The Telegraph’s Money Makeover is a rich seam of entertainment for a grizzled mustelid observing the triumph of hope over experience in the human condition. It seems to be an endless tribute to wannabe buy-to-letters wanting to retire on a woefully small portfolio, thirty-somethings with a tenuous understanding of just how much money you need to have to retire before midlife and the oddball doctor with a massive salary, none of which ever seemed to stick to the sides. I could generalise many of the tribulations as “if you are asking whether Buy-to-Let will solve all your problems, the fact you are asking the question tells you the answer is no”. As a respite from this folly, this week we have a paragon of financial rectitude who is debt-free by 37, but there’s still no pot of gold at the end of his rainbow.
Consider this plangent photo of domestic bliss and unachievable dreams, a comely couple and two preschool rugrats with their associated plastic paraphernalia.
Our man has done an awful lot of things right in the search for early retirement. He appears debt-free in the true sense – paid down his mortgage on a Cambridge semi at £300k, which is a very respectable achievement at 37[ref]a cynical Ermine wonders exactly how he has managed to pay off £300,000 on a household income of £77k within’ say, 10 years. One assumes the untimely demise of a rich aunt may be a factor[/ref]. But he’s done two things wrong for his dreams of early retirement, and they’re in the foreground of the picture.
I’m not saying that having children means you can’t retire early, but JM has a fairly pedestrian job for early retirement ambitions, and kids will seriously hamper his ability to reduce his outgoings, which is the other route to early retirement – being able to sustainably reduce your spend. Which is pretty much what the Torygraph had to say to him. To wit:
JM is doing well in retirement provision but the challenge for him will be getting enough funds to enable him to retire early and provide for his family.
followed by the coup-de-grace
I would sound a note of caution, as one parent to another: children tend to get more expensive as they get older.
The other lot aren’t that much more encouraging
Mr Massey’s primary goal of retiring early to spend more time with his family is unrealistic given his current financial planning route.
should concentrate the bulk of his pension savings into shares-based investments as, realistically, retirement is at least 18 years away.
A quick tappety tap on the Ermine abacus tells me that 37+18=55. As for spending more time with the fruit of his loins, in 18 years time they will have just come of age. He’s not gonna do it before then unless he does something very different. Having children is going to be a big project for anybody- if we say JM is exceptionally frugal and gets his two for the £230,000 they say it costs to raise one child, then clearly in 20 years time his pension pot will be down that much[ref]a DINK couple usually spends more on other things, so the difference may be less[/ref], or at a 4% SWR down about £9000 p.a.. That’s not the sort of thing that early retirement dreams are made of. Of course some people with children can retire early. But you’ll usually find they were in a different class of earnings to JM – The Escape Artist for instance, worked in the City. He probably earned a little bit more than JM, who doesn’t even pay higher-rate tax, which makes paying a fixed sum into a SIPP much less painful than for basic rate taxpayers.
There are other minor aspects of JM’s carry-on which could make it less of a stretch. Let us take this oxymoronic statement
He takes risks where he understands them and has £17,000 in a stocks and shares Isa invested in Greggs, BP, Poundland and Tesco – companies he is “familiar with”.
Mr Massey is satisfied with his investments so far, although Tesco has delivered some losses.
He said: “Everyone always goes to Tesco – I thought how could the shares fall? Well, they did.”
JM, you got frickin’ soaked on Tesco. I’m not particularly having a larf, so did I. I didn’t buy them from a careful consideration of the company, but figured if I paid less than Warren Buffet I would be okay. Turns out this was one of the few occasions when WB didn’t know what he was doing. So I got soaked too. I didn’t understand the risk, and nor did you. The big difference between us, bud, is that Tesco is less than 1% of my portfolio, whereas it’s probably more than a fifth of yours. I also realised within three years of starting along the high yield portfolio route that the global imbalance[ref]that imbalance is less bad for me because many of the FTSE100 firms I have in my HYP make their money partly overseas. Greggs and Poundland seem pretty domestic, looks like JM invests in what he sees on the High Street. From what I see on the High Street I would actively run miles from any firms with a High Street presence, the Internet is eating their lunch. Tesco is in fact my only such firm[/ref] was probably hazardous to my long-term wealth and started to shore it up all round with diversifying index funds, focusing on ex-UK to specifically fight that bias. So go do yourself a favour and listen to Lars Krojer and sharpen up your act. Once my contributory investing career is over[ref]I am reasonably convinced by Lars’ argument you can’t long-term sector pick and beat the market, though I am less convinced that if you only have a few years to get into the market that valuation/when you get into it is irrelevant. I happened to be very lucky in starting in 2009, though of course the effects of the GFC on my job was the reason why I started then.[/ref] I may choose to listen to Lars, so save myself a hunk of time I could be spending on more interesting things to do.
So, JM, you had your two precious little bundles of joy because of all the warm feeling, extra meaning and richness that they add to your life. Good things are worth paying for, and life is full of choices. That particular choice means you won’t get to put your feet up at 55. For God’s sake don’t suddenly decide that your special snowflakes need private education, else you’ll be retiring about never on that salary. Now of course you could go out and get a much better paid job working for The Man, but pushing 40 is leaving it a little bit late to do that. Colour me a heartless bastard but “trust and grant manager at a charity” sounds like a) you’re milking it b) there aren’t that many opportunities for progression and most of them will be dead men’s shoes, the charity sector is notorious for crap pay[ref]until you get to the executive levels where anything goes[/ref] and c) you are just one re-org or restructuring away from redundancy. So better hope nothing goes wrong in the next 18 years, eh?
There are things you could do to make yourself better off in retirement. But you ain’t getting to retire early. Paying your mortgage off was a grand achievement and hats off to you, but paradoxically it was probably a bad move for retiring early. I cocked this up too. At historically low interest rates, you could have carried that sucker for longer and pumped more of your salary in pensions, getting a 20-32% lift and getting longer for it to appreciate, while paying 3% on the money. The 20% uplift plus the ~4% real return on equities make that a win even if you get to put your 25% pension commencement lump sum into clearing the mortgage in 20 years. Think of it as tax-free mortgage saving. Of course mortgage rates will go up over two decades but you will also be paying it off slowly so you’ll take less of a hit, and inflation will erode the principal anyway.
So listen to the drunk telling the traveller how to get to the city with your unrealistic dreams of early retirement.
If you want to get to there, you don’t start from here.
I am curious that none of the advisers asked this fellow whether his question was wrong. It often pays in life to try and make sure you ask the right question, because once you have framed that you’ve eliminated some of the options. Surely if he wanted to spend more time with his family, perhaps the question should be ‘ Can I afford to go part-time for 10 years and see my family grow up’ rather than “Can I retire early”. He still won’t get to retire early, but perhaps he gets something else of value. His wife has clearly jumped to this option, and by reducing the £700 a month childcare bill he would reduce the financial hit and get to see more of his children rather than more of the office.