getting perspective at some ancient stones

I’ve been on holiday, visiting an old friend in France and seeing the prehistoric standing stones at Carnac. It’s been the first holiday for a long time. A week has been enough to achieve a shift in perspective.

seeing something this old gives a new light to the world

Personal finance should be about living intentionally, deploying our crystallised claims on future work in a way that accords with our values. All too often it becomes a search for certainty in an uncertain world. Self-knowledge is a necessary part of doing something well. It is easy to lose sight of this in the figures on the screen, and it’s great to see people looking for understanding of themselves in the search to put the personal into finance. Rob is also looking within to do better without. As investments go, knowing thyself must rank high for ROI.

Taking a break also meant I returned to a pile of mail, which included a deferred pension statement, which unlike all the calculators and estimators I had to use while at work is a definitive statement that applies specifically to me.

The amount is about a third of my gross salary while working, which isn’t hopelessly surprising given I worked for The Firm for 23 years. What is surprising is that I’m not sure I’ve ever lived on that much in real terms.

While working my annual spend was of course much more than I’d get as a pension, but a lot of that spending went into either things that were written off in financial terms or that I don’t spend much on anymore. Some of it was accumulating assets (housing post 1999, share investment post 2004), some of it was pure waste (housing pre-1999, share investment pre 2004) and much was trashed in taxation.

I have eight years to go to the original retirement age at The Firm, and yet I’ve fallen into the same thinking that dominates a lot of the PF blogosphere when people think about retirement. Paralysed by the fear of running out of money, we try and think like the Rothschilds. We don’t ever want to run out of money, damn it, even if we live to 500!

Hat tip to Monevator for pointing me at Can I Retire Yet‘s How Do You Know if You’re Running out of Money In Retirement. The digested read seems to be that CIRY feels that unless you’re withdrawal rate is < 3% of your total net worth you run the risk of ending up in deep shit.

The usual reckoning is drawing down between 4 and 5% of your net worth. At 5% you need to save up 20 times your desired annual income; go with 4% and you need to save 25 times your annual retirement income.

Take a step back and think what that means. A typical final salary pension targeted an income of 50% of final salary, so I’ll shoot for that as a target retirement income. Let’s say you have a flat career arc – that means you need to save 10 years’ gross salary (working salary*0.5*20 = 10). Okay so compound interest might give you some leg-up, but it’s still a big ask.

That shift to 3% is a big deal, you now have to save 33 times your annual income to be out of the woods, and if CIRY is right on the low end that you need 2% you have to save 50 times your annual retirement income. In my case, I’d have had to live 30 years, buy a house, go to work and pay 30 years of taxes on the gross pay from five years of my 30 year working life, and save 100% of the remaining 25 years gross. Let’s allow the boosters of compound interest the possibility of compensating for the fact that my pay rose in real terms over my working life. Even after that, I’d say saving 50 times just ain’t going to happen.

What we all seem to miss here is that you’ve only got one life. It’s a balance – saving more for later means living less now for most of us. To be sure, most people get this wrong in saving not enough, and CIRY does a great job in highlighting that stock market variations place a great big noise signal on your net worth that swamps your withdrawals.

Face it. It isn’t just money you’re running out of, even if you are Nathan Rothschild.

There’s a general ramping up of the requirements for security in the retirement blogosphere, a trend towards stipulating that we must achieve a safe withdrawal rate such that we never run out of money. It’s bollocks, because we are missing one of the other things we’re running out of at the same time as we’re running out of money.

We’re running out of life. Each and every one of us, one day at a time.

The requirement to save 50 times my annual retirement income is clearly nuts in my case, even if I had no company pension. Heck, I could totally forget about the stock market, save in a ladder of index-linked cash savings for each of the next 50 years, and kick back by the pool. I’m just not going to see another fifty summers turn to autumn!

Too many people treat their retirement savings as an Ivy-League college endowment fund, wanting to design things so they never run out of money. There’s no point in doing that. If the elixir of eternal life is discovered or we all suddenly start living to 500 like Methuselah, the changes this will wreak upon the environment we invest in will be so stupendous the assumptions will have broken down completely. You probably just won’t live beyond 100. If that elixir of extended life becomes available at Tesco you’re just going to have to spit on your hands and go back to work.

There is another implication of running out of life. Don’t be so fearful of running out of money that you retire too late, either. For the vast majority of people wage slavery is doing something they don’t want to do for the fear of the consequences. As MMM pointed out a while back, one of the great things about the modern era is that it is possible to retire, and even retire early.

Today we have a unique opportunity to hit financial independence after only 10 or 15 years of work. Retiring in one’s mid-30s sounds crazy, but it is the unprecedented times we live in that makes it possible.

When I was at school in the 1970s people really believed that the future would be a future of leisure and 2 day work weeks. This expectation had even been anticipated by JM Keynes a generation before, in Economic Possibilities for our Grandchildren.

It didn’t turn out that way. Some of it can be blamed on the 1% half-inching the spoils of war over the intervening forty years. Some of it did turn up in the possibility of a shorter working life, rather than in terms of the same length working life with fewer daily hours. Firms really hate employing more people even if they have to pay less for them individually, because managing more people is not scalable. Anybody who’s ever tried to interact professionally with a job-share team knows only too well that the whole is less than the sum of its parts. As MMM continues

The actual fact is, due to productivity and technology improvements, wages have risen faster than the cost of goods in real (inflation-adjusted) terms.

Younger readers may not believe this, because these are changes that happen slowly, you need a couple of decades of observation to see the changes in aggregate. And you always see the exception. Looking back over half a lifetime, the poster child for the hard-done by priced-out generation, the house, has adversely changed in relative value since the late 70s/early 80s. They forget that before the late 1970s most middle class families rented  – indeed more than half my class lived in council houses when I was at school.

Other essentials of life were much more expensive relative to wages. I recall my parents used to put sixpences in a tin after they used the phone, trying to track the costs and save as they used it. Many will think nothing of paying £50 a month for mobile phone service. Food was more expensive. Power was more expensive, cars were shockingly expensive and unreliable to boot.

better products but poorer services

One class of thing that has become a lot worse and dearer is services. Higher average wages relative to needs means that people were cheaper to hire in the past, and many services were better, because for all our technological innovations we have never really managed to approach the adaptability of a properly paid human at unpredictable and non-repetitive tasks. The quality of advice you’d get from an owner-run TV shop was streets ahead of the Dixons teenager of today. Having said that Woolworth’s shop assistants and the like weren’t always the pinnacle of intelligent life…

Early on in my career I could ring up companies and get somebody who a) worked for the firm and b) actually knew the products and their quirks. There’s hardly any point in calling a company for aftersales support these days, particularly for technology – you either get a soldering iron out and fix the damn thing yourself or you junk it and get a new one. I’m 100% with James Kunstler in his entertaining heartfelt plea for the AFTA Act of 2012.

we’ve spent four decades and untold billions of dollars to computerize every phone system in America.

[…] The net result of all this effort and investment is that it is now just about impossible to get a live human being on the phone at any company, agency, or institution in our land. […]

     By computerizing all the phone systems we allowed every company, agency, and institution to dump all of their transactional inconveniences onto us, the customers, clients, and citizens.

Why is there so much fear and loathing about saving enough for retirement then?

We spend less on needs and more on wants. Companies are getting better at increasing our wants, and unlike our needs there is no natural limit to wants. This is an arms race the consumers of the world are losing 🙂

There is less certainty about work, and employers slyly reduced wages without cutting headline salaries by cutting deferred pay – getting out of pensions as much as they can. When I graduated, a typical professional engineer would start at a company and work there until 60. I was an awkward bastard and job-switched several times in the first seven years of my working life, then worked for The Firm for the next 23 years. Compared to other people at The Firm retiring or leaving at a similar age to me I was a fly-by-night – I have seen many40 year long service presentations in my time worked with a lot of people who were with The Firm man and boy from 16!

Uncertain career paths make saving for retirement less clear than it was for previous generations. You need some reserve to be able to handle the unpredictable. How much reserve? Enough to cope with our darkest fears – so we demand huge levels of security, which then leads us to file retirement saving into the too hard self-inflating ball of worry category. However, MMM’s point still stands; although the path is less clear than for the last generation, the capacity to save now is higher than it has been, as long as you don’t chuck more and more of your disposable income down the bottomless pit of increasing Wants.

How would Sir like to cut his retirement planning? Quality of Life or Security?

This hidden security assumption harmed my plans too. According to the pension statement I have retired 8 years before the design retirement date for my pension. In 8 years’ time the deferred amount is one I’d be perfectly happy to live on, indeed I wasn’t living on that much for most of my working life, what with the depredations of mortgage payments, pension payments, tax and NI.

So I designed my stock portfolio to live off the dividend income alone over the interim. Although it isn’t obvious, doing that is an attempt to avoid one of the hazards CIRY warns against as a major red alert, selling shares at a loss. You simply don’t sell 😉 There are second order effects that make things not so simple in a HYP. For a start you are investing in a smaller universe than a straight index tracker. I do end up with plodders, none of the racy sort of ten- and twenty-baggers that Rob is hunting over at Self Employed Investor.

Though you don’t ever sell with a HYP, you can eat a loss if a company goes bust. This hasn’t happened to me yet and is inherently less likely with HYP shares if you guard against yield traps. None of mine have even skipped a dividend, indeed it is dividend performance alone that may well redeem my worst performer in terms of SP, hello RSA, many month winner of the wooden spoon award on SP. It is slowly approaching neutrality on total return with divis. Once it passes that point this firm might actually start working for me. I never realised the sheer power of just sitting on your hands to redeem what was clearly a mistake in hindsight!

The trouble is that I wasn’t able to build a portfolio I can live on in three years from a standing start. More than two thirds of my savings are in pension AVCs so they aren’t part of my portfolio at all. However, I have been tremendously lucky with some sharesave schemes which doubled my portfolio, though getting them into my ISA was beyond me. If you get the opportunity, join sharesave, to the max. JFDI – it’s like the Lottery, except the odds are better and you get your money back if you don’t win 😉

A time for all things

I don’t need to live off my portfolio divis alone. I have a finite amount of time, and as the old Byrds song says,

A time to get, and a time to lose; a time to keep, and a time to cast away;

with a hat tip to Ecclesiastes. Life is a journey, it is not a framed picture on the wall like Dorian Gray. I managed to force down my outgoings down enough that I could live off the income from the portfolio, adding it all together both in and out of the ISA. I am short a little income, but I have more than enough free cash to address the years of shortage. In practice I accumulate in the ISA and run down the cash rather than draw, to preserve the tax wrapper. Unlike some, or perhaps many, I really don’t like cash as an investment class, which of course is why I’ve ended up with more of it than any other class 😉

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As I wandered around the old stones, and reflected on how I got here, I realised that I had lost perspective in the fear associated with trying to bail early. I saved enough outside the pension system to nearly live on. But there’s something a little bit barmy about it, because saving 20x my income needs to bridge an 8 year gap at the outside prioritises security beyond the logical. I could save 10x the income needs and run it down over the 8 years, leaving me some in hand. What I feared was the feeling of a slow decline in networth.

My greatest regret is that I didn’t start thinking about this earlier. In retrospect I worked too long. I endangered both my physical and mental health fighting in the endgame. Don’t be paralysed by the fear of demanding total security – work out what your balance of priorities is. Then navigate your way towards it. Learning about investment management, what the hidden agendas of the other players are, what the risks are and what your own foibles are is a long project – a decade at least, if not a lifetime’s work; indeed people who are both far more interested in investing and more talented than I are still trying to work this out for themselves.

It took me ten years to learn enough about investment to become clever enough to be dangerous in the dotcom bust. I then quit and got on with other aspects of life for many years. I lost balance, focusing narrowly on some kinds of life success at the expense of self-development and individuation, until the imbalance destabilised enough to force change.

Part of that change required me to find a way to retire early, and I focused on the money, with more skill in action as a result of experience, and the guidance of people who showed me I could take charge of finance and shift my path. In doing so I lost balance in a different way. Fear dominated my field of perception, and I became rigid and narrow in vision.

It is not absolute security that I needed. It was freedom of action. Security was a prison that built walls around me. Insufficient freedom of action quenched the fire within, and I had to fall back, and fall back, hoping that one day the fire would restart in the draft of the endless fall. It needed a shift in consciousness, to cease shoring up the walls, and to listen for the sound of Thoreau’s distant drum –

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. Let him step to the music which he hears, however measured or far away.

The signal from that distant drum is faint, and all too easy to lose in the noise and hum of life. It carries a valuable message, to be cherished, despite it’s faintness. Live intentionally, or live not at all…