record of paying dividends, and these are useful enough for a spread of ITs to give me the income I want to top up my pension, with the advantage that if I do it in an ISA it is not treated as income so I don’t get taxed on top, though dividends are taxed at source in the bizarre tax structure of the UK.
They seem to have the advantage of the income being stable over the long term. I don’t want to fret about investments and keep on churning them to release an income, so I will shift slowly from ETFs. High-yield ETFs such as IUKD that I was using are skewed in composition by the need to chase yield, which is a side effect I hadn’t thought about and didn’t want.
The largest part of my conventional portfolio is my final salary pension. It performs the position that bonds do in a self-select pension, a reasonably stable investment. However, since it is from a private employer, rather than government-backed public sector, and there is a deficit, I don’t consider it risk-free. Therefore I will draw it early – which will reduce the annual income from the pension since they will be paying it for more than the 20 years they expect me to live after 60. That means that I get some of it out before any risks/threats to its financial stability, and it is why I need to adopt ERE’s approach to saving enough capital to top it up.
Since pensions are considered income and taxed, drawing early means I get much more of it before paying income tax, which is all to the good in my view. My top-up income is derived from ISAs, which are not currently taxed, so I aim to pay minimal tax. I have paid an awful lot of income tax in my 30-year working life, and I’ve had enough for a while. I have done my part for society. If I get a State pension at 68 that will be nice, but I’m not counting on it, by then I expect the UK economy to be so hammered they’ll turn round and means test it or scrap it as unaffordable.
So I have a decent amount of diversity in my investment structure, in terms of the nature the investments and the spread. I can lose one of the three elements without going broke, though if the pension goes bust I may have to run down capital elsewhere.
The main problem with my escape plan is that the escape is two years off. I will have been at it for three and a half years by the time it comes to fruition. Saving 70% of one’s income is difficult to live with – I have the downside of a job with a toxic management structure without using the upside of the money. The halfway point is a nasty part of any difficult project – it is easy to lose hope, since the distant shoreline is not in view and yet much of the losses have been committed without return.Like Dreamer did, I continually re-evaluate if I can shorten the gap, but the maths do not change when revisited.
Finance is only part of a good escape plan. I am not a minimalist, and a big part of quality of life is who you are with and where you are as well as what you have. I have made good progress on these areas over my working life. In that I am different from many ER bloggers, who are sometimes discontented with their situation in life as well as finances. Much of that is simply being older. Getting these aspects of life right takes a lot of time; my 20s and 30s had much angst in them too I suspect some of that angst is part of the human condition.