Why doesn’t the middle class understand how bad their situation is?

Matthew – Assets £700k, age 42, two children, SAHM, GSOH. Wants to meet lifetime income of 40k in 2015 terms to enjoy the rest of his life

So he’s in the plush City offices of independent financial advisers Ermine, Ermine and Ermine Ltd and there’s a gimlet-eyed white mustelid  sitting behind a big leather desk with oak-panelled walls and one of those green banker’s lamps on it.

Good grief, Matthew. According to the Trinity study a 4% SWR you will get an income of £700,000 /25 = £28,000[ref]The Trinity study was on US stocks and for a 30 year drawdown. Matthew is younger so there are good reasons to suspect he may need more[/ref]. That’s not that far short of £40,000, so ease off on the consumerism by about 25%, send that SAHM out to work – those kids are 13 and 15 FFS, and then you can have your well earned break. Next!

Maybe not…

Let this book tell you a story about the middle classes, Matthew

It never fails to surprise me how much the so called middle classes haven’t realised just how deep the shit is that they’re in. Matthew is thinking along the right lines – he’s not that far away from the dreaded 45 so he doesn’t want to rely on making shitloads of money as he was. But there are some unfriendly trends happening, which he wants to think about. He could do worse that listen to the story this book I’ve been reading tells him.


The first part of the story is told by the physical book and how it came into my possession. It is clearly a fairly new library book – the Ermine is all for library books, because I can educate, inform and entertain myself for free, and not only that, but I don’t have the problem of storing clutter after I’ve read it. And I borrowed this from Suffolk libraries.

I had to pay £1 for that, because Suffolk Libraries have stopped buying books to a large extent because of cuts. They have been resourceful, and struck a deal with neighbouring county Cambridge. The computer systems can search across both book collections, but as a Suffolk resident I have to pay £1 to borrow from the Cambridge holdings. Now I don’t mind, in the end I can afford to pay the odd £1 to read a book,  but it’s a tiny metaphor for where things are going. One of the reasons Suffolk council had no money is they pay shitloads to their chief executives, step forward Andrea Hill paid £200k to outsource everything, including the libraries. Eventually the charge will rise until it meets the price of alternatives like a Kindle book/secondhand copies on Amazon and then the outsourced operation will go bust. I am pleased to observe we now pay only £150,000 for the head honcho of the council Deborah Cadman, and intrigued by the implied nepotism of her husband getting the job she vacated at St Edmundsbury council. Jobs for the boys, eh? I’m sure it was all above board, and I’m still puzzled why it costs more to run Suffolk than that Cameron chap costs to run the country.

In itself the degradation of the library service isn’t the sort of thing that will impact Matthew’s finances, but it is a harbinger of tougher times to come. There is another service that is degrading which most of us get to use sometime. The same outsourceing thinking is applied to the NHS as decribed in “Serco grapples with watershed [Suffolk] NHS contract” [and makes a pig’s ear of it]. I would be very surprised if in 10 years time the NHS were free at the point of use, or so degraded that if you were used to the sort of lifestyle Matthew were used to you wouldn’t want to wait. Some of my excessively large emergency fund is set against that sort of thing – and I am so far in good health for my age, but I wouldn’t want to wait months for a hip operation were that necessary in 10 years time, so I would pay for that sort of thing privately (it’s about £12,000). There are some things you can’t buy your way out of at any reasonable price; in the end you gotta go some time and you may be better off saving the money and letting it go.

I am about a decade older than you, Matthew, so I will die 10 years earlier. You will experience more of this erosion of public services, so you at least need to think about how you are going to buy your way out of it. Not all of your money is going to go on skiing, holidays and paying your children through university. Some of it will go on health insurance. Hopefully Britain will adopt the German or French method of co-payment rather than the ghastly US system which is fantastic for the rich with the best medical care in the world, but keeps frightened wage-slaves pliant to The Man in fear of losing their health insurance. I believe the ‘free at the point of use’ is part of the problem – there should be a small, flat charge for visiting a doctor, similar to the €23 cost for this in France.

The rich have always lived longer, on average, than the poor. It’s not stupendously surprising, but Matthew would be unwise to ignore the straws in the wind. Like me, but more so[ref]because he is younger and will see more of the end-game[/ref], he is on the way down, not up in this fight against the 1%. And that’s just the story told by the library charge, the contents of the book will make you blanch, Matthew.

Let us purview the rest of your situation. Ah, children, it’s the way the modern world really gets to the middle classes. On the upside, there are only two, which is good. You need to be rich or poor to afford more these days, let’s hear it for poster child Shona and the trouble her four got her into. The time will soon come when the middle classes will only be able to afford one child if they want to keep it in the lifestyle they believe they are entitled to. Let us assume that that nice man Mr Miliband gets in, so your eldest goes to university with £6000 p.a. fees, and let us assume a student needs £4000 p.a. for accommodation and beer these days, making a nice round figure of £30,000 for a standard three year course. You need to find twice that because you have two children, which in my book is a knock of £60k, 10% of your capital assets

The question, of course, has to be is this a useful allocation of capital? After all, invest it and it’s an instant boost of £1200 a year for her for life, sort of inflation protected. It would be a useful deposit on a house, outside London. You have to set this against the tax-like version of student loans  – see MSE’s discourse on this which derisks the financial case if they take the loans. Bearing in mind that there are the twin massive forces of automation and globalisation tearing middle-class jobs out of the economy, there’s a strong case to be made that university is an unaffordable luxury – basically your children will be less able to build wealth by earning money across their lifetime particularly if they want the lifestyle you had, and inherited wealth is possibly much more important. So if if you want to make sure your children have a decent future then:

  • Don’t have too many, because it splits your estate
  • Have them late, because then they will get the inheritance earlier in their lives, (you will die when they are younger) That also helps damage the career of the primary caregiver less.
  • Teach them the values of grit and determination
  • Don’t autopilot on university. A degree was much more valuable in the 1960s and 1970s when <11% of people went, as opposed to 50%. Looking at some of the illogical thinking, rotten grammar and mush written by university-trained intern journalists now compared to the school-leaver journos of yesteryear the Flynn effect is obviously too slow to have made four times as many people academic in the last couple of generations. We’ve simply lowered the bar, which is a git because now employers can’t tell the bright from the dim bulbs and everybody has to pay because there are five times as many students as there were when the taxpayer supported them through university. I personally would like to see the taxpayer support students through university again, but I’d like to see a much lower percentage go, no more than 15% with full grants for tuition. If you can’t pass the exams, well, I guess there’s nothing wrong in paying for a vanity degree…

Anyway, on to other things

Rule 1 on page 1 of the book of personal finance is know thyself. Without self-knowledge you are doomed

Hmm, so you realise you are “quite risk‑averse”, do you, Matthew? Absolutely nothing wrong in that, and indeed holding nearly half a million in cash would seem to support the assertion. I thought I was mad holding more cash than property, but I tip my hat to your good self. And yet on the other hand

“waiting for a stock markets crash – after which I would dive in”

Matthew, me old mate, do you have any idea of just how hard that is to do? I did it in 2009, and I had to fight the primitive lizard-brain every inch of the way. Do you know what it feels like to lob cash into a diving market and see yourself lose 25% of it in the next few weeks, and do you know how you have to practically seize one hand with the other to stop selling back out because every part of everything is telling you wrong way, step back, run for the hills, Gateway to Hell and total oblivion this way?

That is just not something risk-averse people do. Know thyself. Risk averse people need to be sated with the general long-term lift of the market over many years, which is sort of 5% real though there’s good reason to think it may be a bit lower. Passive, index investing is what you need. Spend the time you save on otherwise obsessing about money with your kids, Matthew, the days are long but the years are short. You’ve already missed five-sixths of your eldest daughter’s childhood and two-thirds of the youngest…

Mr and Mrs Ramsden also want to invest some of the capital in a business venture together. He’s thought about setting up an auction house but Mrs Ramsden plans a tea room.

People in business are not characteristically risk-averse. Else they wouldn’t do it, given the ghastly odds of 50% failure in the first two years, more so in the restaurant biz. Cripes…

There’s hope. A word in your shell-like – cut spending

Unlike some of the other wannabee early retirees, with a bit of  cutting his cloth to match his resources Matthew could do well. He needs to lose that £40k figure – he’s just not that rich. Half of it, however, he do do without breaking a sweat. If he really has had the experience of

20 years of constantly working hundreds of miles away from his family

he is probably used to a high-spending lifestyle while away, all on expenses and making up for the rotten nature of that sort of thing. For a few years I worked on a project that involved international travel about once a month, and that was about right, particularly as I was single at the time so I could use the travel opportunities. But even then, all the married colleagues with kids were frazzled and hated it and were always rushing back. If you are doing much more of that you spend loads of money because, fundamentally, you are bored in the downtime – one hotel room looks pretty much like another, you’re too frazzled from long days to do much tourism  and you are looking forward to the weekend. That’s why such jobs pay well, because they’re a little bit shit in the lifestyle department.

There’s probably room to spend less but live more. I think he can do it. But it’s not a financial makeover he needs. It’s a lifestyle makeover – a what am I doing, what really matters to me, what are the risks and opportunities ahead drains-up. It’s not surprising he wants to downshift after that. He could also do with harmonising these life goals with his wife – after all in five years his children will be adults. If he and his wife want that £40k then maybe they could consider working at a low level, though the way this is going a 20 year gap it’s not going to look good on his wife’s CV.

As for those IFAs –

Okay, they agree with the general principles of the Ermine IFA partnership of cynical mustelids. I found the second IFA to be much more on the mark with the fundamental  issues. Matthew’s primary problem is not that he hasn’t got enough money, it is that he doesn’t know himself, so he doesn’t know what he wants. He knows what he doesn’t want, but ‘anything but this’ is a dangerous way to map your path. You’ll struggle in getting from London to Scotland just knowing you need to get out of London. You might end up in Bognor Regis or the Slough Trading estate.

Word in your shell-like Matthew, one of the aims of life is to know yourself  else you’ll always be a stranger in a pathless land. Some of what he thinks about himself is inconsistent and incompatible. These are not financial conundrums, and some aren’t even solvable by money. There is serious tension between

  • risk averse : buying in a bear market and/or starting a business
  • seeing more of his kids: starting a business
  • featherbedding his kids: retiring early

Either way, the odds are that his children won’t have the lifestyle he or in particular his wife had. Broke is a long-form story of how that got to be that way. The short form is that the 1% are eating their lunch, they have the firepower and the deep pockets. The halcyon days of the middle classes were when there was limited mobility of capital and labour, and automation hadn’t greatly dented the need for people in running companies and administering things. University for those kids is a chimera  – the vet may need it, and at least the job isn’t outsourceable which is very wise even if she needs 4 years at university but the “I dunno” is case unproven. The world is changing, and it’s not favouring their future in a First World country. Now if they were Indian, or possibly African, the hope of middle class parents might be more likely to be fulfilled.

It’s an interesting book, Broke. There be trouble up ahead for people with certain kinds of aspirations… Matthew could do worse than read it.

One fair question to ask is how much of that wedge is inherited, since the BTL he finds such a PITA to run was his Gran’s flat. I’ve charitably made the assumption he’s earned/saved it. If it is inherited, you need very specific and careful skills. The middle class is going to need to learm the characteristics of old money, and if this is ancestral wealth then it’s not his to spend – it is fossil wealth that should be husbanded across the years to benefit his dynastic line, if he wants his children to remain in the middle class. Old money never eats it’s seedcorn.

“never spend your principal[ref]The child-free can be more relaxed on this[/ref]”

That’s why it’s old money 😉 You can spend the income it throws off, but the aristocracy holds its capital in trust for its children. Preferably in assets like agricultural land[ref]obviously they don’t get their hands dirty farming their estates, they get contract farmers to do that[/ref], where old money has negotiated tax-free status for its ancestral wealth.