Changed Days

My son started work this time last year and, on his first day, I gave him the best advice for that event that I could: “Remember to sign up for the company pension!”

Of course, he didn’t need that advice because he’d have been automatically enrolled these days and would have had to register to come out of his company pension scheme, as opposed to physically signing up to joining it as I once had to. Doing so was one of the most important financial decisions of my life, not that I was aware of it at the time. I’d be lying now if I said I could remember signing on the bottom line that took me into the company Defined Benefit scheme, I’m just ever so glad I did. I don’t think I ever missed the money either, not even thinking about the subject until about ten years later when I started to become interested in investing for the future. Even then, I took the pension scheme for granted. After all, surely everyone was enrolled in some sort of scheme?

I read in the paper this morning, however:

A 25-year-old starting work in the private sector would have to put almost a third of their salary into a workplace pension to match the retirement benefits of a colleague embarking on a career in the public sector, according to a report by the Taxpayers’ Alliance, the low-tax campaigners.

Never mind the public vs private sector debate (if you can). What shocked me was that a twenty five year old would need to invest a third of their salary to get a decent equivalent of a “defined benefit” pension on retirement. It just highlights what a loss to the average employee the demise of those DB schemes has been. Not that they’ll probably notice, or miss, something that they never had. But it certainly makes me think that your fresh faced employee joining the workplace today has a tougher financial future ahead than I ever did. To be honest, if I had been told that signing up to the company pension scheme that I joined in the Eighties would cost me a third of my salary, I doubt I’d have joined. But my contribution was nowhere near that.

A few other things that have gone since those heady Thatcherite days when I joined the working population: firstly, the company car I was given was a total perk, hardly cost anything on tax and was way, way better than having to buy your own car. That’s not the case now – I opted out the last company car scheme I was offered due to the tax burden on it.

Secondly, my starting salary of £7k a year meant I could get a mortgage of £23k, enough to buy a small flat in my home town and get on the property ladder with a ten percent deposit. That’s almost laughable these days and has me wondering if I’ve got my facts right – but I know I have.

Thirdly, if I wanted something like a new TV for my flat, I had to sign up to a Hire Purchase agreement or save up the money. I was about three years into employment before I signed up for an Access Mastercard (Your Flexible Friend) which changed how just about everyone thought about getting into debt. Something that was almost shameful to my parent’s generation became almost fashionable and cool – paying for dinner with a credit card let you almost imagine you were Gordon Gekko from “Wall Street”, or Bud Fox at least. Surely that slinky mobile ‘phone wasn’t far away either?

gekko

I smile at those recollections now, but many of my early financial decisions I made happened without me thinking too much about them. Generally speaking, however, the basic things I assumed in those days were both sensible and achievable – pensions were a good thing, you should try to get on the property ladder early and you should be wary of debt. And, generally speaking, those rules are still sensible today. It just seems that for my son’s generation, they’re a lot less achievable.

Tench Detecting

As I approach the finishing line of official retirement – I turn 55 in November and can start to drawdown my pension, if I choose to do it – I spend time wondering what will make my leaving the workplace different the second time around? I recently listened to The Mad Fientist relate his “struggle” to come to terms with Early Retirement in his first year of doing so, and how he found his second year much more pleasurable and liveable than his first. I wondered, for about the thousandth time, if that had been my problem with my own “early retirement” – I was never really mentally committed to it, never really believed it was a realistic option for me when I was still able, and quite willing, to work.

One example of this – a friend of mine in his early fifties who recently retired spends about three of his afternoons a week playing golf with members at our local club. Despite having that option in my year off, I never “allowed” myself to take it up. Why? Basically because I believed that wasn’t the retirement lifestyle I wanted, although I became hard pushed to define what that lifestyle would be. All I could say was that I wanted retirement to bring more fulfilment than I’d find spending endless hours on the fairways with a bunch of old blokes.

These days I find myself looking for something, a hobby or pastime, that I could do in future retirement that might constructively fill my hours. Recently I’ve been watching on TV two old blokes struggle to come to terms with their own semi-retirement and mortality on the BBC’s iplayer. Paul Whitehouse and Bob Mortimer have “Gone Fishing” in an effort to come to terms with the ageing process, Life, the Universe and Everything. The best thing about this programme, by a long way, is the camera work – it’s beautifully done, and England looks like Paradise. It’s educational too, at least for me. In the first programme they fish for tench. Tench? Would I even have know that was an English freshwater fish prior to this programme? And it’s inspirational. I watch the scenery, the skill involved in the fishing, the knowledge needed and applied, the camaraderie of the fishermen and I think, “I’d quite like to have a go at that, when I’ve got the time.”

Another TV show that’s very similar in style to Gone Fishing (and possibly inspired it) has become one of My Favourite Programmes of All Time. It’s the Detectorists, and it’s difficult for me to say why it appeals to me so much. Again it’s the scenery, the camaraderie, the knowledge required that underpins the hobby, the leisurely and reflective pace of the stories and the warmth, humour and humanity that exists between the main players. It leaves me thinking “But I want to be a Detectorist!” , even although I probably don’t. But I do want to do something that delivers the fulfilment, learning, community and satisfaction of the type that these shows suggest is attainable.

I’d have to say that golf does deliver some of what I’m seeking, and I’m happy with that. I couldn’t play it three times a week though because (a) it’s the most difficult, frustrating game ever invented and (b) it can be mentally and physically tiring. It can be quite a slog and, when you’re not in the mood, it does live up to the description of being basically “a good walk spoiled”. 

At the moment, I golf on a Saturday morning and Wednesday evening, looking forward to both outings. One thing I learned in my year off is that routine and structure are ultra-important to have in your days and weeks. The Fientist underlines this point too. However, you need variety too or your days can become quite stale quite quickly. If you’ve come from a highly stimulating workplace, as I did, to face endless days with nothing to do, it’s important to have mental challenges too – four hours a day in the gym really won’t cut it, mentally, no matter how many games of treadmill suduko you attempt to complete.

Retirement, early or otherwise, is often looked at for a primarily financially perspective. Can you afford it? If the answer is “yes”, good on you, start planning for what you’re going to do with your time and start investigating and participating in those hobbies before you reach the stage when you have real time to indulge them. That’s easy to say, of course, so the next question for me is: Will I now head to Amazon with the search terms “Course fishing” and “metal detectors” at the top of the list?

 

Heigh ho, Heigh Ho

I’ve been back from my holiday a few weeks now and am struggling a bit to get back to a routine, and that includes posting on my blog. You know how it is after holidays though, especially ones you’ve really enjoyed. You ask yourself why life can’t be like that all the time and immediately start planning the next trip.

Of course, if you’re in the fortunate position of being able to retire from the workplace with a decent income then maybe life could be like that all the time. I know the first three months of my bout of “Early Retirement” felt just like that, every day had that “holiday feeling”. I’d watch others heading to work with a glow of inner satisfaction that I was no longer on that hamster wheel and that I was on a different path.

The holiday feeling didn’t last. Soon I went from humming Madonna’s “Holiday” to Morrisey’s “Every Day is Like Sunday” as I found each day the same as the last. I began to think that what made holidays special was that they were a break from work. If you weren’t working, they lost their sheen. It was the same with weekends. Whereas once I craved reaching a Friday evening with a whole weekend of relaxation ahead of me, Saturday and Sunday became just another couple of days – although there were more people available to share them with you.

That was one of the things about my weekday retirement – finding people in a similar age and situation to myself to share the days with. Most of my friends and peers continued to work and seemed to be quite enjoying themselves doing so. Even my wife wanted to maintain her part time job (probably to ensure she got a break from me!) and, while I’m quite comfortable in my own company, I’m a long way from being a loner. I enjoy social stimulation, interacting with other people and, for almost thirty years, the workplace had provided me with that.

In the end I returned to work, partly to provide that “social stimulation” I was missing. When I came back from holiday a fortnight ago, I really wasn’t looking forward to returning to the actual work that I do – but I was looking forward to catching up with the people there, both my co-workers and my customers. In fact, it’s the people that keep me going, because the work itself is fairly routine and not too demanding on a day to day basis.

It would, however, be remiss of me not to mention the financial side of working too, something that just can’t and shouldn’t be ignored. When I stopped earning an income and began to rely on my savings and investments to cover the bills, I struggled to get comfortable with the situation. Although all my spreadsheets and projections told me I’d probably not much to worry about, I couldn’t shake the notion that I’d feel a wee bit better if I started cleaning windows on the side – just to put some cream on the cake. Even if I only earned a hundred quid a week, well, that would pay for a damn nice holiday or two, wouldn’t it? Plus, if I was to blow five thousand pounds on holidays purely from my savings and investments, would the resultant hole fill itself in?

When you’ve spent most of your life saving money for retirement, the switch to spending money to fund that retirement takes a massive shift of the mental gears. Maybe, over time, I’d have coped better with the no income side of not working, but I admit that in the year I had out I did struggle with this.

This year, as I approach pensionable age and ask myself the question if I want to give retirement another go (imagine, a permanent holiday!) I remind myself of the above realities as they were for me. What has changed since then? Not a lot. In that case, I tell myself, start planning the next big road trip to the States, or wherever, and let the work pay for it. That still feels like the best bet for me.

Born in the USA

We’re on our annual holiday to the U.S. (arguably the home of FIRE) doing a road trip of the Western states. We’ve currently stopped in Scottsdale, Arizona, which is essentially one massive shopping mall and seems to offer a pretty pleasant lifestyle – if you have the cash. And, from what we can see, there’s a lot of it about, judging by the Porches, Bentleys, Ferraris and Range Rovers being driven around. A lot of them are driven by pensioners too, which made me wonder what the average pension income is like over here for the “average” American? A quick search on Google brought up this:

Avg US Pension

https://www.newretirement.com/retirement/average-retirement-income-2018-how-do-you-compare/#average

You have to say that this looks quite good – a median income of $47k, or almost £35k a year for those households aged between 65-74. From the article, it looks as if the State Pension part is somewhere around $12,000 a year, not dissimilar to what we receive in the UK, and the rest will be coming, I assume, from private pensions, employment and investments. (as an observation, there do seem to be a lot of older workers here, in department stores, restaurants and the like.)

The next big question – here in America – will be how much is your medical insurance out of that? At this point, I’ll stop the comparisons because there are far too many differentials to take into account in comparing the US and UK, but given that the US possibly inspired FIRE, I thought it was worth a look see.

In my Google search though, I found that the definitive report on comparing pensions worldwide is done by an Australian consultancy – Mercer – and they came up with this ranking of countries in 2016.

pension ranking

I’m not a big fan of data, really, in the sense that I see it as “the drunk holding onto the lamppost” – it’s used more for support than illumination. Choose your argument and then pick the data that shores it up. Singapore scores highly, but I wouldn’t want to retire there, thanks very much. Too crowded, too hot, too controlled, too far away. I’d be sitting in Raffles Bar, pining for home and a decent pint in decent pub, which is what I was doing years ago when I visited the place.

All the same, it’s an interesting analysis and at the very least it’s good to know that someone is taking a serious look at this as society grows older (I’d read recently that Japan is doing some pioneering work on the pension funding issue with reference to its ageing population, but it doesn’t score well here.)

I should read the whole report I suppose, but Ye Gods I’m on holiday! Plus I’ve already decided that I’m not going to retire abroad, one of the subjects frequently up for debate in FIRE discussions. No doubt I’d have a great standard of living in Panama or the Philippines but so what? You’d never be a local, you’d always be an “ex pat” along with the rest of them, an outsider wondering when and if you’d ever feel fully settled in an adopted homeland later in life.

Having longtime friends, family and a community that you’re settled in is supposed to be worth its weight in gold in retirement and I suspect there’s a lot of truth in that. Britain’s not perfect, but it’s home and it’s funny how much I miss it when I’m away. As I sit here writing this, incessant American news coverage of the Royal Wedding drones on in the background, but even that can’t spoil some of the scenery being broadcast of Windsor and England in the sunshine. “That lot won’t have to worry much about their pensions”, I muse to my wife, who rolls her eyes and tells me to go and get a beer. 

Good idea.

Unsafe Withdrawal Rate

I was writing last week that I had been listening to the Dave Ramsey podcast which, I guess, would be an acquired taste for most UK listeners or a taste that they’d rather not acquire. But I like his straightforward bluntness and bluster that disguises an essentially decent bloke underneath.

Anyway, while listening to one show last week, a middle American called in wondering how he should figure out a Safe Withdrawal Rate on his pension.

“Where have you the money invested?”, barked Dave.

“Well, gee whiz, I guess mostly in mutual funds Dave…”

“And what have they returned since you’ve been invested”.

“Ehrmm…..”

“You don’t know? You don’t know how your money has grown? I know how my funds have performed for the last twenty, thirty, forty years”, and Dave proceeded to quote the numbers.

Suitably chastised, the caller mumbled, “Well, I reckon maybe ten or twelve percent Dave’.

“Okay”, thundered Dave, “I doubt that. But let’s say it’s ten percent. And you’ve half a million invested. How much can you safely withdraw? Per year? How much? You’ve been returning 10 percent on five hundred thousand, how much can you withdraw without eroding that capital”?

“Reckon it should be fifty thousand a year Dave”.

“Exactly”, snapped Dave, and cut him off.

So there you have it. That’s how Dave calculates a Safe Withdrawal Rate – and I like it. Of course, this is full of holes even for those of us who aren’t mathematicians, but I’m sure Dave would take a sledgehammer to the naysayers. I’m sure he’d argue: “Right, your fund has returned 10%, on average, for the last twenty years. It’s a good bet that it will probably continue with this. Okay, some years it will return 1%, or lose money, and some years it will return 40% or 50% but who gives a damn about the detail? The 10%, over time, is what it’s returning. End of discussion.”

Dave often takes a sledgehammer to crack a nut. You know that he knows the devil is in the detail, but he’s little time for nit picking on it and likes the big sweeping statement that contains an essential truth. Keep It Simple Stupid, is his mantra.

Is he wrong, I wondered? Yes, of course, nobody can predict the future, and a fund that has returned 10% growth for twenty years could turn tomorrow to produce a loss for the next twenty. And tomorrow I could get run over by a bus, driven by Dave Ramsey. These things could happen. But what are the chances? That’s what you’ve got to try and figure out – and that’s the frustration, and possibly the attraction, of investing.

I’ve listened and read the endless discussions about timing the market, about the bloke who started saving his money in 1994 versus the bloke who put in the same amount but started three years later blah blah blah. The data is the data and you can manipulate it how you like. That’s manipulate it how YOU like. Not anyone else. Choose that stats and argument that suits YOU.

This is the core of investing. What type of person are you? What is your attitude to risk? Is the glass half full, or half empty? You can put your money wherever you like and every FI who ever drew breath will advise you while pointing out that in the end this is your decision and the market can go down as well as up. Really? So, what you’re saying is, Mr Financial Adviser, is that essentially you have not the slightest idea what will happen in future? You’re telling me that past performance isn’t necessarily a reliable indicator of future performance while advising me with data that’s based on past performance? Well, what am I to make of that?

And there you have it. Here is what investing boils down to. It’s a game of chance. So to quote another American icon, do you feel lucky? Well, do you? If you do, take out that ten percent, or more, each year from your half a million pension fund. If you don’t, then take out 2% and feel safe. Or put it all in cash and then fret about inflation. Whatever, make a decision that you’re comfortable with and then, much more importantly, go out and live your life.

Baby Steps

I’m back listening to the Dave Ramsey podcast at the moment, paying attention to his words of wisdom – and I’m not being totally sarcastic when I say that. This morning, he rang a bell by saying “When it comes to running your own business, there are three rules. Everything will cost twice as much as you expect, everything will take twice as long as you think and the third rule is that you aren’t the exception to the rules.”

Dave would kick my ass all around the room about my current budget and planning, I think. Mind you, I once heard him advise a bloke to save and invest in a way that meant he’d have $8m in the bank by the time he was 85 – for what?! Cocaine and hookers, you’d hope, but Dave, being a bit weirdly religious, isn’t going to advise that.

So why would he kick my ass? Because, at the moment, I seem to spending way more than my income generates on a monthly basis. In fact, I’m gobsmacked myself at the way money seems to be hemorrhaging out of my account in the last few months. This is mostly to do with the house, where unforeseen expenses have recently been slapping me around the head. Firstly, our ceiling fell in due to mice nibbling through the plastic elbows that connect our copper water pipes which run through the floor space between our ground floor and upstairs. “Insurance job”, I thought, which is when I found out I’d taken a £600 excess on the policy and the repair cost was £700. Deep sigh. I had it repaired and, two weeks later, it happened again. Same thing, so not only had I the repair to fund again, I had to get a professional pest controller out to help me find where the little buggers were getting in.

Next thing was the mower. The first grass cut of the year and I just couldn’t get the fifteen year old brute to start. I’d serviced it myself twice last year (thanks to Youtube), but I couldn’t face another summer of fighting with it when £350 would buy me peace of mind in a new mower with a Honda engine. So I shelled out for that too.

Next thing, a real horror story when our pressurised water tank gave up the ghost. No, our insurance wouldn’t cover it and it was just out of its twenty year warranty. It had to go. I’m still waiting for the bill, but there will be no change out of three grand.

There’s a screed of other things that need done to the house too, some of which I can do myself but some which I need to get the professionals in for. For example, I could paint the outside of the house, the decking and the fence, but I might die of boredom if I try. And I don’t fancy risking really dying falling off a ladder trying to get to our top windows either. So I’m budgeting £1,000 for that lump of work.

Then there’s the garden which, given the work I need to do in it, will necessitate a fair amount of spending too. There’s brickwork, which I haven’t the first idea how to attempt, and I have to rebark all the garden flower beds (it’s quite a big area) adding to costs that I know I will incur. I could also do with replacing the garden shed, which is rotting away, but I’m drawing the line at that on the basis that it’s still currently standing. There’s always alternatives to spending money on the garden – it would be fine if I just tidied it up, really – but I’ve been following that strategy for about the last ten years. At some point you have to acknowledge that you need some help with it.

This is the sort of spending that you should plan and budget for, of course. Most of us in the FIRE community know the rules, and even although Dave Ramsey isn’t necessarily a fan of the RE bit, I can hear him demand, “You knew this would happen, Jim, so where in darnation is your emergency fund?”

“Ehrm, well, I kind of invested it, Dave”, would be my response, although that’s not entirely true. I do have cash sitting in the bank, but if you do a quick tally of the above then taking the best part of five grand out of it is not an action I relish one little bit. I was hoping to invest that little sum when the US market drops back under 20,000 points as I kind of think it eventually will. That’s now not to be.

I can’t be the only one, however, who secretly sees their “emergency fund” as an asset that might never have to spent and then has a bit of petted lip when it does. Worse, I’ll have to replenish it now, which is making my petted lip pout even more. I have to admit that I really liked the idea of an “emergency fund” until the day I had to face spending it. Ironically enough, it’s often a new boiler or heating system that’s quoted as being the emergency you might have to find money for in many of the books and articles I’ve read. Discovering that this shit actually does happen in real life hasn’t been any fun at all. As ever, Dave’s rules aren’t for lightweights. He’s serious about the steps you have to take to reach “financial peace” and starting an emergency fund is Step Number One (bolstering it is Number Three.) But I’d slot in a Step 3 (a) which would read, “And do not count your emergency fund as an asset”, as it’s only going to disappoint you later in life when you have to actually spend the damn thing.



 

Dave Ramsey’s Baby Steps to Financial Peace

baby steps

 

 

 

Pulling the Plug

I tell you something, and I know it’s a cliche, but time zips past as you grow older. I’m moving from the stage of telling myself “I can access my pension this year”, to “I can access my pension in six months”, and it’s shocking how fast this year is going in.

For a long time I’ve been constructing plans about what I might or might not do with my company pensions when I reached 55. I have two significant pots – one a DC one, where I can see the lump sum available and one a DB, where I can’t. Nevertheless, it’s amazing how many options and plans you can build out of these two factors and I think I must have gone through most of them. I won’t bore you with any of that, however, but I also have a third variable that impacts on the other two – do I continue working, or not?

If I stop working, the planning becomes much starker and more serious. The comfort zone that my current salary buffers me with vanishes overnight and, as I have experienced before, when the income tap is shut off it is quite a shock to the system. I’ve previously blogged that if your income equals your expenditure, like Mr Micawber, you’re probably comfortable with that situation. Let’s say you bring home £2,500 a month and that covers all your bills. When you stop earning, not only do you miss that £2,500 coming in, you might still have £2,500 going out. Psychologically this feels like you’ve taken a £5,000 a month hit – or at least it did to me!

Of course, psychological issues aside, the reality of the situation is that you now need to generate that £2,500 (not £5,000!) from your savings and investments to cover your expenses. Hopefully, your investments will generate this income through growth and then you’ll not have to worry – too much – about your pot running out too quickly. Well, “yes and no”, in my experience. “Yes”, on spreadsheets, my calculations told me my investment growth would counterbalance and cover my annual costs. And “No”, I could absolutely not stop fretting about the fact that I may have got both my sums and assumptions wrong. I was, roughly, looking at the 4% withdrawal rate as a measuring stick for my calculations, but you don’t have to Google for very long to see this strategy being pulled to pieces as being far too risky. Many say 3% is a better rule, or 2% just to be safe. It’s not long before you start pining for the security of the days when you put 10% of your income into your pot instead of taking 4% of it out.

In my “retirement”, I set up Google calendar monthly reminder of when I needed to “pay myself” out of my investments – i.e. cash in another tranche of funds to cover my monthly outgoings. This was they way I’d chosen to withdraw the money – I suppose I could have done it quarterly or annually, but I felt that taking a monthly withdrawal was more like “pound cost averaging” in reverse. I certainly wouldn’t have liked to have withdrawn a big amount of annual budget at a time when the market was on its knees. I grew to hate that reminder though, with the ironic “Pay Day” title I’d given it. And this was at a time that my investments were actually rocketing upward – not that I cared, because all I felt was that they’d be rocketing upward even faster if I wasn’t scooping a substantial sum out of them on a monthly basis just to live!

Perhaps one lesson to be learned was that I shouldn’t have “retired” with absolutely no intention of reducing my living expenses from the level I had when I was working. That was partly because I had been made redundant without much notice and therefore hadn’t “planned a retirement life” as opposed to a working one. But it was also partly because one of my Early Retirement ambitions was that my income and lifestyle shouldn’t “reduce” once I stopped working. That’s probably not at all realistic, but it was what I was aiming for. In my head, that would give me all the financial options in retirement that I had when I was working, and maybe a lot more.  I didn’t want retirement to seem like a step down from the life I had been living. Why should I have to sell my home to buy a smaller one because I needed to reduce the mortgage? Why holiday in the UK instead of the US? Why drive a smaller, older car? Why eat out once a month instead of once a week? And so on. That was a choice I made and one that I’d make again today – I’m basing my projected retirement income on the same income I generate today through employment. That’s quite a hurdle rate and, if I stick to it, will mean “raiding” my investments more than I would have to if I made some alternative choices on where I live, what I drive and how I enjoy myself. But each to his own. If nothing else retirement is hopefully going to be your plan, and not somebody else’s, and that’s what FIRE is about – you build the plan on your own terms. So good luck with yours.

 

Spring Cleaning

Last week I posted about how daft I was not paying attention to the fees I was being charged for the management of my pension fund (and I’m supposed to be interested in looking after the pennies!) What chance do the majority of pension holders have? According to the comments last week, there are people who have pensions running into the millions who don’t care what they’re being charged for them. One percent, two, three – why worry? A lot of people really don’t. But even more won’t have a clue what they’re being charged and will probably not even think about it.

I am interested, I think. I read Monevator, always browse the Sunday Times Money section, am a fan of Mr Money Moustache and buy Moneyweek, every week. I also listen to financial podcasts, including the Moneyweek one, hosted by Merryn Somerset Webb who – IMHO – dishes out sage financial advice on a variety of topics.

Imagine how I felt, then, after being rightly chided over not paying attention to the fees my pension fund was charging, to hear Merryn SW and her sidekick, John Stepick, laying into investors on their podcast who had put money into the Virgin UK Index Tracker. They expressed utter incredulity over the fact that this passive fund has over £2.8 billion in it and charges 1% for those daft enough to put their money there. They were literally aghast that this fund was not only surviving, but thriving, compared to some equivalents.

And, as you will have guessed by now, I am a holder of the Virgin UK Index Tracker fund.

So, as I have an alleged interest in financial matters, how did I end up investing in that dross? It’s a story not unconnected to being frugal and watching your spending because I bought into the Virgin Tracker when I was fixated on building my Quidco pot of money. (Quidco being one of these cashback sites). I think Virgin were offering £100 cashback if you signed up and invested £1,000 into their UK Index tracker. I took a short term gain for potential long term pain, invested that sum, and never put another penny in there. I should’ve moved my funds long ago, for sure, but my usual inertia just prevented me from doing so. I wasn’t losing a fortune, after all, and the fund was building quite nicely thanks to the market moving up.

Whatever, by the time you read this blog, it will have been sold. It’s clear to me that I’ve been a bit blase about my finances when I was telling myself I was pretty much on top of things. Or as “on top of things” as I was comfortable with being, because I don’t want to be obsessed with financial matters. I don’t think it’s healthy, but on the other hand that approach has possibly cost me quite a bit of money. The fact that I tend to think that discussions of things like TER and ETF’s are not really for me, are forcing me to consider a reassessment of practicing what I preach.

I tell myself I like to keep things simple when it comes to finances. Another of my rules is to “do nothing” when I consider switching funds, selling one investment to buy another or trade out into cash, or gold, or any other passing advice that might strike a chord with me. Over the years of reading the financial pages and blogs, I’ve felt that it is so easy to make things complicated that I would try and resist being lured out of some self-imposed guidelines, which are generally:

Invest regularly in Index Trackers

Spread the trackers across global regions – US, Europe, Asia, UK etc

Do not buy single shares for any reason and try to stick with the same funds

De-risk the pension from 100% in equities to a 75/25 equity/bond split as I approach pensionable age.

Avoid debt (apart from a mortgage)

Have an emergency fund in cash (of 3x net monthly salary)

If anyone had asked for my advice on saving and investing, I think that’s what I would have told them. Notice that I wouldn’t have said “Avoid high fees on your investments”, even although I am vaguely aware of how much that can cost in the long run. This is largely because I haven’t walked the talk when it’s come down to it, ignoring the first of my “rules” and buying some managed funds. I’ve justified this by taking what I’ve called “educated guesses”, on funds that I fancy might do well in the next five years. For example, I recently bought a Baillie Gifford Japanese fund due to aforementioned Moneyweek crowd continually pushing it (and, yes, I know Merryn Somerset Webb is a Director at that business.) I can justify this as many ways as I want but accept that, as ever, this is just a total punt on the future.

I’ve now tidied up and simplified my pension, although I still have a few managed funds in my other investments. I’m still unsure if it’s a good idea to have all my pension in the one fund though, and could split it up into some other providers outside of Vanguard. But really, if I am going to back my passive instincts, perhaps Vanguard is as good a bet as any? As ever, any thoughts or comments would be greatly appreciated.

 

 

Charged Up

An email arrived during the week to inform me that my annual pension statement was available and I wondered if I even dare look at it? Not because of the performance of the funds over the year – I’m well aware of that because I check it online on an almost daily basis. No, it’s the fact that the statement will highlight how much I have been charged for the management of my money. Last year I almost fell off my chair when I saw what this amounted to – it was roughly 1% of the fund total. On paper, and when you say it quickly, this can seem almost reasonable. But, if your funds are heading toward the LTA (Lifetime Allowance) territory, that’s quite a substantial charge. No, let’s be honest, it’s a frigging massive amount of money – £10,000 p.a. – which may be charged every year for the next thirty years. Of course, many will feel that if you have a million quid in your pension fund then you deserve to be charged for the management of it, but really, of all the deserving people who might want ten grand of your money, is it the City who should get it? Just because they can?

That’s not to say that this fund is pushing the boundaries of the LTA –  I might have died of shock if it was. As it is, I’m shocked enough that I have no idea whether 1% is a fair charge or not. Similarly, I have no idea what the charge is for, where it is incurred or why it is incurred. My pension is now a mixture of about 25% in bond funds and 75% in stocks and shares represented by (mostly) tracker funds. I would therefore assume there’s not much active management of these funds involved, so why am I being charged such a massive amount of cash for the “management” of it? One of the funds is actively managed by Fidelity (Global Special Situations), although they aren’t the provider for the pension. I assume FIdelity is charging me for this, but is that included in the 1% that my pension provider is levying? Or is that just being deducted as a charge within that fund’s performance? Maybe this information is buried somewhere in my T&C’s, but who reads that stuff? Like the current storm over privacy in social media, it’s not that they don’t tell you what you’re signing up for, they just do it in a sneaky way, burying it within forty pages of legalistic guff that ensures you’ll probably die of boredom trying to read it. I can’t understand why they wouldn’t want to explain the charges in a simple way – if I could see it, I might even believe it was good value. But because I don’t know, I’m suspicious, and suspect I’m being ripped off.

The sum I’ve been charged on this pension dwarfs just about every other monthly sum I budget for – cars, food, heating, council tax, spending money, everything. And, what’s worse, if the fund drops fifty or a hundred grand next year, I’ll still be charged an exorbitant amount for the administration of it. Heads they win and tails you lose. Either way, I’ll still be left with no idea of how this figure has been arrived at and whether or not it’s fair value.

I feel totally exasperated by this situation. Where do I start to find out if I’m being ripped off or not? Last year I posted in several forums, such as the Money Saving Expert one, asking if an overall 1% annual charge on a pension fund was exceptional.  The answers, as far as I remember, were that it “Sounded about right”. Oh, that’s okay then. I should relax and not worry about paying a small fortune for a service that I don’t understand, while feeling guilty that it’s my fault for being too ignorant to understand it. But is it really?

I’ve seen it stated many times by many commentators, who understand the way these things work, that the fees in the finance industry are an absolute scandal. Margins in fund management are over forty percent. Tesco, not an unsuccessful customer focused business, makes a margin of around five percent. One of the main reasons for this is that Tesco are competing every day for customers on price and quality – they are not on the ‘phone fixing their prices to consumers with Asda, Sainsbury, Lidl and Aldi. Nor are they lobbying to be allowed to do so. As consumers, we can choose to shop where we want to based on what we can see and experience. It’s pretty transparent, and the absolute reverse of what we have in the finance industry.

I’ve also read recently of the outrageous fees that some consumers are being charged to take advantage of the “pension freedoms” with their fund provider. Seemingly if you want to regularly drawdown, or take a big lump sum up front, or just generally get your hands on your cash, the provider will gladly charge an arm and a leg for doing any of it. Not that they’ll be up front that it’s an arm and a leg that they’ll take – they might just carve a juicy slice off your arse instead. They’re not about to reveal exactly, in clear English, what cash they intend to take or why and where those charges are being incurred.

At the moment I’m not too sure what to do about this. I could write and ask for a detailed breakdown of where the charges come from, but suspect part of the answer may well be “Providing detail of charges for people like you”. And I doubt their response is likely to be, “Ye Gods, you’re right, we are charging far too much for what we do. Let’s reduce it by two thirds.”

I’d also like to know that if I decide to drawdown, say, £1,000 a month from this fund, then what will I be charged for that service versus, say, taking £12,000 in one lump sum? Or £120,000? Is it the same? They’ll probably tell me if I ask, but whatever the answer is I doubt I’ll be left with a clue as to why I should actually be charged anything for withdrawing my own money when I feel they’ve already been charging me for “managing” it to date. But I feel I should at least make my feelings known and threaten to switch providers if I’m not satisfied with the response. If millions of us did the same then it might change things. I struggle to think of anything else that will.

 

Into the Woods

I see on my Twitter account that the Early Retirement community is winding a lot of people up again by being a bit opaque about the financial facts that underpin the objective – namely, that you need a rather large wedge of cash to be able to do it.

This week it was the Frugalwoods and their 66 acre Vermont abode that was ruffling feathers, and no wonder. I won’t go into the detail, because you can read the article and comments for yourself, but I do understand the annoyances expressed over it. I used to feel the same about Mr Money Moustache and Jacob at Early Retirement Extreme and, to be honest, a whole load of bloggers exalting the FIRE lifestyle, including myself. You absolutely need to have money in the bank to do it in the style some of the bloggers extol. Quite a lot of money. You can be relatively up front about this, like Mr Moustache is, or you can fudge around the issue, as I tend to do. Yes, I did retire aged fifty one on pretty much the same income as I had while I was working – but I don’t think that reaching 51 and retiring readily qualifies as  “early”. That, however, is how long it took me to save the money necessary to quit work and not worry about it drastically altering my lifestyle.

I’m not about to divulge how much I had in savings, investments, pensions, cash, payouts and the rest that allowed that choice. But I do recognise that it was a substantial nest egg, regardless of how much I felt that my career, lifestyle and habits up to that point had been aimed toward that goal. I feel I was quite a committed saver as opposed to choosing to “Spend Spend Spend” as I “Earned Earned Earned”, but I was also in the fortunate position of having disposable income to make the choice. Many people don’t.

It seems to me now that it’s quite obvious that FIRE is an aspirational, middle class fixation. After all, in Britain, if you never want to work, if you shun possessions, if your ambition is to life a frugal life and have then all the time in the world to follow your muse, then do it. You can tailor your lifestyle accordingly and you probably won’t starve or live in a bus shelter – but you certainly won’t be living in a 66 acre rural estate in Vermont.  However, for many of us in the FIRE community it’s the latter type of lifestyle that’s the goal as opposed to a pretty basic existence.

Our dream is to be financially independent on our own terms. We won’t have to rely on others – either an employer or the State – to determine the financial course of our lives. This might mean that we still set out to generate income, but we’ll be doing it through our own endeavours and we’ll feel that this is more of a choice than a need. Which makes a big difference and, I think, is a valid and worthwhile ambition to have. It’s about taking control, striving to get to the goal you’ve set for yourself and discovering the myriad of ways and options that you have to realise it. You can choose the level of income you want to attain. We like having the feeling that we are captaining our own ship, which is why so many of our Recommended Reading lists are peppered with Self Help and “Be all You can Be” books, as opposed (or in addition) to the collection of Stephen King or Lee Child novels.

So, FIRE is about personal ambition for self-improvement. Other people will have other goals – maybe their ambition will be to improve the life of others before themselves. Maybe it will be just to simply live for today. Maybe it will be to care and provide for their family and community while a job – any job – provides the means to better achieve this. Each to their own, which is the problem with the Frugalwoods interview – God, they sound pretty smug and pleased with themselves, don’t they? Did they really have to shout about what they’ve achieved so publicly, or is that because they have a book to sell? It’s an underlying paranoia that I have myself – while I’d love to advertise the virtues of being Financially Independent and consequently Retiring Early, I don’t want to sound all smug and self-satisfied while doing so. It’s a difficult line to walk. Perhaps I was trying  to have my cake and eat it when I chose to go back to work?

I still haven’t turned against being Financially Independent though. Try as I might, in the society that we live in today, there’s very few downsides I can see to reaching that goal.