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.

Community Care

I’ve written a couple of versions of this post, about a subject that’s quite personal for me at the moment. Let’s just say that it concerns social care and the cost of it. In summary, if you’re unlucky enough to be affected by dementia or Alzheimer’s, have amassed some savings in your lifetime and haven’t acted to “protect” them from the State, then the State is going to come after you to pay for your care. They will demand to see bank statements, investments, divestments, savings and anything else that they see fit to request. If they feel that you have knowingly tried to move money in order to avoid paying for a relative’s care, you could end up in jail. It’s serious stuff.

I know from reading forums that plenty of people feel that this is fair enough – if, in your dotage, you have the cash to fund a plush care home, what better way to spend it? Especially if you don’t have kids, or likeable relatives, or a favourite charity, to leave a financial legacy for. Choose somewhere you’d like to live and pay for it.

The costs are quite breathtaking when you face the reality of them. For a standard, council care home, you’ll be looking at finding between £700 and £800 a week to stay there, of which the State will pitch in around £200 for as long as you have financial assets to cover the difference. If this is the case, then the remainder of the bills will be funded by you, until you’re down to your last £16,000, when the State will step in to pick up the charge. From your pension, investments, savings, sale of your house, whatever, you’ll be finding and funding around £500 a week.  And you’ve pretty much no idea how long that is going to go on for. One year, five years, ten years, more? The way medicine is going, they’re able to keep YOU going, whether you want to or not, for a long time.

If you want to scare yourself witless about a potential future, take a stroll around the nearest dementia ward local to you and ask yourself how, in God’s name, the country is going to be able to afford to look after the legions of poor souls who’ll require round the clock care in the near future? Yes, the big idea is to keep people at home for as long as possible while pumping in community care teams to “look after” their needs. It wouldn’t surprise me, however, if this is even more expensive than caring for someone in a home. The cost of it all is mind-boggling.

When you consider the amount of people who have no pension other than that which the State will provide; when you consider the average amount of savings people have in the bank; when you consider – if you can – the cost of looking after a person twenty four hours a day, seven days a week, plus their medicine, plus their emergency call-outs, their wheelchairs, zimmers, adapted homes for living, the medical teams required for support, the falls team, the social workers, the ambulance service, the heating bills, the solicitors, the GP’s, the administration….look down your street. How many people in their houses are going to need care at the end of their lives, One, two, ten? Then multiply your street up to imagine your village, town, city and country. 

I don’t know about you, but I’d be prepared to pitch in a couple of pence more on income tax if it would guarantee secure care for our elderly. As a community this is surely the right thing to do. My only reservation is that the money would soon be squandered and wasted hand over fist, but what’s the alternative? We’ve got to do something.

Of course, maybe because of my recent personal experience I’m worrying about a potential future of my own that I don’t particularly want to fund out of my own savings if I can help it. And maybe there’s a truth to that, and maybe I feel a bit guilty about it because I was brought up to not break the financial rules, nor even bend them. You paid your way, fairly and squarely, that was how a caring community was built. Everyone contributed what they could, or at least that was the ideal.

The way the health service is going, it’s obvious that the money it will require is way more than a small number of individuals can shoulder. We’re all going to have to contribute more, as a massive public insurance against an uncertain future. There may be a myriad of ways to approach this, politically, economically and socially, but fund it we must as we venture – a lot more slowly – toward the dying of the light.


Dumb and Dumber

“You don’t bank percentages”. This used to be a stock rejoinder in a previous workplace when (usually) some marketeer was talking about their brand’s year-on-year ten percent growth. I mused over this workplace cliche as I tried to come to terms with the hit my various investments took over last week, and decided that I actually did “bank percentages”- as it was much easier to think my funds had dropped by 6% as opposed to the actual cash that had vanished from the accounts.

The use of some other clichés also helped mollify the impact of the carnage, such as “I’m in it for the long term”, and “Our favourite holding period on stocks is “Forever””, thanking Warren Buffet for the latter one, if he actually said it. (Like a Shakespeare of the financial world, every pithy quote ever made about money seems to be attributed to the “Sage of Omaha”.)

Most of the Sunday papers offered solace too, with “Don’t panic Mr Mainwaring!” being the favoured tone of most commentators, although I did feel that there was an underlying, if not blatant, message of “Nobody knows anything”, when it came to trying to explain what had happened. I’m not sure if this was comforting or not, because surely professional analysts, economists and finance geeks should have a better idea than most of us as to what was going on? After all, when I visit the doctor with a well explained summary of a condition that ails me, almost the last thing I want to hear from him is “You know, I haven’t a bloody clue what’s going on. Have you got any ideas?” I might appreciate the honesty, but it’s not really going to help me.

There seemed to be a lot of discussion and dissection of the VIX index, but at that point my eyes began to glaze over. I realised I wasn’t going to be enlightened on the situation if one of the main tools used to try and explain it was just something else that I didn’t understand. Hopefully someone else did understand it, but is that really how the modern world works these days? When you think of some of the key pieces of engineering that we all rely on every day, how many of us can repair our car, never mind an iphone? When the central heating or boiler goes on the blink, do you reach for your toolbox? (The last two issues I’ve had with my boiler have been down to a faulty circuit board, something a spanner and screwdriver couldn’t really repair.) Even my cooker mocks me over my inability to use the functions it has at its disposal and let’s not even think about how we’d live without the main cultural, social, educational and emotional crutch of our lives, the Smart Telly. You can’t even walk over to it and give it a good wallop on the top of the cabinet when it malfunctions, because it doesn’t have a cabinet.

When I start to think like this, I can feel a bit of panic rising. It seems to me that in the “old days”, when there was a problem you called on a professional you trusted to fix it. A doctor, a mechanic, a joiner. And, when you called them in, you’d generally thought through the problem and maybe had a go at fixing it yourself before bringing in the hired help. These days, before the help’s even over the door, we’re standing there with Google and Youtube in our hand, ready with all of the questions and none of the answers.

I have a book on my reading list by Tom Nichols, “The Death of Expertise”, which laments this trend in society and worries over what it all means. I found out about that book through listening to the Sam Harris podcast, but increasingly listening to the Sam Harris podcast worries me. This guy is extremely smart, and interviews all sorts of other smart people, but often his live debates with fellow eggheads leave me feeling that they too are lost in the complexity of life today. Was there ever such a thing as an uncontested “fact”? You’d hardly think it, listening as yet another debate wanders off into the philosophical long grass of whether “a fact” is actually only an informed opinion built on certain rules and constructions, or vice versa. (The only “fact” that Harris seems to feel is truly incontestable is that Trump is an arse.)

Then, just as I was about to abandon all hope and embrace the “fact” that ignorance actually is bliss, along comes Monevator’s “Weekend Reading” with a fantastic summary of the many factors that might be behind last week’s market volatility. In plain English, and with no sense of panic whatsoever, cooling oils are poured over the fevered brow. And the Vix Index isn’t mentioned once.

Taking the Plunge

And the markets come down, as inevitably as they once went up. Most of us, disciples of Motivator and (mostly) passive investing, take a deep breath and take this in our stride. “We’re in it for the long term”, we tell ourselves, finger hovering over the “Sell” button. Many of us have been here before, the dot com crash and Lehman Brothers in 2008 being our two watershed examples. But, in my days of yore, thoughts of selling out, or de-risking my portfolio into bonds and other less volatile instruments were just not a consideration. I had years – years I tell you – to watch the market recover, so I kept up the monthly payment plan while chanting the mantra “Pound Cost Averaging, Pound Cost Averaging”.

So, today finds me trying to reframe time. I turn 55 this year which, I now tell myself, will be the start of my serious investing life. It won’t be time to cash in any big slugs of my investments because that would be silly. This, of course, is the complete reverse of what I was telling myself two weeks ago when I was hoping the Trump Bump would last at least another year, just long enough for me to maximise my tax free lump sum out of my DC pension pot. Then, with the Dow Jones possibly slowing as it approached 30,000, pulling all markets in its glorious wake, I would “take profits”.

Well, it seems it was a nice idea, despite the fact that when November arrived, and if the Dow was closing in at 30,000, I know I’d be thinking, “32,000 is a better number to cash in at”. This psychology is a great way to drive yourself nuts and, I feel, is directly connected to my inability, or severe reluctance, to spend money. I’ve been regularly investing for almost twenty five years with, on a monthly basis, at least 10% of my net income being salted away into Index Trackers. Sometimes it was a lot more than that percentage. After the bills were paid, I “squirreled away” any excess cash as, for me, this was the singular most satisfying thing I could do with the money.

Recently, however, the day came when I could no longer find that incremental income, unless I started to cut my costs.  I was, and am, reluctant to do this, comfortable as I am with the way I live today. Therefore, when the markets plunge downward, I’d be lying if I said I wasn’t twitching, wondering where it could end and whether or not it will recover. I’ve seen it before, I say, but are we not in new territory here, what with all that QE about to disappear and only the hangover to live with? Didn’t Japan stagnate for twenty years following their own bout of irrational exuberance? Will the Remoaners have their day in the sun, dancing in the ruins of the British economy while tweeting “Told you so!”?

Maybe. But 55 is young. I can work for another 20 years if someone will have me. And if they won’t, I can consider doing without for a time, take pleasure and satisfaction from the things in life that you’re supposed to, the things that don’t rely on money to power them. In the end, the markets will come back, I’m pretty sure of that. It may take ten days, ten months or ten years, but eventually the ship will right itself (probably!) In a way, this “correction” is a timely reminder that there’s more to life than fretting or celebrating over the Dow Jones or the FTSE or Emerging Markets, and that it’s a useful signal to focus on things outside of them for a while.   


Taxing Issues

I was reading an article on the dreaded Brexit the other day – it’s still hard to read anything that doesn’t refer to it – about the hotly disputed claims over the amount of weekly money going to Brussels that could go the NHS. Cutting through the chaff and spin, the main point was that those Big Bad Brexiteers quoted a gross figure, not net.

Well, the last time you quoted your salary, or an employer quoted one to you, what figure was used? Gross or Net? Daft question, isn’t it? On salaries, everyone quotes gross. In this way, a gross number has some sort of legitimacy and credibility, even if it has a long distance relationship with the “bottom line”.

When I stop working I won’t have a salary of course, but I will have a pension, including one from the State which is probably going to be around £8,000 a year. But – is that gross or net? That depends on (a) what other pensions and income I’m taking and (b) how I choose to look at it.  Worst case scenario, the government will give me £8,000 with one hand and then take 40% of it back with the other. In a real horror scenario, they might take 55% of it back (as I understand it) although that could be quite a nice problem to have as your pension pot will then be north of a million quid.

The subject of pensions and taxation is one that lingers on the periphery of many dialogues I have with myself on retirement income. It’s on the periphery because I often just don’t allow it in to the inner circle of my calculations on the basis that it’s an uninvited guest who I may, or may not, ask to join the party. However, if I cannot totally exclude the taxman from the party, I assume I will be doing everything to minimise his presence. It’s just that I’ve not yet really dug into the detail of how I do that.

I once constructed a spreadsheet that did factor in the knowledge I thought I had about the tax situation in retirement for both my wife and myself. It soon became an unwieldy, over-formatted monster that included so many “ifs and buts” it threatened to crash my computer. Needless to say, I haven’t opened it since I thought I’d finished it. Instead, exhausted by scenario planning, I told myself, “Keep it simple”. Stick to the big things you do know and, if you have those correct, you’ll not make any massive mistakes.

What do I think I know about tax and pensions? Firstly, the big tax free bonus that applies to me is that I can currently take 25% of any pension pot tax free when I hit 55. For my Direct Contribution pension that’s a simple calculation. Secondly, when it comes to income tax, both myself and my wife can withdraw up to £11,850 a year tax free which, when you tell yourself that’s a net number, is quite a substantial amount. What gross salary would you have to earn to take home, after tax and NI, an income of £23,700 a year? I can’t be bothered doing that calculation (because I’m frightened I will get it wrong) but it must be close to thirty grand, which is above the national average wage. Anything you add on top of that is cream on the cake, taxed or not.

Perhaps, if I left things at that, then I’d have a much more relaxed and stress free life. Unfortunately that’s not the way I’m made and, I think, I didn’t get where I am today by letting my money take care of itself. You have to work on your cash to ensure it’s working for you. Plus there’s the whole question of getting value for money when you spend it – after all, isn’t that why we work to earn it? At some point you have to choose to spend and, when I do, I want to ensure I gain maximum value at the point of withdrawal to give maximum value at the point of purchase. (I also give myself a hard time about mulling over “First World Problems” like these, but that doesn’t change anything except my mood and level of guilt).

I’ve already become lost in various forum threads that try to answer the question of how best to withdraw retirement funds in a tax efficient way. There are a lot of strategies because just about everyone has a different set of circumstances that apply to them. In a way, it reminds me of those examples newspapers always run post-Budget that take a variety of households and calculate “Here’s how the budget will affect you”. In all the years of reading them, I’ve yet to find one that actually applies, a hundred percent, to me.

As ever, when it comes to personal finance, a good outcome will probably be related to the amount of work put in. I could pay a professional to give me some pointers but, with those fees running into potentially thousands of pounds, I doubt I’m ever going to do that.

It would be easier, and possibly saner, to just plan to live on £23,000 a year net, with any excess sitting there as an “Emergency” or “Fun Fund” to be called on as necessary. In a lot of ways, I really like this idea. It’s really simple. I just can’t shake the feeling that it’s also really dumb, as I worked hard to save the money that I’ve accumulated, telling myself that one day I’d be able to enjoy it. I just don’t think it’s a sensible option now to sit and watch the pile grow. For what?

So, in lieu of any other great ideas, it’s back to the financial grindstone of the forums and blogs, and the never-ending debate about what to do for the best.

Calculated Risk

One of the most infuriating arithmetical questions that has bugged my life off and on for decades is this: “If your salary was increased by ten percent to raise it to fifty thousand pounds a year, what salary were you previously on?” My gut response is always to say that you were on forty five thousand, because 10% of fifty is five and……wrong, wrong, wrong! (again)

I pondered this as I smugly reviewed my investments on Fidelity recently, mentally warming my hands against the financial glow from the growth, and a somewhat disquieting thought disturbed me – how do I know they’ve got their arithmetic right? All those dividend payments, currency fluctuations and compound returns, minus their management charges across a variety of accounts – I mean, who’s checking the sums on my portfolio are correct? Because I, unable to calculate a simple percentage sum, sure as Hell can’t do it.

I then began to remember the legions of financial controllers and directors I’ve worked with over the years and the errors they (often cheerfully) made in their own numbers. Too many numbers and variables, you see, to ensure that everything was a hundred percent checked. But even the most complex business I’ve worked in, I imagine, would be simplicity itself versus running Fidelity?

Later in the week, I heard on the radio that the government’s state pension forecast tool, which estimates what your state pension will be, was in hot water for giving erroneous projections. Okay, we expect the government to cock up any and every computer system it invests in, but still, it underlined my suspicion that it’s relatively easy for anyone to get their numbers wrong. 

The thing is, they could err either way. My investments and pensions could be over or under stated (I can’t actually decide which would be worse). If they wrote and informed me of this, what would my recourse be? Ask for the data so that I could check the numbers?

Ever since Primary Six at school, when I think I first encountered tackling fractions in maths lessons, I’ve struggled with percentages, ratios and functions. Perhaps if that had been a more positive experience maybe I’d have gone on to be an accountant, but I was intimidated by the numbers (and by the teacher). I’m sure many people are entranced by the prospect of puzzling out answers that stack up when they face a difficult calculation, but me, I’m just ever so slightly terrified.

It’s also been my experience at work that if “You don’t know your numbers” then that can be a powerful criticism. There’s little to match the horror in a business presentation than when someone points out that you’ve made a basic error in a spreadsheet calculation. You feel your credibility in just about everything else has just been completely blown out the water (yes, I have been there and got the T-shirt. In fact, a small collection of them). For some reason this can happen to finance people too, but they seem to be able to generally laugh it off. Which I can only put down to confidence in their own ability in this area. When I made such an error I felt like an utter clown and would be genuinely mortified, but if I saw other people do similar I felt it made them a bit more human. (That’s probably two reasons right there why I never made it to “the top”!)

The trick, in your career, is to latch on to someone who really does know the numbers and is willing to check yours. Perhaps that would be a good idea in investments too? Unfortunately they’d probably charge a small fortune to do it and, of course, I’d continually be asking “How do I know you’re right?”

So there you go. I’ve no option but to take my investment performance “on trust”. It’s a lot to ask when I consider that this is my life savings I’m talking about, but I don’t really see much option. Then again, the whole monetary system is built upon trust and very little else. It only exists because we all choose to believe that it does.

As an investor I like to tell myself that I’d never invest in something I don’t understand – and then I read over what I’ve just written, and realise that I don’t actually understand anything.

Well, at least I understand that.