So it pleases me to bring you the results of a couple of researchers at the LSE, who were using the results of an app called Mappiness to see how people’s happiness correlated with various factors. One of which was working.
Guess what I can reveal about the results? By all means go and read it, but basically it says
Work pisses you off, and you are less happy while you’re doing it
Well, I’ll be damned. Who’d have thunk it? What happened to the increased leisure time they promised me at school? Why are we building a society where we keep doing this to ourselves –
Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need. We’re the middle children of history, man. No purpose or place. We have no Great War. No Great Depression. Our Great War’s a spiritual war… our Great Depression is our lives. We’ve all been raised on television to believe that one day we’d all be millionaires, and movie gods, and rock stars. But we won’t. And we’re slowly learning that fact. And we’re very, very pissed off.
Tyler Durden, Fight Club
Now that science has shown us that work pisses people off, we will re-engineer society so we have a 20-hour week but earn half the money? I guess not, there’s only so far you can go with evidence-based policy making, and that’s where the hard edge of evidence rubs up against the soft gloopy squidginess of values and judgement calls and who gets to call the shots 😉
There’s an evil asset class in Britain that hurts the inhabitants even though they are in love with it. Warren Buffett charged gold with not delivering an income and a lack of productivity, but at least gold has the honesty to just sit there, glinting. This asset class causes Britons to lock up stupendous amounts of their lifetime earnings in a lumpen asset. It’s called residential property, and in a curious Stockholm syndrome people want it to always rise is price, even as that hurts the people they supposely love the most – their offspring.
Britons imbue property with a magical aura, it is the one asset class that will always deliver. As such the price of houses in Britain has risen to high levels relative to wages. I derived the associated graph from the Government data on this. I have no idea of whether using the median is reasonable – it is apparently the point at which half the datapoints lie above it and half below. If we take Ipswich as typical of places outside London this is running at five times median earnings, I’ve listed London and England separately but I’d imagine London and the south east skew England up.
What does that actually mean for you, the putative homeowner at the start of your house-owning career?
Let’s take a moment to think what this means. Apparently most people go to university now, and you leave university at 21 or 22, and you will retire at 67, so your anticipated working life is 45 years nowadays[ref]when I graduated at 22 the working life of a white-collar worker was 38 years. But in compensation you will live a lot longer than me ;)[/ref]. About ten years in, typically[ref]I know that a lot of today’s young ‘uns seem to expect to buy in your twenties, in the belief that everyone used to do that, but they didn’t. I was nearly thirty, and my Dad was older, when we respectively bought our first houses. Loans were much harder to come by and you were expected to have a deposit and repay the mortgage I really don’t know where that expectation came in, and you’re more likely to switch jobs and move in search of better opportunities in your early career, which mitigates against home ownership.[/ref], you will purchase an asset that costs you five years gross salary. Unless you were born with a silver spoon in your mouth you will buy this on a 25 year mortgage, and if you consider trying to buy this outright in that time[ref]that means no interest-only mortgages, unless you are saving the capital in a different asset class[/ref] you will pay about three times that price, though inflation sees to it that in real terms you will only pay double the price in real terms[ref]this is a hand-waving argument in that inflation halves the value of money every 15-20 years. You will pay about three times the nominal sum but a lot of that will be in money that is worth less, provided your income keeps up with inflation[/ref].
That means that by the time you retire you will have tied up ten years of your income in that house. In the UK you can’t offset the interest you pay against income tax, so you have to pay that from taxable income, so you’ve probably tied up about 12 years of income in keeping a roof over your head.
Yikes. I was mad enough to buy a house on an income multiple of about four times but at least I had a 20% deposit, and bitterly regretted the stupidity of that move. After about twenty years, a house move and some of the other slings and arrows of life it sort of came okay in the end, but it was a nasty ride. My income rose over the period I was working, and I discharged my mortgage in 20 years rather than 25, so I probably lost about five or six years of average income to that. That’s about a fifth of my working life, so the actual proportion lost to housing is not that different, despite the structurally higher income multiple nowadays.
The Government, eager to buy votes, has observed that Brits like nothing better than rising house prices. They’ve been busily devaluing the currency and printing money to help with that, though unfortunately average wages don’s seem to be keeping up. But house prices have generally at least not gone down, because people hate that. Monevator observed that real house prices have increased about 3% p.a in real terms since the 1970s. Now to some extent that is understandable. Britain has become far richer in those 40 years, we spend a far lower proportion of our incomes on some essentials of life, like food and energy, and in many ways British houses are a lot better than they were in the 1970s – they have things like central heating and inside toilets that weren’t universal in the ’70s. So some of that increase in real price stands to reason, you’re getting more house for your money.
Not all of it makes sense, and the slow creep of prices to wages will eventually mean it won’t be possible to buy a house outright within a single working life, though this is offset by the increase in the length of working life due to increasing life expectancy. I have already experienced the trend – I was older than my Dad was by the time I discharged my mortgage, though I had a better job than he did and he had the cost of raising a family. At the point a working life isn’t enough to buy a house we will either have intergenerational mortgages like the Japanese, or a revolution, or massive inflation. Nobody looks at the big picture when buying a house, what they look at is the price of the loan, and can they afford it at the time they take it out.
Which is where the Government comes in. Our Dave has already been fiddling about in this area, with Help to Buy. Now the most damn fool thing that a first-time buyer can do, in my view, is to by a new house because they get to eat the new to secondhand price hit when they come to sell it – but Help to Buy was designed to do exactly that; help first time buyers to buy new houses.
I’m sick and tired of Britain’s high house price policy. And I even own a house, outright. But I don’t want to sell it, I don’t want to move anywhere, I want it to sit there and do the job I bought it for – to keep the rain off my head and give me somewhere to stick my Stuff.
However, due to Government policy of giving money to people to buy houses, I need to buy a house. Strike that, I need to buy another house. The trouble is I hate everything to do with houses in Britain. I don’t want to buy another house. I probably could raise the cash, but I don’t want to putz about being an amateur landlord and take the risk of rotten tenants or voids and all that malarkey. Everybody in Britain says go for Buy To Let, old man. I know people half my age that ‘own’ two houses[ref]I am unreconstructed enough to believe if you have a mortgage then you don’t own the house. However, you are mad if you own a BTL outright because you could be running more BTLs by using leverage and other people’s money, it’s a business, not a home. I still wouldn’t say I own it[/ref]. I don’t want to piss about with BTL.
I don’t actually consider my house part of my financial assets. But though I have commercial property as an asset class in my ISA, I have no residential property. Eeeeurgh, the very thought brings me out in hives, I loathe residential property as an asset class, particularly the thought of owning such a lumpy, illiquid asset with the whole world of hurt and transaction costs that go with buying and selling it. If you’ve never done it and look wistfully at the thought of buying a house, you take the shaft from the solicitors fees, from the estate agent’s cut of the selling price (which buyer and seller effectively pay between them, though it’s charged to the vendor), the survey fees, from the government stealing a slice via Stamp duty, then if you buy with a mortgage then the mortgage company will charge you an arrangement fee, a mortgage insurance guarantee, a high loan to value fee and anything else they can lob into the pot. Then there’s any rewiring costs, painting and all the futz and hassle. And people say the stock market is risky…
So I don’t want to buy a house. What the hell would I do with it, I’m trying to get Stuff out of my life, not get more. But the Chancellor has just declared that he is going to drop money on you with a helicopter, if you use it to buy a house. How do I get a slice of the action? Well, what’s the aim of this policy? To stop house prices falling make house prices go up in nominal terms. Never mind the poor chumps who don’t have one yet, your boat’s just gone out. Never mind the people that have just had another child and want to move to a bigger house, tough luck on you too. Where’s the Chancellor going to get the money from? Hell, he’ll get Mark Carney to print it. The latter has also declared his aim is to target nominal GDP growth. That means inflation. Your house price will go up but so will the price of gas and food and just about everything else in life. So you will sit there thinking “Great – thanks to that nice Mr Osborne I have more money to buy a house with.” If you have one then you will sit there and think “Great, thanks to that nice Mr Osborne fools will pay me more for my house” without realising you are the greater fool overpaying for your next one. And you’ll mutter to yourself how everything seems to be so expensive these days.
How to get into residential property without buying a house
So I don’t want to buy a house, but I want some exposure to the asset class, and unless I want to become an amateur landlord and do BTL and all that crap that’s not easy to do. Plus I only want some extra exposure to the asset class, not a whole damn house’s worth. There are two ways of doing that
One is spreadbetting, but unfortunately you don’t seem to be able to go to a spreadbetting firm, say here is £1000, stick it on the Halifax house price index and I’ll come back for it in three years time. Well you can, but they will charge you a daily finance charge even if you try and pre-lodge the cash with them, because that’s how they like to make money. Although the day rate looks low, it adds up over time. They don’t pay you any interest on the money you have lodged with them. You use spreadbetting over weeks and months, not years. Why three years? Because that is when there is going to be a sunset clause on help to buy. Now the Ermine has had previous experience of what happens when there is a sunset clause on Government fiddling in the housing market. way back in ’89. When Lawson stopped the ability for couples to pool MIRAS entitlements up to £60,000.
What happens is there is a feeding frenzy that ramps up prices and everybody goes mad with Torschlusspanik to get in there and get a slice of the Government pork. Yes, that was me too – and I was only a single person buying a house, but I was unlucky and stupid enough to want to buy it in this feeding frenzy and only saw escalating prices. Hell, some colleagues even pointed out there were distorting circumstances. But I Wanted. It. Now. Yes, I did get MIRAS, on 30k of the price, and it was worth about £1000 p.a. and the then-prevailing interest and taxation rates. It probably compensated me for, oh, about 10% of the amount I overpaid for that house, and I didn’t even have a partner to get the extra MIRAS over 30k 😉
Volatility is lower with houses than with stocks
I actually bought after the cutoff date, which taught me something else about house prices. They respond slowly. A stock price can go from hero to zero in seconds, whereas look at the languorous pace of the house price index – house prices move slowly. This isn’t such a surprise – after all transactions of high-frequency trading in stock prices are measured in terms of microseconds, whereas the whole mortgage arrange/survey/offer/exchange contracts is about six to eight weeks in England. Even as a cash buyer you’re still talking a couple of weeks if you want to do the surveys and searches. We’re talking megaseconds here, so the integration time is 12 orders of magnitude bigger for houses than for stocks. The index is also integrated over a wide geographical area, further smoothing things. Let’s take a butcher’s hook at how that all panned out for a little over over my house-buying career to see the difference. Fortunately they tracked over that nasty little heft in 1989, so the picture is still accurate over exactly my house owning career 😉
I normalised both to 100 at the outset[ref]I pinched the house price data from the Nationwide (the Halifax doesn’t have historical data AFAICS), And the FTSE All-share from Yahoo [/ref]. You can immediately see there are whole chunks of volatility, though the FTAS got first out of the starting gate and stayed waaay ahead for 10 years, before taking a gut-punch in the dotcom bust. You’ve have been sore to have taken out an ISA-backed mortgage in 2000, though dividend payments would have made you less sore than this chart shows. And you’d have been buying through that 2003/3 suckout, so perhaps you wouldn’t have suffered too badly. I take Monevator’s point that the dividend income probably matches the rent you’d be paying on the house you wouldn’t have bought if you went the rent and save into an ISA route, so sticking with the capital values is probably okay.
Housing is an easier ride, n’est’ce pas? Your share man rings in the millennium in 2000 thinking ‘Holy cow, I am Riiiich’ only to crest the peak and suffer a gut-wrenching almost halving of his net-worth. Whereas me, I’m still sore about having crested that tiddly little lump in’89 on the house price index. What’s up with that? Well, the reason is that a house is a leveraged play, because most people buy their house first, before they can afford it. I borrowed 80%, so all of a sudden that suckout is money I didn’t have. It was until 1999 that prices returned to their previous 1989 heights. I still ended up paying down murderous amounts of negative equity before I moved. Yes, I gained on the new house and the nominal value is up, but this is not a hit you want to take in the first five or ten years of house ownership. The younger Ermine paid for a lot of the housing wealth of the older Ermine at a time when it was hard to do, and it’s not like the older Ermine can realise that cash and go on a bender with it even now.
Let’s take inflation[ref]That’s RPI inflation, because we all know that CPI inflation, though it is technically more correct with geometric means is fudged shitless by governments to pretend that they aren’t printing money to pay for all those goodies that voters want but don’t want to pay taxes for[/ref] out to level the playing field. Here we see in real terms our stock-market playing fellow really did take a 50% crunch high-to-low-water mark. He’s generally had a bumpy ride all round.
No wonder Brits are in love with property, eh? So much in love we want to stick a quarter of our working lives into bricks and mortar. Life would be a lot more fun if we didn’t do that, and spent it all on holidays, or not working so much and spending time with our children, after all, Warren Buffet was right about gold, it doesn’t actually do anything for you, and nor does most of the cost of your house – a builder can build or rebuild it for a fraction of the purchase price.
Brits aren’t any richer nowadays because we stash more of our lifetime incomes in housing, we can stash more of our money in housing because we are richer, so we don’t have to spend it on food. But it’s still a stupid thing to do with our increased wealth, compared to spending it those holidays or extra time with our loved ones.
But that’s what we’re gonna do, because that’s how Brits feel about property. If we had US style home loans without recourse then house prices would be cheaper because mortgage companies wouldn’t lend such stupid amounts as they know they’d often take the shaft with jingle mail. They would come up with some other types of tomfoolery to make a mess of things, like, er, lending money to people who are obviously so poor they can’t pay it back, and then obfuscating the sleight of hand with derivatives…
Now an Ermine has to hold a lot more cash than if I were working or even a pensioner, because I have no means to earn more money in the short-term to make up for a one-off hit. Someone earning would be able to borrow that money and pay it back from earnings, but I am my banker of last resort. And I hear that the Government is doling out free money to underwrite the mortgages of people that shouldn’t be able to get mortgages, because they are overpaying for their houses. So they will overpay for their houses, and house prices will go up, nominally. And my cash holdings are taking the shaft from the piss-poor interest rates on offer and the high rate of inflation that the Bank Of England is setting to discharge the national debt by making it worth less in real terms.
So I want some of that. And I could use the diversification. Look at that chart – there are significant periods when stocks outperform residential property, and significant periods when the converse is true. But I don’t want to buy a house, so I am SOL on that, and three years is too long for spreadbetting. There are three other ways to get exposure to the market that I know of –
Buy To Let. No. Not doing that. Diversification means you need to sometimes buy asset classes you detest. Buying so much of them as to make it the largest holding is something else, however – I don’t have enough money to get the asset allocation right, and even if I did I don’t want the pain. I’m an engineer, and introverted to boot. Why the hell would I want to set up a business and deal with stroppy people?
Both have their own problems. Hearthstone seems more honest, in some ways, they buy and rent accommodation to punters on AST tenancies. It’s like being a partial BTL landlord without most of the hurt and the meatspace interaction with stroppy fellow-humans. If Britain is going to move to a lower-owner-occupation model then more professionalism is something I have been looking to see for a long time – the fact that you are dealing with amateur landlords is part of a lot of the hurt that being a tenant in Britain seems to be about. I have a very low opinion of Britain’s army of amateur BTL landlords, mostly from my own early experience of amateur landlords – step forward one of the more egregious examples Mr Uddin from Acton whose bright idea it was to wire the shower to the lighting circuit, ‘cos the shower was on the top floor so it was more convenient. Punk. If you don’t know why that’s a bad idea you shouldn’t be a BTL landlord. End of. This douchebag also stole our deposit in addition to trying to kill us with the melted power system.
Professional landlords will have enough scale and expertise to have or hire their own maintenace and facilities management teams who hopefully will have the expertise to do this properly and to a more even standard. However, Hearthstone buy new and nearly-new houses, and I am prejudiced against new houses because of the secondhand depreciation effect. I have never understood why anybody would buy a new house – the premium is off the scale and the sound insulation sucks, you have tiddly rooms, no storage and eyeball to eyeball with your neghbours. On the other hand car rental firms only use nearly new cars so perhaps there are issues for professionals I have never experienced.
Castle Trust have different issues. Their proposition is easier to understand – match the Halifax House Price Index, and the way they aim to achieve this is very much like Help To Buy, by lending to individuals, So the risk is obvious too – some of those individuals will get slaughtered when they lose their jobs/get divorced/have children/interest rates go up. There is a secondary risk in that Castle Trust is a derivative investment so there is counterparty risk as usual.
Castle Trust have latency issues – you buy effectively a bond benchmarked against the Halifax index for three or five years. The three year one matches Help To Buy very well so I will probably dip a claw into this. I’m not going to put a lot into this, but I want some of Osborne’s money since he is planning to helicopter drop it on the toxic UK housing market to buy himself some votes. If interest rates go up in the three years then although I will eat a loss on this (and consider shorting it using IG Index!) I will actually be able to turn a return on my cash holdings.
BTL will be more lucrative if that’s what you want
BTLers, specifically those doing BTL on an interest-only mortgage, which I presume is nearly all of them, will do much better if house prices go up. That’s because they are using leverage, effectively betting the farm on house price rises. They also get the benefit of charging the interest payments on the loan as a cost of doing business, reducing their tax liability against the rental income. I don’t need leverage – my worst case outcome is that Castle Trust goes titsup and I get to write off my stake. A BTL’ers worst case is he becomes a forced seller selling into a dead market for less than he paid. And goes bankrupt, it’s the old risk/return conundrum. I’ve had the experience of owing more money on residential property than the asset was worth, and I ain’t going there again.
Government pork and diversification in small chunks
But as a way to stick a paw in this cesspit of quasi-religious British belief, and in particular to hold a claw out for some Government pork, I’m prepared to take the risk to a small extent, and see how it goes. The great thing about these is the subscription requirements of Castle Trust and Hearthstone are modest – like any other asset class you want to drift in and out of it over time. You don’t normally have the chance to buy or sell a house in small chunks marked to market each year. The Government pork has its own attraction, though any market that has the 900lb gorilla of the government charging about it buying votes is susceptible to unintended consequences. There is mixed opinion – in some quarters there’s the view that Castle Trust could be destroyed by Help to Buy and in other quarters that they may work well with it. They certainly seem to be the more exposed to getting hurt by the unintended consequences of Government action, because Castle Trust is very much more a pure play on the house price index. Hearthstone’s model is less susceptible to that, though if rent controls ever started to catch on in Britain they would be in trouble, whereas Castle Trust could just make their mortgage holders eat the cost of capital misallocation along with their investors.
I’m not an expert of UK residential property. But I’m going to take a punt at some point, because I’m tired of the Government’s high house price strategy being bought at my expense. It’s a punt for me, but God help the poor bastards that have to make this call in terms of buying a house. There be dragons in this market, been there, eaten the crow. Wouldn’t it be nicer if we all used our higher wealth relative to the 1970s in having more holidays or working fewer hours rather than foolishly always ramming a quarter of our lifetime earnings into a house? Yes, but the market’s made of other people, most of whom seem to want higher house prices rather than more leisure and fun. Beats me why, but “the market can stay irrational for longer than you can stay solvent”. Poor old John Maynard Keynes, eh. He just didn’t reaise just how powerful the Gollum-esque evil heart of avaricious darkness is that beats in each and every British homeowner. He believed
When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession — as distinguished from the love of money as a means to the enjoyments and realities of life — will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease … But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.
Hmm, it didn’t pan out that way, bud.
Note that both Castle Trust and Hearthstone are complex, they are new, there’s an awful lot not to like about each of them as well as some things to like. For God’s sake do your own research before you even think about it. They aren’t proxies for a house deposit because of the latency, because of the wide geographical integration and because they’re about more than houses. Here be dragons!
With a thump on the doormat a new missive come from Tesco Bank who are feeling in a jolly mood, inviting the ermine to give himself some breathing space from the crushing weight of consumer debt, with a kind offer of taking it off my hands at 0% interest. Presumably their impecunious customers are supposed to read “0% – that’s FREE OF CHARGE”. I regularly get this kind of offer from all sorts, but without shedloads of consumer debts it’s hard to avail myself of the pleasure. This one, however, came with an added wrinkle which was new to me. Usual puffy piece, enjoy some breathing space
Ta-Da! Tesco Bank – you win the lying sack of shit award of the week as I turn the page
So I pay no interest, but the usual scam of a ‘handling fee’. Presumably it’s to feed the hamster that runs the wheel to keep the supercomputers running in Tesco Towers. Or to pay the grunt to lick the stamp – no, that can’t be it as it’s a typical 21st century financial proposition that won’t involve any humans at all. Except for you, the willing consumer, who is the Debt Slave to be bound by the system. At least Asimov’s robots had the Positronic laws but Tesco clearly feels that sort of thing is effete and robotic computer shafting of their customers is A Good Thing.
In my book if it costs me 2.99% (min £5) to borrow £10,000 for a year then that’s an APR of about 3%, simples dear Tesco Bank. One of these days I may rouse myself to grouse to the Advertising Standards Authority about the fact that 0% isn’t 0% when it’s really about 3%, but I observe the new wrinkle, that the fee is charged as a purchase and what’s more that will be charged interest at the purchase rate. Just so you don’t get suckered by oh it’s only £5, I’ll save you fishing the calculator out – unless you’re borrowing £125 or less that hamster is going to be demanding more than a fiver for the privilege of ‘handling’ your 0%! Interest-free! loan. Life’s a bitch at times, innit?
2.99%? 3.5%? What’s a mere crafty 0.6% interest rate uplift between friends, eh?
Say I borrow £10,000 that way, and pay £299 for the privilege. Which is obviously not 0% of £10,000, unless something has changed since I went to school. However, feeding the data into the munge-a-tron that is Excel, and assuming the purchase interest rate is about 16.9% p.a. which seems to be the going purchase rate at the moment in Tescoland it appears that after 12 months of this game, I owe £353. Which is a tad in excess of 0% to £10,000, to the tune of about £353 😦
So that 2.99% is actually 3.5%, which is what got Tesco the Liars of the Week award. In fact that means that at Tesco Bank 0% interest is really 3.5% interest, so on your bike, peeps.
It’s deceitful, underhand, and just downright wrong. Way back in 1989 when I borrowed some of the deposit for my house from those nice people at MBNA on interest-free credit interest-free actually meant interest free, and these were the days of 7% interest rates. Somewhere along the line in the intervening years we seem to have accepted that 0% doesn’t mean 0% when it comes to credit cards. I was under the impression that credit card firms had to put your payments ot the dearest part of the loan first these days, in which case overpaying the first payment by about £309 would save me £40 of that purchase interest rate if I were to borrow £10309 right off the bat (and pay the excess £309 back ASAP). Con-artists… In the meantime, if anybody feels the need to avail themselves of interest-free credit that isn’t interest-free, then remember the solution to this chicanery
Borrow the handling fee on top and pay the handling fee + £5 back ASAP – before you start paying back the loan monthly
As usual DYOR and make sure that your card provider does apply your payments to the dearest part of the loan first – this will be in the small print. As I read this from the card payments association they are bound by law to apply the payment to the highest interest part of the loan first, but I am sure that Tesco’s and your card-issuer’s lawyers are more crafty than I am clever. In theory your first payment (of £10,000/12=£833) should wipe out the high interest rate purchase bit, but something gives me the feeling that Tesco haven’t done it this way simply to win a crafty £3 extra on my putative £299 extra cost. You can’t exactly expect the sort of people who call a 3% APR offer a 0% interest offer to play straight down the line now can you? They’re also hoping you carry on buying consumer shit with the card, where they can sting you for 17% APR, cos you didn’t pay it all back in the month, did you Sir?
Three years ago, almost to the dot, I wrote a post called Post Retirement Needs & Wants are Hard to Envision in Debt Slavery I’ve come across this again a few times since then, and it seems that though I found it hard, it was a damn sight easier for me than many people. So I thought I’d revisit the theme, with about a years worth of hindsight.
Most people, particularly those who have been working for a while and got set into a certain lifestyle spending, lose the ability to think outside the box. yeah, I know it’s a terrible piece of management-speak that I heard all too often at work, but it seems uniquely apposite here. I can’t believe the number of times I’ve heard variations on the theme.
how on earth do you have a life on that little?
A lot of successful people seem to gain their sense of self-worth from the number on their P60 corresponding to their salary, and there’s a knock-on effect that means their sense of self-worth ends up connecting to their spending. They feel that life isn’t being lived to the full if they aren’t spending a similar amount in retirement as they were spending at work.
Now there’s nothing fundamentally wrong in identifying yourself with your spending, provided you can afford it, and most of these successful people can afford it. Many people become successful precisely because they identify themselves with their salary, I know I switched jobs a few times early on because I thought I was worth more than what I was getting, and stopped when I figured I had reached Enough. Identifying yourself with your spending, however, has a cost. It makes retirement in general, and early retirement in particular, scary.
That’s because you lose a bit of your sense of self-worth if you retire, since in most cases the maths dictate your retirement income is lower than working income[ref]a typical expected retirement is about as long as your working life, so unless you are saving nearly half your pretax salary you will retire on less than your working pay. Compound interest isn’t enough to do most of the heavy lifting here[/ref]. Early retirement in particular, is all about reducing your spending. It isn’t about earning more, because earning more is generally associated with lifestyle inflation, if only to compensate for the extra stress that usually goes with it. If you get your self worth from some of your spending, then reducing that is going to make you feel like shit and generally give you the willies. There are three things you can do about this
Accept this is the way you are, these are the values you choose to live by, enjoy the spending and retire later!
Examine your priorities, and ask yourself if your spending is really that important to you or if working is costing you more in loss of quality of life than the increased spending is improving your quality of life.
Refuse to look at the situation and conclude that people who reduce their spending are living a miserable life of slumdogs
1 amd 2 are both valid and reasonable courses of action. While 3 may make you feel better, if you haven’t asked yourself the question and honestly considered the alternatives, well, you haven’t really got your head out of that box, have you? It’s not like you are committing yourself to course 1 or 2, but at least if you go for 1 then you know that you are living your values, that there are other options but on balance you know you prefer to work longer and spend more.
One of the problems is the classic one associated with all change. It is easy to see what you will lose with a change, but not so easy to see, and impossible to live, what you will gain with the change. The vast majority of the benefits of retiring I found were not to do with money. They were to do with the extra time I have, the vastly increased sense of self-determination, and the elimination of stupid rules and hoops to jump through.
Many people think they will dive into a frenzy of DIY which will save them a load of money, and good for them. I did repair a tractor starter motor and a few things. But I can’t be arsed with many DIY tasks – I still have a flat roof fund against the time when that will need redoing, I paid a chimney sweep rather than do this myself though it’s perfectly in my capability, and I still haven’t really convinced myself I want to paint the house. All of these are still choices and the balance may change in time. There are some things I will do if it’s too hard to find competent workmen or the labour cost would make it prohibitive but I haven’t run into too many of those yet.
My spending dropped because far too much of it was compensating for the stress and ennui of not being a free-range human being. And here’s a secret I can share with you – all the money in the world can’t compensate you for the deep loss of personal freedom that working for a living imposes upon you. Each one of us has 24 hours allocated to us every day, and about 8 of those we have to sleep. Of the remaining 16 half of them are sold to work. It’s a necessary evil, but over the course of three decades it is easy to end up with the words of Tyler Durden being all too true
Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.
Now there’s no getting away from the fact that the transition from working to retired is a change, and a challenge to boot.
It made me nervous. More so in my case than most, I should imagine, I went from having a decent income to sweet FA, because I am not drawing my pension. Why not? Because I saved a shedload of money as cash, I had a year’s worth of salary under the tax-free threshold as cash and even after filling up 2012’s ISA I still had a load of cash left over.
And you can’t turn a profit on cash these days. So the best I could do with this cash is to live off it and defer my pension. Because the trustees in charge of my pension expect me to die 20 years after I turn 60, each year I defer my pension it gets bigger by 5%, though since I am running into tax that actually only increases by 4%. It would be mad to take that income now because where the hell else am I going to turn a 4% in real terms return on investment on cash after tax? What am I going to do with it, there’s no point in drawing it and saving it, or even investing it, because I am not such a smart investor that I can say I have a good chance of doing better than 4% real.
However, I have the ghost of Micawber on my shoulder, yelling out
You are spending more than you earn Wrong Way, Stop, TURN BACK NOW
He’s right in a narrow way and wrong in a big picture way. At the point of transition this gave me grief, I had just come out of three years of saving to get out, and wasn’t in the greatest place mentally. I tried to maintain my net worth, becoming virtually catatonic for a short while after leaving. No, that isn’t living life to the full, but the time was productively used, it’s called convalescence, and that sort of thing takes just as much time as it’s gonna take 😉 Life is a dynamic balance – as so well summarised in Ecclesiastes on “a time for all things”
However, looking back I went on holiday three times in the last year. So why is it that I needed less money after retiring? Was it as simple as Jacob ERE highlighted in his direct way – that for most people, the idea of living life to the full consists of
In general, if you ask the average consumer what enjoying life is all about, it distills to the following trifecta: buying tickets, going to restaurants, and shopping.
That’s it. Those three things are all there is to enjoying life. The uninformed opinion is that if you don’t have these these three things in your life, your life sucks. I know, because that’s what I used to think. And it’s also what consumers keep bringing up
Why is this so? Jacob linked to this post on Raptitude which makes an attempt to nail down why, where the author looked at what changed when he went back to work
We buy stuff to cheer ourselves up, to keep up with the Joneses, to fulfill our childhood vision of what our adulthood would be like, to broadcast our status to the world, and for a lot of other psychological reasons that have very little to do with how useful the product really is. How much stuff is in your basement or garage that you haven’t used in the past year?
The ultimate tool for corporations to sustain a culture of this sort is to develop the 40-hour workweek as the normal lifestyle. Under these working conditions people have to build a life in the evenings and on weekends. This arrangement makes us naturally more inclined to spend heavily on entertainment and conveniences because our free time is so scarce.
I’ve only been back at work for a few days, but already I’m noticing that the more wholesome activities are quickly dropping out of my life: walking, exercising, reading, meditating, and extra writing.
The one conspicuous similarity between these activities is that they cost little or no money, but they take time.
Suddenly I have a lot more money and a lot less time
I failed dismally to call this out in my post on post-retirement needs and wants, because I wrote it while still at work. I missed Raptitudes’ insight because I hadn’t lived it, but now I have lived it he’s spot on. He goes on to say
Can you imagine what would happen if all of America stopped buying so much unnecessary fluff that doesn’t add a lot of lasting value to our lives?
The economy would collapse and never recover.
All of America’s well-publicized problems, including obesity, depression, pollution and corruption are what it costs to create and sustain a trillion-dollar economy. For the economy to be “healthy”, America has to remain unhealthy. Healthy, happy people don’t feel like they need much they don’t already have, and that means they don’t buy a lot of junk, don’t need to be entertained as much, and they don’t end up watching a lot of commercials.
I recommend his post to those who say that reducing spending means not living life to the full. To wit –
Big companies didn’t make their millions by earnestly promoting the virtues of their products, they made it by creating a culture of hundreds of millions of people that buy way more than they need and try to chase away dissatisfaction with money.
Now if that’s really what you want to do with your three-score-years-and-ten then have at it, but do take the time out to ask yourself whether that really is what living life to the full means to you 😉
Me, I’m going to post this and then wander out in the neighbourhood and look at the bees skimming the clover and the flowers growing and the birds singing. It’s part of my investment in health insurance after MMM punched me in the face with his 23 1/2 hours article.
That’s why I need less money than I anticipated. It’s that I have more time. And no, it’s not as simplistic as time=money so I can do for myself what I’d pay others to do. That sounds smart but it’s bollocks. More time has an existential value in and of itself. It enables me to live better, so I don’t have to chase away dissatisfaction with money.
The Ermine is a europhile, in a sort of car crash tourism sort of way. And Monevator has just introduced me to a lower cost Developed Europe Ex UK Index fund than the Vanguard one, run by Blackrock.
Now TD Direct’s interface as far as funds are concerned is ghastly. giving minimal information.So I roll up and want to buy me some Blackrock Developed Europe ex UK. How hard is that going to be?
Hmm, Continental Europe D Inc it is then. So I take a butcher’s hook at the fund PDF and observe on page 38
an AMC of 0.75%. So I back up and clock that the Trk is the operative word here and indeed I can elect to pay 0.15% on the tracker index. Bullet dodged and the right fund bought, but I wonder if Blackrock are being crafty bastards and relying on a fair number of people not paying attention enough.
TD Direct’s interface is particularly crap when if comes to funds, and the fund universe seems to have a stupendous range of similarly titled products. Most of my dealings are shares so I’ve never been much of a fund sort of guy. TD’s shares interface is fine.
F’rinstance here’s what part of my regular non ISA trading account looks like. In there is some anonymous Vanguard fund VAN FTSE DEV
So WTF is VAN FTSE DEV, I bought it earlier this year in a CGT exercise to diversify out of The Firm’s shares. It’s not exactly descriptive. I actually have a separate spreadsheet with the name, but assume I have only what TD shows me. Let’s review what I own from what TD tell me. The only way to win the information out of TD is to create a buy order, set the fund manager to Vanguard, then step through all the funds until they show me I hold this fund.
This seems to be the only way to second-guess what I already hold. Crap, eh? Even a display of the ISIN code would be useful. Say I was The Accumulator with a shitload of index funds then this whole second-guessing game could get tiresome really quickly. TD get two times fatter on this fund than Blackrock, with their 0.35% platform charge, so I get to eat a 0.5% carrying cost on the whole thing. Not quite as bad as the 1% charge on my old CAT Virgin FTAS ISA of years ago, and on a £1700 stake it’s £8.50. Every flippin’ year, so if I hold this for two years then I have taken the shaft on owning the equivalent Vanguard ETF. The advantage of a fund is there is no transaction cost, so it’s still relevant as I plan to fly into the upcoming Euro storm whenever it blows, but once I have finished accumulating it could be time to sell up and switch to an ETF for the hold stage to ditch those annual platform charges 😉
I didn’t start off with funds and perhaps I am prejudiced against them, but there seems to be a lot of subtle charlatans in the field looking to get a hand in my money by dishonest means, from the naming conventions of Blackrock to TD’s fee structure. Compared to the honesty of paying to by a share or investment trust, and then just sitting on my backside watching the dividends roll in, this seems to be dealing with a bunch of dodgy geezers. It used to be that funds were cheaper than ETFs, but I only have to hold this small stake for three years to end up better off with the ETF.
There’s an interesting thread on Money Saving Expert’s forum that was kicked off by a fellow who works in international accountancy I believe, who is mulling over whether he should retire early. It brings it home to me that what people want of retirement are very very different things. It’s an interesting glance at the road not travelled. ML is doing this the right way round – he’s in a job he likes, it’s all going swimmingly, he was about 46 and wondering to himself whether he should retire early. And if so, when.
He’s been mulling this over for a couple of years now, and draws the eventual conclusion that his required income in retirement is €60,000 p.a.. Wow. On the plus side it sounds like with a bit of work he can do it, which is all to the good. It kind of made me think.
Ermine, say your fairy godmother rocked up tomorrow, waved a magic wand and said
here’s £60,000. What you must do is take this and spend it in the next year. No buying of capital assets. Spend it, on cookies and sweets and crisps and Fun!
Could I do it? Remember I can’t bring forward capital spend, or replacing a flat roof, or slap it in my ISA, it’s gotta be gone by Independence Day 2014. This is also a one-off – obviously. What could I spend it on?
There was a lot of travelling in ML’s plans, he’s already a globetrotter for work. It’s actually a very common desire for prospective retirees. If there’s one piece of advice I’d like to offer to retirement wannabees it is that for God’s sake don’t book that while you’re still working. Exotic travel is the siren song to the cubicle slave because it’s so different from your daily experience. You will change when you retire. You will probably mellow. You will get some of the relaxation you crave and you projected onto that trip. You might find that the money you spend on a round the world trip of a lifetime might be better spent after you have decompressed and know yourself more. Maybe it’s not sun-sea and sand you want, it’s more culture. or the other way round. or something different – you want to be more independent, or ride a Harley-Davidson through the Pyrenees [ref]I have no idea if you can ride a Harley through the Pyrenees, but it might be fun for some[/ref]
Of course you might well have your leaving do, wake up the next morning and go Hell Yeah, I want to do that round the world trip in which case take it last-minute and knock yourself out. You’re now flexible in time. One of the bewildering joys of retirement is just how much is now possible to you. I could finish writing this, and go ‘Bollocks, I fancy going to Moscow’ and be off. [ref]I’d probably have to get a visa so Moscow might be out ;)[/ref]
I had plans for more travelling. I found I favoured little and often was more to my taste than big and grandstanding. If I wanted to travel round the world I could do it, paid cash. I’d probably get it cheaper than these guys because I hate hot places, particularly hot and humid places. I’d skip Florida, and Malaysia, in the same way as I’d skip Hell… I can do hot and dry if need be.
But I have no desire to, at the moment. One of the great things about being able to do something financially is that it takes out the if-only thing of the grass is always greener. Consumerism is terrible in that it plays on that particular human frailty. Many people buy things and experiences they can’t afford precisely because their marginal affordability makes them more attractive – we are pre-programmed to value the scarce and expensive. French fashion houses have known this for years. Take the scarcity and affordability thing out of the equation and ask yourself “Do I actually want to do this?” and in my case with the whole round the world travelling on retirment thing the answer is “Hell, No”. It’s something everybody else wants to do, but it’s not for me.
Dialling down the travel dream is easy for me, because I came to really hate air travel. I’m not scared of it – jumping out of a light aircraft with a parachute from the erstwhile Ipswich Airport was scary, getting into a passenger jet isn’t. It’s the Sartre thing, L’enfer, c’est les autres. I last travelled by air in 2007, for work, travelling to the United States. Something must’ve been up, the airport was heaving with people, stupid people at that. Pillocks who wanted to take huge bags and all their kids toys as hand luggage, despite the clear notices on number and size of bags, so they held up the queue. The whining kids generally. The stale smell of sweat and the metallic scent of human stress and low-level anger that the departure loung aircon couldn’t quite clear. The whole security theatre rigmarole. The fact that airline seats recline at all – that was a grand idea in the 1950s, but when you have a seat pitch of about two feet it means when the guy in the front row does it everybody else has to do it in a Mexican wave down the cabin. And people consider this leisure? At least I was being paid to put myself through the experience.
And I decided I’m not going to do that again. But apparently according to Blink I can charter a private jet from RAF Wattisham (EGUW) to Geneva (GVA) and back for two weeks in August for £12k all in. And if I had a yearly income of £60k I’d consider something like that every other year to get somewhere civilised I could switch to a long-haul flight. There are probably much more intelligent ways to do it – after all a retiree has control of his time so why not fit in with someone else’s schedule and act as a seat-filler on a jet and be open-minded on destination. Commercial air travel ceased to be any fun after 2000 IMO.
What does living life to the full mean to you?
And then it dawned on me. When ML expresses what living life to the full means to him, it has a lot to do with what he is able to do, and that usually involves spending. It was common in many of my ex-colleagues – they had a fixed idea of how much they needed, and they couldn’t retire early because they wouldn’t have the money to do stuff, like city-breaks and weekends away. These discussions used to puzzle me, because I was always thinking ‘yes, but the price of those city breaks you need to get away from work is that you don’t have the time to do a lot of other things, because you’re in front of that screen?’ Two weeks of respite for 50 of drudgery seems a crap deal to me even if you can do all sorts of fancy stuff in the two weeks.
For me, living life to the full is more about what I am, and what I master, it’s less of what I do, particularly external experiences. I derive my values more internally focused than is probably typical is society. Jacob ERE had an article called everything explained where he called out how the different personality types valued different things in life. However, I’m still a member of a social species, and when soemone says living life ot the full means spending a lot more than I do, it does cause me to ask myself
Ermine – have you stitched yourself up? Have you financially cut yourself off from living life to the full, because you made yourself too poor?
In which case the obvious thing to do would be to follow Monevator’s sage advice, ease back from the big red nuclear button, and go git myself a job. Assuming I could get one, that is, after all I am probably one of the finished at 50 😉
Hell, no. Bollocks to that. It’s been over a year so far, and you know what? I haven’t missed a single bit of working. It really is overrated as a reason for living. Don’t get me wrong, I’d prefer to have a nice £60k p.a. retirement income and take the odd private jet. But it’s not worth even thinking of going back to work for! Guess what did most of the heavy lifting of living life to the full for me?
gaining control of my own time
I am Myers-Briggs type INTJ – this wasn’t as clear while I was working. Work favours extroverts big-time. It’s not surprising, because a business needs to marshall people to get their shit together and do stuff, so people who are more externally focused are far better suited to work in a company. They motivate people better, they are better salesmen, they are better leaders of men. Coincidentally, I suspect it can also foster a desire for amazing experiences and Stuff – so these talented extroverted employees will also be locked into the system a little bit, because they need the money that work provides to live life to the full in their own terms
Jacob called it out well – addressing the INTJ reader
You do not get much out of amazing experiences or have no particular desire to have your picture taken while snowboarding down a rock.
You do not find an uncluttering a reflection of your personal growth and a statement of your spiritual detachment from “things”.
It’s not surprising I couldn’t find a way to spend ML’s £60,000 in a year – because I am not like him (I would hazard a guess he’s in the group of what Jacob called artisans). It puzzled me what he called “living life to the full” because I would find doing that sort of thing a maelstrom of activity, the centre would never hold.
Knowing yourself is a key part of self-development of course, but as I get older the diversity in what matters to people still amazes me. We all start, of course, with the narcissistic assumption that everyone else is exactly like us, and part of the process of individuation is to differentiate and cleave closer to the things that really matter to you, and dial down the extraneous noise of all the stuff that really matters to other people but doesn’t really matter to you. There is an inherent tension, we are a social species, and striking out a little bit apart from the pack leads to some discomfort. Conversely, not doing so, living by other people’s values has a different cost, because you then live life against your nature which builds up different tensions.
There were other aspects of spending in ML’s £60k target than I don’t have. I don’t have any child-related costs/expenses. Healthcare? I did have private healthcare at work, though I am happy to say I avoided using it by, er, being lucky enough to not get sick 😉 One of the fantastic things about living in the UK is that the whole healthcare fear and loathing thing you get in the US just isn’t there. People moan about the NHS but it does pretty well for the big stuff. Yes, people grizzle and moan about the failures to keep their particularly elderly relative alive for years and years and years and mistakes do happen, but for the majority of things that can happen to you, particularly accidents and stuff like the Big C, it does okay. Even in the US their healthcare can’t stop people dying, despite the best efforts of some really weird people. You have to do it sometime, and I’m not sure I’ve convinced by the $70k call option on resurrection…
It’s also not just AXA that does health insurance. Getting on your bike or just taking a walk regularly for half an hour a day buys you health insurance too. That’s obviously a bastard while you’re working, because half an hour out of the rest of your day after you’ve sold 8 hours plus commuting time to The Man is a big lump. For a retiree it isn’t too bad. Plus you get to hear birds singing and squirrels fighting and kids playing in the park. Beats screen time earning the money to pay to Axa to make up for the fact that you can’t take the free alternatvie because you’re doing the screen time to earn the money…
So funnily enough I think extroverts need more money to live life to the full in retirement. On the upside, they are the Right Stuff for work, so they get more out of it. In America, where it seems introversion is considered a defect, you hear a lot about finding the work you love, it’s almost mandatory to derive meaning from your work is seems. I was surprised to see this ad for Susan Cain’s Quiet on introverts. I guess there must be some 😉
And this generates a genuinely exciting and stupendously effective capitalist society. Okay, not one totally without problems, for sure, but despite the conflagration of the financial crisis starting there, the first one where there is the suspicion of it staggering to its feet. It’s intoxicating –
It even almost convinced a younger me that I wanted to work in the electronics industry in California, the heady mix of American get-up-and go and a UK in Thatcher’s third recession of the early 1990s. Or was it John Major? Let’s just say I’d probably be feeding the fish off Santa Monica pier if it had happened, I would have cracked up years ago… On the other hand, in a city full of therapists, they might have sat me on the couch, took a long hard look, and delivered the view ‘there’s nothing that much wrong with you, you just don’t fit here, bud. Nothing that a cab to LAX and an airline ticket can’t fix ;)’
Once you have the nuclear option, you may as well use it. People can’t motivate me with money to any great extent now. Across the PF blogosphere, there is a strong sense of the work ethic, that underpins and drives capitalism. This is the mastertape that inspires drives people to greater success in things financial, to be the best they can be among their peers.
I have drunk of the cup of the elixir of the Work Ethic, and found it failed me in my hour of need, but as it failed it revealed a beautiful truth, which was “Know what Enough looks like, and take appropriate action”. So I don’t have it any more. It’s also kinda nice to think that while extroverts do better at work on the whole, there’s a little price to pay. They have to work a tad longer to achieve a lifestyle that meets their needs. There is a little justice in the world 😉
It’s coming up to the silly season now, and we even seem to be having some hot weather. Hopefully it won’t lead to an actual hot summer of rage on the streets, but the markets have got that sort of lazy, hazy indolence that gave rise to such opportunity a couple of years ago, and I have a shitload of wedge looking for a home even if I don’t have any ISA allowance left.
It was time to shoot some pictures in sunny France in return for accommodation, fine wine and cheese, then later on meeting up with an expat pal of old. We fought the Calvados, and the Calvados won.
I was pleasantly surprised by the French region of Picardy, I had anticipated it all to be slag-heaps and post-industrial devastation of the sort that happens if you turn left on arriving at Calais, but in fact it was very pleasant indeed. If this is really what Suffolk is going to be like after climate change then it’s not too bad at all… There is the usual whimsical Gallic architecture, and the French retain a more local form of government. The County council is probably our smallest effective district authority, but in France it seems to go down to the village mairie, who take on some quite localised duties. In some ways there’s something comforting-ish that the Mairie has the capacity to rouse the town from its post-prandial verre du vin with a universal signal that some Really Bad Shit is going down. Yeah, I know everybody’s meant to have a smartphone always on these days, but the performance of the mobile network has a lot of dependencies, and I like the gonzo analogue simplicity and low-cost always with you always on receiving equipment.
You can’t go to France without sampling some of the local produce, particularly since Mrs Ermine was researching what we could learn from their approach if we experience an increase in average temperature. Florent’s strawberries were fabulous, an opinion shared by the local merles (blackbirds) hence the netting. I was surprised the problem wasn’t starlings!
The Ermine, as befits a creature of cold climates, really, really hates the classic British summer holiday destination of sun, sea and sand. I’ve only ever been to Spain for work, Madrid in November was quite agreeable 😉
So I’ve had a bias to Northern European destinations, though I haven’t been averse to the the US and one day fancy a long trip to see some small part of Canada. You always end up with some foreign currency when you come back. There’s no point at all in keeping coins but you do end up with some notes, and every so often you forget where the heck you put them. These ones I inherited, but they probably date back twenty years or so
It’s disturbing to think that at the start of my career one of the greenies would be a perfectly serviceable beer token – in London! Some Germans must be feeling a fond memory of those stable Deutschemarks that slowly and steadily dragged Germany’s post-war economy out the shit through Konrad Adenauer’s Wirtschaftswunder and the French may feel a twinge for the old FFr. It feels like the Euro crisis is limbering up for another rumble – it seems to be a summer thing, a bit like the screaming of swifts in the hot city nights.
It was also a time to lay to rest the question of just how much horse I had been eating. I really don’t have any problem eating horse, as long as the supplier tells me that it is. Which you can’t really accuse the Richelieu Corporation of avoiding. The price probably tells me it isn’t the idyllic pastoral scene on the top of the packet, but it was all horse. Maybe the copywriter was feeling the bad rap of horsegate when he put 100% musclemeat on the packet,
but I couldn’t argue with the result, a decent horseburger with the classic large-herbivore-but-not-beef-though-there-is-significant-similarity sort of taste. Horse is distinctive and good. I can see how you might be able to pass it off as beef in something that’s only 30% meat as it is, but I’m of the view that less is more as long as it’s of a decent quality.
I’d be happy to see more horse on the menu. Just cut the crap and tell us what it is 😉