It is August, California has recorded the hottest temperature on Earth at the aptly-named Furnace Creek. I just can’t imagine 54 degrees. I went there in 1993, and overheated my rental Grand Am in the 1500 meter lift up from Zabriskie Point through Daylight Pass, with the heater flat out and all the windows open. In July…
Nevertheless, in Blighty there is the hint of Autumn in the air in the changes of the natural world. Birdsong has changed from the frenzy of the breeding season, perhaps most clearly and commonly with the Robin, which sings a song that sounds in a minor key to me, which we associate with mournfulness, though of course this is pure anthropomorphising. The retired Ermine is more physically active than the working Ermine. Earlier this year in lockdown there was an edict from the government that you were permitted to spend an hour walking. I stayed with some of this, while I don’t do it every day I cover about three miles. Walking is good for reflection and rumination – in the heat of summer I started earlier, and there is some reward to doing it before wrangling anything that needs an Internet connection to happen.
I get to know the small area better, and living in a small town it is easier to get out into the countryside by shanks’ pony. The transition between town and country is sharp, I cross the liminal space in about fifty yards. Earlier in the year I got to know the territory of some of the blackbirds and robins by their individual song. Now these ranges are more fluid, and I hear the lovely sound of flocks of goldfinches who have swelled their ranks in the breeding season, feasting on the seed-heads. Although the swifts have gone some time ago, the swallows are still swooping over the fields with their chattering sound.
Swallows chattering hawking insects over the fields as I come to the main road
The bold song of the chaffinch has been replaced with the double finch-finch sound of their alert call, and the lovely arrow-like white tail feathers flicker in the morning light as they make their swooping flight away from the paths into the trees. I have seen herons courting and the odd egret drifting lazily on the summer breeze.
I have learned that the sound of the wind in the oak is not the same as the wind in the ash or the willow. In some ways it is reminiscent of the almost animistic approach of my primary-school self, where I knew a very small area intimately. I cover more ground, and there is far more natural variation in the natural world of the Levels than there was in the urban landscape of New Cross. When I checked the size of my childhood world on Google Maps the size of my patch was amazingly small.
spotting quality in the competing price signals
We are surrounded by opportunities to buy Stuff, and yet trying to buy quality Stuff seems to be a tougher game now. Ellen Ruppell Shell highlighted that in Cheap, but it’s a lesson that I keep on relearning.
Discriminating quality is inherently tough buying online. The easiest parameter to compare is price. Perhaps one day there will be a way to heft the thing you are buying and turn it over via a 3-D display with haptic feedback, and twiddle the knobs or whatever. However, that’s susceptible to the usual problems of advertising. For example food photography uses tricks1 to make your Big Mac look better that it is in real life, so how do you know that your 3D virtual gizmo isn’t bigged up somewhat, pretending to be better than it is?
Covering more ground walking showed me that I got on the wrong side of this when I replaced my Brasher walking boots that I had bought in the early 1990s. I replaced these with some bought from Trespass a couple of years ago, I think these are closest to mine. Things didn’t get off to a good start after six months when one of the riveted hooks at the top came off, but in fairness to Trespass they replaced them without demur. The sole tread was poor, particularly on mud, as I discovered at RSPB Swell Wood where the action was more skating than walking in parts2. Fair enough, I will pay more attention to the sole when buying my next pair of walking boots in another 15 years I thought.
At three miles a day on and off I will put say 12-15 miles a week on thse boots. The Somerset Levels are called the levels because they are flat, my entire gain in elevation is about 20 metres. It’s hardly rough terrain, either. These are quiet roads where I only expect to meet two or three cars in the three miles, it is a combination of grassy paths and tarmac. Although the boots have been up in the Mendips, the Preseli hills in Wales and also in Scotland, they haven’t gone over that many hills and rough ground regularly.
Apparently Brasher, founded by pacesetter for Roger Bannister and the guy that brought us the London Marathon were bought out by Berghaus, which were bought out by private equity, which is a shame, as my first thought had been to go back to them. It seems their punters are not happy these days. Brasher talk proudly about their heritage on their website, but are surprisingly coy about being owned by Pentland Group who also own Black’s.
I’m surprised at the low expectations of Internet reviewers. I don’t expect a pair of walking boots to last for only a couple of years. I expect them to last a decade! Anyway, I need to fix this. It’ll be good when the kids go back to school, the litter problem hopefully gets better3 and the rest of us might get the country back from our unwilling staycationers pining for Benidorm and Ibiza.
Teacher, leave them kids alone
But the children dance and sing as if the time were spring
When the seasons change everything they find a joy in what it brings
September leaves are falling through the autumn haze
And the school bells tell everyone there’ll be no more summer days
Warm nights are gone, all the leaves are turning brown
Then the windows close again when the winter comes around
Seasons, Grace Slick
And with that transition to the colder part of the year the hazard of coronavirus rises. Particularly once the school bells tell everyone there’ll be no more summer days…
Despite everybody telling themselves that children don’t spread the virus I find that incredibly hard to believe. They spread pretty much every other sort of viral disease – the winter that I was installing videoconferencing kit in schools was one where I had more than my fair share of colds. I do take the point, of course, that as a societal policy we have to take this hit in the Autumn season, but the ridiculous wish-fulfilment and magical thinking disturbs me. It seems true that children are less likely to take a hit from the virus, which is only a good thing IMO, and for the wellbeing of the children that points in favour of reopening schools.
The spread in the general population is likely to rise massively. Like everything Covid there is a range of opinion, from that it will all be ticketty-boo, move along now, nothing to see here, children don’t spread coronavirus all the way through to that reopening schools is a major public health hazard and the Georgia summer camp and Missouri. It would seem more prudent to accept that this is a serious risk that we have to take rather than singing la-la-la and pretending it wasn’t a problem, which seems to be the current approach. However, competence and skill in action doesn’t seem to be a strength of the UK’s current leadership.
De-facto unelected UK prime minister, Dominic Cummings may well have a brain the size of a planet but he can’t lead from the front and seems incapable to seeing the big picture. He may bitch about elites and EU technocrats with some justification, but he’s just as much of a technocrat himself, in a different way. Clever people can be just as blinkered charging down their preferred rabbitholes as the rest of us. Dom’s got an unhealthy penchant for AI, Big Data and algorithms. That doesn’t always seem to end well when it meets real people in the Real World. Particularly when you pay your mates to do the job on the QT, eh Dom? And what’s this BS about non-disclosure agreements from OfQual? If it’s public money and there is no compelling reason justifying the Official Secrets Act then it should be available, in the open, to everyone for a FOI request and a tenner. This is about kids’ exam grades, hardly a matter of national security.
Being a slave to the algorithm works well, until it doesn’t, and where it doesn’t it goes very bad very fast, be it Facebook fomenting fringey fantasies or Ofqual dropping teenagers’ A level grades three levels. You can be clever as hell and believe in the algorithm, but the latter SNAFU was foretold by a 17 year old girl in the 2019 Orwell Prize winner A Band Apart. Her reason for writing the story matches the issues the Royal Statistical Society flagged up. OK, she missed the rampant corruption that seems to be at the heart of this administration – after all what did BoJo’s chum Dido Harding do to justify running public health in the midst of a pandemic, having artfully buggered up NHS Track and Trace? I guess Dom hires in his own image, the same centralisation fetish was evident there, and as the FT observed
Given Dido Harding’s track record overseeing the set up of England’s sub-par test-and-trace system, many people will be worried to hear that she may be given a pivotal new role in the NHS
Back to them kids again. I’m not a bleeding-heart teacher’s union member of The Blob, I have despised criterion referencing 4 ever since I came across the idea, my A and O levels were norm-referenced and it worked fine, you didn’t get the regular bitching about grade inflation, or the need to invent A* and A** etc. And you didn’t leave university owing shedloads of money, because few enough people went to university that we could support poorer students with full grants5, I was one of them. A levels are used to allocate limited resources, university places – by ability. Norm referencing would let you match these more reliably IMO. But obviously not this year!
The desperate drive to centralise command and control doesn’t speak of someone open to a diversity of opinion. While Dom’s lapdog Boris Johnson’s great attachment to the right of every Englishman to have a pint in the boozer is admirable, perhaps he might consider opening schools a little bit more important and perhaps closing the pubs if things get out of hand. Education before recreation, Dom-Jo.
Winter is coming for the economy
Though not the markets, because as Barry Ritholz reminds us, if you’re an index investor then the big digital fish of the FAANGs and Microsoft have had a good crisis, and they make up most of the market capitalisation.
The most visible and economically significant market sectors are also among the smallest weight by market capitalization. Markets are not especially affected by highly visible but relatively tiny sectors. The 30 most economically damaged sub-sectors could be de-listed before tomorrow’s open, and it would hardly shave more than a few percentage points off the S&P 500 index.
So that’s all right then. It presumably explains the WTAF moment when I look at networth and see that it has gone crisis, what crisis? I was soaked in Q1 but I had a good Q2, so I am about 10% up on the year relative to 1/1/20.
There is a respectable amount of gold there, and the pound and the dollar have been drifting downwards reflecting hefty money printing and fiscal muppetry, which makes anything else look good. Not everything is as it seems, but these markets seem to have the temerity to not only ignore the shit going down, but also to sneak up. The trouble is that the real world is hurting. Perhaps the markets are reflecting that people are withdrawing into digital worlds like Neuromancer or the slightly less dystopian Solarians of Isaac Asimov. I think those 1950s and 60s SF guys got too hung up with the Space Race when they set their stories among the stars. You can save an awful lot of rocket fuel and difficult faster-than-light story devices if you just go with virtual reality, like the holodeck in Star Trek when the production budget was tight.
Some part of me wonders what actual value these high-market cap behemoths Apple, Facebook and Amazon are actually adding to the world? Sure, we’re buying into them like gangbusters, but so what? Amazon at least shifts stuff about, and Google sort of enlightens us in exchange for following us around the place like shit on your shoe, and Apple are purveyors of overpriced but user-friendly IT to the rich.
Facebook seems to be an overall malignant force on the interwebs, one that humanity would be greatly better off without, particularly in times of crisis. Think of pretty much anything going wrong in the world at the moment, and Facebook is there making money out of making a bad thing worse. It has an uncanny talent to amplify our darkness more than our light, feeding off bile and hate for profit. Perhaps Dom’s AI singularity is already here, and it really, really hates us. Maybe we wrote our id into the algorithms, they are expressing it like the monster of Forbidden Planet, drawing power and resources to give expression to our shadow selves and their repressed craving for dominion and power. Perhaps Mark Zuckerberg’s parents didn’t love him and he holds that primal injury against humanity like a virtual Unabomber. Whatever the problem is, he shows no interest in fixing it.
But the virtual world isn’t real, and in the same way as we can’t all cut each other’s hair, we can’t all withdraw into virtual worlds; we still need to eat, keep the water supply running and discharge our sewage. If all the money in the world is going into flipping bits, then where is the limit? The Germans have a saying that
die Bäume wachsen nicht in den Himmel
and we can’t stay in the virtual world all watched over by machines of loving grace – at the moment it’s going more Adam Curtis than Richard Brautigan
a winter of discontent
A lot of people are going to lose a lot of jobs in the next few months and a lot of businesses are going to go down, and landlords will evict a lot of tenants. Fair enough, they aren’t represented on the markets, but they are represented on the streets of our towns and cities. So I’m still not convinced that this isn’t going to go titsup in a big way. Which I guess is why my asset allocation looks a lot more like Harry Browne than it has for a very long time. Which is slightly disturbing, Harry Browne is somewhere to the right of Ayn Rand, but his four orthogonal asset classes bring some comfort, they are a terrible way to try and make your fortune, because of the dead-weight carriage of gold and cash, but probably not so bad to try and hold it through a storm. I do not need to hit it out of the park, just stick with what I have is a good start.
I was active this year, shorting some of the rubbish I had bought chasing income. It worked out, though Uncle Donald has made me look better by devaluing the US$ in real terms, heck even against the GBP in the last 6 months! I have been shifting and diversifying that into VWRL and some gold a while ago, to add to my earlier attempts to hedge the coming Great British Fiasco of Brexit. I’m sure there’s a theoretical success that might be had there, but competence is not a hallmark of this crew.
I had a butcher’s at gov.uk’s what do you need to do for Brexit and even as a retiree only going to the EU for leisure travel it’s all about getting a new passport because it has to be < 10 years old, about getting an International Driving Permit, having no health cover because EHIC is gone6, needing a GB sticker without pesky stars around it, border checks taking longer. This is what success looks like? Personally I will wait for a few months and let some other band of intrepid Brits find out what you really need to do to travel abroad without getting into the shit. In the meantime, God help you if you want to do business over there. Best wait for that US trade deal, you know, the one that says When we say jump, you say how high?
So I’ll probably dial down on the cash and up on the gold/equities with the Permanent Portfolio. With a steady DB cash income stream I can live with that. I really don’t ever want to be shorting anything again. That’s a big boys’ game, and I really shouldn’t have been holding that much overpriced rubbish in the first place.
An interesting encounter with a cautionary tale of early retirement
I had an interesting conversation with someone who worked at The Firm and left when I did. We both had the same sort of trouble with the system, and followed a similar path. He had more saved up to start with than I did, but for technical reasons he had to draw his pension about five years early.
I slowly accreted networth across the intercession between leaving work and now. I did earn small amounts of money in that gap, but nothing that would justify the difference now, he has run down a lot of his capital. He’s spent a little bit more, too, I would say. But then I’ve moved upmarket housing-wise, s it’s hardly that I lacked frivolous decadence either.
He had shifted very heavily into chasing income, he had a lot of oil and lacked diversification IMO. He has suffered in this year’s crash. Not to the extent of having to sell into a down market, but his income has taken a hit. He has to cut his cloth now.
I am not cleverer than he is, but one of the differences was I remained in the personal finance arena with this blog, and it is likely that some of you, dear readers, knocked off some of the rough edges or leaned against nascent excesses in the comments. You will never turn me into a passive believer, but I grew to believe less and less in any edge I may have – much of my success was being desperate enough to go balls-deep into a stock market crash assisted by 40% tax savings. I have pretty much discounted any personal skill with sector allocation, though I would say timing and valuation have still served me OK, both this year and originally. Sadly one cannot influence those, and it is hard to discount Lady Luck. Thank you, readers, for the moderating influences 😉 And learning – because I was surprised how far my colleague had drifted out of the PF scene.
I was able to help him by suggesting a) he gets a new state pension forecast and b) he considers buying extra years before he reaches retirement age, with Class III contributions, which work out to an index-linked annuity at a return of about 25%. That’s a steal compared to the open market equivalent, which would be about a tenth that rate. Like me he had his 30 years NI contributions by 2016, but like me he was contracted out, so you can make up the contracted-out reduction by buying extra years. I bought four more years using self-employed Class II contributions, which aren’t so much a steal as an outright gift – for £150 you buy an extra index-linked income of £208 a year post-tax, for life. He will go Class III because he CBA to go the self-employed route. He may have to buy more years, but you can’t knock a 25% annuity rate.
And it was also a reminder that there but for the grace of God go I. Good fortune and some lucky breaks meant that I grew my ISA beyond the real terms amount he started with, but I wonder how much of that was skill, how much sequence of returns, and how much simple frugality. I was much poorer in disposable income in the period just after leaving work than he was, and conserved the capital.
He will be OK IMO, insulated by a DB pension, but it is chastening to see someone starting from a stronger capital base and with modest pension income from the get-go rather than running on empty for 8 years take such a hit in the Covid era. Even in the worst point of the year towards the end of March I hadn’t taken anywhere near that sort of a hit. The difference was diversification, both sector-wise and asset-class wise in terms of cash and gold. If there’s one lesson from this it is diversify, both sector and country. In my case the HYP is adequately diversified and the index holdings are diversified by VWRL and some of the investment trusts. No sector and no holding is more than 30% of assets. The price of trying to win a sustainable income from capital in retirement seems to be eternal vigilance, and keeping up to speed with the ever-changing personal finance landscape.
- I was once going to do some food photography, and got a book from the library about it. As well as the use of controlled lighting, there are many problems such as the time taken to set up and the heat makes things wilt, so you can hit anything that needs to be wet or fried with gloss varnish, which is clearly not how you’re going to eat it! ↩
- the TripAdvisor review isn’t kidding when they say ‘Messy but good‘, although it did deliver nuthatches as promised. ↩
- the kids are probably all right, it’s the chavvy parents that drive off leaving all that crap behind that are the problem ↩
Teachers and educationalists really, really hate norm-referencing where you allocate a fixed proportion of students to each grade. Not all of them, but most. So they dreamed up criterion referencing, which is testing to a particular standard. That makes sense for things like the driving test, but it is both terribly hard to set questions for, particularly in the humanities, and doesn’t help allocating limited resources properly. Educationalists hate norm-referencing so existentially that this dude from Cambridge spends seven pages of intelligent obfuscation declaring norm-referencing never really happened, can’t really have happened, and even if it did it wouldn’t explain why pass rates were stable in the Sixties and Seventies before skyrocketing from the 1980s.
That’s all very well, but I give him an epic fail in his conclusion “If we are to interpret the overall, national pass rate trend line at face value, then not only did student attainment rise substantially over the past three decades (during the 1980s, 1990s and 2000s), it rose from a baseline of no substantial change over the preceding two decades (during the 1960s and 1970s). The only alternative explanation is that, despite the A level awarding process not having changed radically during the 1980s, more subtle changes were taking place, and these somehow affected the way in which grades were being awarded.This is certainly an intriguing possibility; but one beyond the scope of the present article.” which can roughly be summarised as ‘buggered if I know’. The Ermine red pen of Doom would scrawl “did not answer the question” on his entry, with a consolation prize of “top marks for restating the problem“. After all, something changed towards the end of the 1980s and if it looks like grade inflation, acts like grade inflation and moves like grade inflation then whatever really didn’t change about marking has had a hell of an effect and continues to do so. Current school leavers haven’t suddenly become many times cleverer than I was when I left school with four A levels some 40 years ago. Could. Do. Better ↩
- In my day 11% of school leavers went to university. Nowadays 50% do. I support the idea of reintroducing full grants, but let us be aware of what the costs of that would be. Only one out of five children who currently go to university would be able to do so, and somebody needs to find the spine to fix the borked A level grading system and tell an awful lot of kids they’re not up to the mark. We might go up to two out of five because the modern economy is probably more demanding that it was 40 years ago, but that’s a lot of people and their parents who will be spitting bricks. On the upside you won’t need a degree to serve coffee, and we won’t be normalising four-figure debt in the minds of our young people at the start of their working lives. ↩
- I am old enough to remember that before 1973 you had to fill in a form E111 which helped you get medical treatment in Common Market countries, so we have managed to go backwards there, well done us. ↩
85 thoughts on “winter is coming”
So much to think about here is I’ll stick to Columbo “you don’t mind if I ask a personal question, how much did you pay for those shoes?
My wife just spent £200 on a pair of Lowa boots for hill walking
I’m happy that she spent that much as they should last a decade (or a lifetime) and given she just broke her big toe (cycling) they are an amazing fit.
My sports warehouse boots cost a fraction of that and have one of the rubber soles hanging off and they leak – buy cheap pay twice
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Ah, the the “Captain Samuel Vimes ‘Boots’ theory of socioeconomic unfairness” 😉
Mind you, I was unaware that you could pay £200 on a pair of boots, I thought £100-ish was about it. My problem isn’t that I can’t afford a decent pair, it’s that I don’t know how to gauge quality. I don’t want to buy expensive garbage – the number of people grousing about Brasher has put me off going back to them, else I would get these, which look similar to what I had. But the reviews are disturbing.
Mrs Ermine, who is of the Sam Vimes school of thought and buys £20 stuff from Aldi, did make the fair point that the retired Ermine is more physically active than the working Ermine, but it’s hard to believe that in two years my retired self put more wear on these boots than fifteen years of my working self put on the Brashers…
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As someone who has now had the same hiking boots for 23 years and counting (and they have done some really horrible and hard stuff) I can recommend the top end of the Scarpa line – expensive but … . If they fit your feet they are (or have been for me) just about bomb proof. (Having now said that they will apart when I next use them – although they really don’t owe me anything.)
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David, the point Ermine may be making is that while Scarpa may have made great boots 23 years ago when you bought them, that doesn’t mean if a person bought a pair now they would be any good.
I’ve found price or brand reputation is not guarantee of quality now. From Dyson to Brasher, especially M&S, you can now pay a lot of money for something and it be awful. You just can’t rely on previous reliable brands.
One advantage of being in the personal investment world is you get to find out who owns what, and now I look up who owns a brand before buying. If it’s PE, warning bells go off.
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@Hare > You just can’t rely on previous reliable brands.
The trouble is that success in the marketplace, due to a good product, can be built over time. But it’s easy to buy as a brand once the fire has gone out – after all Chris Brasher is no more. And you are right. PF is good for nobody but themselves. Not the customers, definitely not the employees or the suppliers who get left high and dry when the debt overwhelms the company and it goes bust or into a pre-pack.
This is an interesting RL investigation, and if I could go back to 2014 I’d be happy with either pair of the Brashers. I don’t really walk over the sort of rough terrain these guys do.
I am, however, surprised at how few miles these guys get out of their walking boots. Say I clock up 10 miles a week, that’s still less than two years’ service life. I do wonder if Mrs Ermine may have a point, that the retired Ermine covers more ground than my younger self. In which case I need to factor that in!
Great stuff as always and a real pleasure to read through as I retreat inside with the weather looking proper autumnal.
On boots – my wife loves her Meindl (she’s 5 years in). I’m not ashamed to say mine are Hi-Tec (£70ish) and have done very well over mainly Dartmoor and Exmoor.
On HE – I won’t comment too much as I work for a Russell Group uni and we’re currently seeing just how many of these AAA students we can fit into a socially distanced campus. They still won’t cover lost income from China not letting flights out and hence lost postgraduate students but I won’t grumble. Unis towards the lower end of the food chain are going to really struggle to get through this (which is what Dom wanted).
On markets – I keep having to pinch myself. I’m up on the YTD and very up on the shiny bits of my portfolio (mix of Gold and Silver). Slowly starting to take backward steps now into cash or safer ITs like PNL and CGT.
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> Unis towards the lower end of the food chain are going to really struggle to get through this (which is what Dom wanted).
I know I’m in bad company here but I’m with Dom on this. I’m really uncomfortable with a 50% school leaver target for (domestic) university attendance, because it means university is for the average and up.
IMO university is about academic excellence, one of the dimensions of life through which a society can become better at being human. That doesn’t start at average. But perhaps I am stuck i nthe mindset described as 30 or 40 years ago in this guy’s dissection of what’s gone wrong with university in the US
I’m starting to get the picture. I have been a cheapskate 😉
Oh I’m with you and Dom as well. During lockdown I’ve had a few projects on the go that at times needed the assistance of a skilled tradesman. Be it electrician, plasterer, carpenter etc, but these seem few and far between. I can’t help but feel whilst learning for learning’s sake is great and all some of these kids are more likely to find employment and fulfillment via vocational training.
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> some of these kids are more likely to find employment and fulfillment via vocational training
I think part of the trouble in the UK is that the prevalence of the aristocracy and the associated thinking in government means we look down our noses at the non-academic. This is cultural in the leadership of the country, and therefore tough to change. The gentleman scholar and aristocrat is still the prototype for good living in the eyes of the upper echelons, actually needing to work for a living is regarded as for the horny-handed serfs.
As a classic example of the overvaluation of the academic I was involved in a project that use MATV headends for a while. There are the sort of things that in hotels take off-air signals, add them to the pay-TV porn channels that used to make lots of money for business hotels and distribute TV around the rooms. I joined the Confederation of Aerial Industries and went on one of their first SMATV rigger’s courses with a bunch of aerial riggers and satellite installers.
I wiped the floor in the written test, to the extent of winning a prize of satellite installer’s meter and a dinner for myself and DxGF in London, because I understood MATV from an engineering POV. They couldn’t believe the 98% correct pass. There were guys on the course who were unable to add up the channels where you had to avoid offsets of 1,3,5, and 9 to avoid interference. If you wanted someone to design one of the headend components I would have been right for the job.
I was the slowest rigger on the block. By an order of magnitude. And my craft skills were so-so, everybody else’s install was faster, better and neater. They overvalued the written and theory test. I was in fact the poorest rigger of the lot, even if I had the greatest theoretical grasp. That tended to make me overthink things – on one job I was on a roof and lined up the dish beautifully on a bird using a HP spectrum analyser from the lab. Only to get back in the headend and find I had lined up on the wrong damn satellite, a tyro mistake that a real rigger would have spotted on the roof using his Sky box and portable TV.
The worst rigger shouldn’t have won the prize, but academic chops blinded the system, because leadership in Britain tends to have that anti-practical bias 😉
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The dissector doesn’t know what a public good is, mind.
I would like to point out that this ‘50% of kids go to university’ thing is misleading. The 50% target includes lots of forms of higher education including vocational and technical qualifications (e.g. nursing). It is not all people doing academic courses.
Just as a minor point of clarification on the 50% HE ‘target’, a quote from this article might be illuminating: https://wonkhe.com/blogs/does-gavin-williamson-mean-what-he-says-and-does-it-matter/
“…is it possible to abandon a target which doesn’t exist? It’s never been Williamson’s policy. It hasn’t been one under his four predecessors. And it hasn’t been in any white paper, green paper or any policy document as far as I can see, in the last decade.
The 50% target was, of course, former PM Tony Blair’s in 1999 – although what the Education Secretary said he said, wasn’t what he said. It wasn’t about university entrance, it was all of higher education. It wasn’t just 18-year-olds, it was “young adults” up to 30.”
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That wonkHE is fun. It appears the actual proportion of school leavers that go to university is about a third.
Mind you, I fear I share the Gav’s
although I don’t share the belief that this is possible in many cases, because the economy has much less need to grunt work than it had back in the day. But that’s an argument in favour of a universal income rather than wider university access IMO.
But that’s the reasons I despise comprehensive education. Firstly because it would have sunk me, but lso because I disagree with the premise. Just as well I have nothing to do with education policy eh, with such unreconstructed views I’d be even more lethal to the common weal than the Govester.
Gosh I don’t know about that on comprehensive education @Ermine. I grew up in one of the counties where it still exists and went to a grammar (along with about 25% of my cohort). I can only say that the people who just failed to get into grammar (but were bright and could have done well on a different day/in a different test) were really failed by their secondary modern education, which was entirely focused on getting as many “passes” as possible, and not on getting the brighter kids to get As or Bs in the subjects they excelled at. It was pretty horrible to see a single test sat at 11 having such a huge impact on people’s future path (and financial fortunes).
Partly it’s cultural though – if secondary moderns didn’t become sort of unloved dumping grounds then maybe a split system could work (maybe it does in Germany, where I believe there’s a lot more respect and resources given to the technical schools than to the secondary moderns here?) But we should be careful what we wish for. I would really hope that we should be able to achieve great academic success AND great technical qualifications within a comprehensive system if we put our minds to it: though I will concede I know little about it, having not been through it myself.
Talking of DB pensions from ‘The Firm’, I received my pension options from them this week. Any thoughts on the ‘higher pension/cash sum in exchange for lower future increases’ option. I’ve number crunched and see that an average 2.5% inflation rate gives a break even date of 19 years hence. I’m favouring towards it as a) I can’t see inflation & interest rates going anywhere for the foreseeable future. b) It won’t be my only pension income as I have other DB & DC scheme’s to draw on.
I also checked my state pension forecast and I have over 40 years and no gaps. My forecast is £xxx.xx and it states “You cannot improve your forecast any more”. I thought there would be an option to make up the contracted-out years but it appears not to be the case.
And finally …. boots. I found an old pair of ‘The Firm’s’ PPE boots in a cupboard recently. I wore them to do some digging and within 5 minutes, both soles had literally fallen off. They must have been at least 25 years old but they don’t make them like they used to !
Hmm, I am much much less sanguine about future inflation than you are. My fear w.r.t. The Firm’s pension is that every time inflation overtops 5% the income falls by the excess for the rest of my life by the differential.
I do see your point, the fragility of the economy ever since 2009 has made government policy favour low interest rates and lowish inflation. However, inflation can also rise because of external factors, and these can overpower government action, see the 1970s. Power is clearly shifting away from the West in general, we have the excitement of Brexit and deglobalisation could also run against low prices of foreign stuff. There are too many people in hte world for everyone to have our lifestyles, improved communications means more will desire it, resulting in more people chasing the same pool of goods.
That different viewpoint made me pass on that option. I also don’t have any bonds in my ISA, regarding the DB pension as bond-like, so for long-term diversification I don’t feel comfortable in tinkering with the bond-like proposition. But I haven’t sat down and thought about whether the index-linking is important to that – most bonds are not index-linked.
I had the same experience with the degradation of the soles on some older pair of The Firm’s PPE boots that were about 20 years old, but the last pair I had for the London 2012 work are still OK – the uppers are cracked but the steel toecaps and sole plate are still good, and worth having when we chainsawed a tree earlier this year. I guess the lump of steel in the sole plate weakens the attachment to the top.
> I thought there would be an option to make up the contracted-out years but it appears not to be the case.
That is probably because you have 40 years NI. This will have been qualified in 2016 against the 30 year requirement at the time, and if you have accrued any years since then over 30 then that will have gone towards compensating for the contracted out period. Contracting out ended at The Firm in 2009 ISTR. I only had 34 years NI as of retiring (this contained three years allowance from school post-16, though not university), and needed another 5 years to reach the max. I have bought four of those at Class II 😉
The other guy from The Firm needs more than four years. He started work three years later in life than I did and did an MSC on top of his undergraduate degree; he was 24/25 when he started work contracted out. I worked a few years contracted in before doing my MSc, and it appears I paid my NI stamps myself when I did my MSc. My grizzled older self is grateful to my younger self for his prudence, because the way the academic year interacts with the tax year means i would otherwise be short two more years now.
Where you say Class 1 NICs you presumably mean Class 2, which are payable by the self employed.
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> you presumably mean Class 2, which are payable by the self employed
Absolutely. I corrected typo in the article on rereading, but not fast enough for the email version I fear.
gov.uk on the various NI classes for the avoidance of doubt
Great post, and a lot I would like to comment on, but, for the time being at least, I will stick to PF.
You previously mentioned (in your post about fancy fintech’s fishy fun IIRC) that things changed more than you anticipated as a result of taking your DB pension. This, I assume, is partly why your net worth has increased by 10% since the start of the year. Knowing what you now know (and notwithstanding your recent discussion with a former colleague) do you think that perhaps you should have drawn your DB earlier than you did?
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You have a habit of asking intriguing questions, to which there are no easy answers. So I will waffle on at length 😉
> things changed more than you anticipated as a result of taking your DB pension. This, I assume, is partly why your net worth has increased by 10% since the start of the year.
tl;dr – not overwhelmingly
I have inquired of the oracle of Quicken, although TBH I should have been able to compute the differential in my head. This is not the case, my pension is not that big by a long chalk. It easily defrays my expenses, so clearly I am better off, but it didn’t do the heavy lifting.
Assuming that I bank the entire cumulative net pension (because it reduces my outgoings by that much relative to previous years) about 3/4 of the increase is the aggregate change in investments plus the income from the short. Now that increase is not true in real terms – I would say that the GBP and the USD have depreciated in real terms as a result of monetary policy, though of course, what is that objective absolute standard of value, particularly when the USD varies? Half of IMF Strategic Drawing Rights is US dollars. And of course it is the notional market value, it’s not real until it’s sold.
What changed with drawing my pension was my attitude to risk, and I was therefore able to short the stuff I concluded was lost in value, and a misallocation of capital in chasing income. Unlike Monevator, who called the low-water mark correctly and about which I am still bitterly jealous, the jammy bastard 😉 I was slow out of the gate.
In that last part of March, I was busy shorting stuff, not buying it. I have the Gerald Ford problem shorting, I can’t short and buy at the same time. But a little through April I switched from short to long. I have increased my VWRL exposure after I sold my shorted VUKE. I also had a significant amount of gold from Brexit days and added to that, fortunately before it started to ramp up too much. You win a terrific amount of detachment from the markets when you know it could all go titsup and fall to zero and you can still pay the power bill, eat out every so often and keep the wolf from the door.
> do you think that perhaps you should have drawn your DB earlier than you did?
There is an argument that I have lived less large over the last eight years than I could have been. The counterfactual is my ex-colleague, who took the road I did not travel, drawing early. I believe the reason he ran down his capital is because he made some quite significant hobby purchases early on – most of my investment gains came from the years just after the GFC, where he will not have had that investment gain. I spaffed a similar amount of money into a housing upgrade in 2017, but that was after a lot of investment gain. But he’s definitely had an emotionally easier ride to date. Without an income I was fearful and hoarded resource, I have never properly learned how to trust an ‘income’ gotten from investments. That has been eight years of good health that I won’t live again, although I am lucky enough to still have good health. OTOH I can’t say I was miserable – it beats the hell out of being employed and while I haven’t travelled round the world filling Instagram with selfies in front of wonders of the world, I haven’t been bored, I’ve kept learning new stuff and meeting people and doing interesting things.
People anchor and become emotionally invested in their choices. Faced with the same situation, knowing then what I know now, I would take the same path. That may well be confirmation bias. I do not claim to be a dispassionate independent observer, you can probably find examples of each and every single cognitive bias on here 😉 And the calculus between jam today and jam tomorrow is different for different people. Mrs Ermine makes the case (from a background as the daughter of an entrepreneur) that I had a middle-class background and therefore was taught an edge in the balance between a bird in the hand and two in the bush. I am not convinced, my Dad was a maintenance fitter (machinist to Americans) which is a skilled trade, and neither of my parents had a university degree. Something that supports her thesis is I know a couple of retirees from working-class backgrounds and they cannot hold on to capital, favouring jam today. Fortunately DB pensions and the SP means they don’t have to, but the prognosis isn’t good for future generations without DB pensions.
I was also lucky that I started drawing my pension late last year, before I got to see my first market crash as retiree. That meant that the three to five years’ running costs I had as cash to forestall becoming a forced seller into a down market were superfluous to requirements. Six months to one year is good enough for a fellow with a steady defined income, and I despise cash as a holding for its value slip-sliding away in the night while your back is turned. I need a very good reason to hold cash. So that became available to take up some of the opportunities this year – first as a stake to short rubbish holdings without the risk of being margin called. I staked the entire notional purchase price of what I shorted, I didn’t putz about with staking 10%. If you can’t stake the lot you can’t afford to short IMO, it’s a deadly enough game as it is. Then when I cleared all that, the cash and the gains were available as resource to go long VWRL, the S&P and UK mid cap, the latter largely for sport. All of these are in the money, even that damned UK mid-cap, although I am sure Brexit will crash and burn that. I need to just keep buying through the suckout. Well, and live long enough to see the proceeds!
I had a lot of luck, but one day I will stick my neck out and write the post that valuation matters, whereupon I will probably be excommunicated from the PF scene for going off-message. Perhaps it will be my valedictory last transmission 😉
I concluded I had/have no significant skill in stockpicking or sector allocation, I am now easy with big broad indexation. Hell, I didn’t even get carrying the FTSE100 right, though I sold at a total return profit because I started early enough and jumped fast enough. I would have been better off with VWRL. ZXSpectrum told me why in a deconstruction of the FTE100 on Monevator. I’m not as bright as those guys, but I am bright enough to accept that rather than chase Dunning-Kruger. In that respect, at least!
I will be Galileo to the big passive investing Boglehead doctrine, when you buy still matters, or more to the point at what valuation you buy. This is otherwise called market timing, and you’re not allowed to think or say that matters. And it’s true that if you are a young fellow with 30 years of accumulation, then start, start now, and do it steadily. You will see market cycles but you’re likely to do OK. Your multi-cycle integration time will run most valuation differences out into the noise. The nasty and unreliable hidden assumption behind that is As long as you stay employed and keep regularly investing,, not things Millennials can take for granted these days. The assumption is still subject to force majeure, but so is life, and this year shows only too well. I was tickled by some of the non-financial ways Millennials could improve their lifestyle resilience in that article – you and I had the privilege of being able to get away with an individualistic approach which may be passing out of validity.
Compound interest will roughly double your capital over a 30-year working life, which is worthwhile, but won’t save your tail and it’s not the eighth wonder of the world. The trick to having more money is retirement is saving more money while you’re working. I didn’t start saving early enough to retire early. What worked for me is earning a fair bit more than the average UK wage, CI is irrelevant to my story, though it is making me better off now.
Unlike stockpicking, where at least theoretically you can spot opportunities that are undervalued at any time if you have the smarts or inside information, you have absolutely no control of when valuations will be good or when they will be sky-high. That is controlled by animal spirits and the madness of crowds, or big actors like the Fed. The individual retail investor is an observer, not an actor on the stage. You are much more likely to lose your job when valuations are good. It is the opportunity associated with that which worked for me, because I was an old git near the end of my working life, so at peak earning power, lowered outgoings because I had most of the Stuff I needed, significant home equity paid down and desperate enough to take a multi-year sabbatical from the white-collar worker lifestyle in exchange for freedom.
It worked out okay for me. But if this had happened five years earlier I might have been in trouble, and my future self, assuming there is one, would be a fair bit poorer. And that’s luck, not skill.
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Well, there is little point in asking you easy questions!
Thanks for the “waffle” – there is a lot there to dissect and digest, but I will need some more sauce or syrup to get to the end!
Joking apart, the questions I ask stem from genuine curiosity and a desire to try and learn from your experiences of successfully navigating “the Gap”. As you may recall, I am part way through “the Gap”.
A few hopefully simpler initial follows-ups if I may.
> About 3/4 of the increase is the aggregate change in investments plus the income from the short.
Some of which would have had to be used to pay your expenses were it not for your DB or have you already accounted for that?
I think this also means that your DB more than covers your current expenses. Assuming this is correct, are you not rather likely to be even more over-funded when your state pension(s) kicks in?
> You win a terrific amount of detachment from the markets when you know it could all go titsup and fall to zero and you can still pay the power bill, eat out every so often and keep the wolf from the door.
I can see that and when you couple this with your observation that “But he’s definitely had an emotionally easier ride to date.” I start to wonder should the end game (re the Gap) be the point when you have enough rather than prolonging “the Gap” so that ultimately you draw the optimal pay out from the DB scheme?
There is still much in your answer for me to ponder, so, assuming you do not mind, I may come back with some other points in due course.
> Some of which would have had to be used to pay your expenses were it not for your DB or have you already accounted for that?
The other 1/4 is the total cumulative value of the net pension (ie assuming i had banked it). Money is fungible, since my expenses have not changed that should roughly compensate. In practice this is an odd year, there is simply less to spend money on. There’s only so much lobster a fellow can eat 😉
> are you not rather likely to be even more over-funded when your state pension(s) kicks in?
Yes. Not only that but I get to pay tax on all of it too!
> I start to wonder should the end game (re the Gap) be the point when you have enough
I would say there is a sweet spot, Maybe drawing four years early might have been it. Had I done this as a controlled strategic plan designed say 10 years before I did retire, I might have planed to draw a little bit early. Bear in mind that before 2014 I believed I would have to draw the pension early to liberate the AVC savings (by taking them as my PCLS) . All of a sudden the world changed. It is not strictly true that I ran without drawing on my pension across 8 years, but I consumed the AVCs via a SIPP, slowly enough to avoid paying tax on it until 2017.
I have been an employee all my life. I never learned to trust an income derived from investments, so I ended up at the hard limit of an aristocrat – never sell down capital. Of course I understand the SWR in a theoretical and intellectual way. But I never came to trust it in my gut. This perhaps pushed me into error – chasing yield with the FTSE100. In my early days I was massively HYP centric, both because income was easy to come by in the crawl from the GFC, but because I had earned all the money I was ever going to earn, and too young to spend capital IMO. I can intellectually understand the equivalence of selling down units of an accumulated world index within the nominal SWR, but I can’t live it. I’m perfectly happy to exchange some total return for a more comfortable ride for my irrational preferences.
I have never drawn from the ISA, though I haveborrowed against it. I have sold capital assets in burning the SIPP almost to the ground.
Your calculation re the balance of drawing early is individual to you, your own aims and fears and the specific balance of outgoings and savings. I wouldn’t go as far as to saw my ex-colleague got this wrong – I’d say he has it right for him, and he has no partner and is child-free. That shifts the balance somewhat, and there were other reasons that favour drawing early in his case.
> I may come back with some other points in due course.
Fire way! I learn more about myself too. I am happy to acknowledge my irrationality and pay for it if I choose not to fight it, but it is always good to know learn where it lies!
A key realisation that has slowly dawned on me since I started my journey through “the Gap” is that I have much more time to look into PF things properly and consequently I have got better at husbanding resources. A possible consequence of this may be that we need less than I originally forecast. Does this ring any bells for you and how long did you give it before you became confident that this was real and not just penny-pinching that would ultimately prove to be unsustainable?
P.S. I agree entirely that the calculus for drawing early is completely particular to your set of circumstances. But having said that I quietly suspect that you may well be asking yourself in not too many years just what are you going to do with all your dosh?
> I have got better at husbanding resources. A possible consequence of this may be that we need less than I originally forecast.
There are a hell of a lot of things that means the retiree spends less than the wage slave – owning your time gives you a control and optionality.
Take the simple act of doing the washing. Choose a day when it’ll be dry and windy in the forecast- the wage-slave you has to be either much more organised than I was, or take have a 2/5 chance of the opportunity. Reduced power bills and your clothes last longer. You can go on holiday outside the school and bank holidays, and travel midweek. You can sometimes exchange time for quality of life. Your observation about having “more time [to look] into PF things properly” applies more widely, be it house maintenance where you can view the YT videos on plumbing or other things. Having said that I am biasing towards paying people if I want decorating etc, I don’t ever want to paint a room again, and showed no terrific aptitude when I did. We had a couple of guys paint the outside house and rebuild a low garden wall when we sold the last house. That was a job I’d dodged for 15 years. I’ve forgotten what I paid them for that but it was a steal 😉
You also get better at qualifying what is worth doing, because you’re not usually under dire pressure. For instance a cowl in our campervan engine started to rattle. I considered taking that on. After all, I have my own drive with space all round to get at it, power and coffee available. It’s not like my 25-year-old self changing the waterpump on the side of the road outside my terraced house in midwinter to be able to go to work the next day. But I came to the conclusion that I didn’t really fancy the job, so I took it down to the local independent garage that does servicing for us. When it came back in turned out that the bolts holding it on had sheared in the engine block, which they had drilled out and retapped. I figured £90 was a bullet well dodged.
When our 13 year old washing machine started a very slight leak, I thought can I be bothered? And then recalled the dishwasher, where I changed the element, only for something else to fail a few weeks later, which called for a replacement. I could have taken the back off and looked for any faults, but I’d then still have a 13 year old washing machine coming to the end of its service life. Not worth the fight. So I ordered a new one and got them to clear the old one – it didn’t owe me anything. Purchased with a credit card, to get my Section 75 protection if the retailer goes bust but paid off when the bill came, natch.
So yes. You will very probably have lower running costs in many areas than while working. OTOH if foreign travel is important to you then you may spend more on that. Not on a per day cost basis – a lot of your costs are in flights, so spend more time there, or make it a multi-centre vacation – after all why settle for 10 days if you can have 8 weeks?
> But having said that I quietly suspect that you may well be asking yourself in not too many years just what are you going to do with all your dosh?
Possibly. After all, having more than you need is insurance. Rather too much than too little, eh? The seven lean years may never come before I run out of life. Mrs Ermine is younger than I, so statistically likely to be able to put it to good use in the direction of fine eating, caviar and champagne. Or whatever lights her fire.
The tale of my ex-colleague show that the outcome depends quite critically on subtle differences in the boundary conditions, as well as the dreaded sequence or returns risk. I had fantastic luck in retiring three years after a massive market crash, which is about as sweet a SoR as you can ask for. Even with that – similar age, similar smarts, similar retirement date, he started with twice my capital and a DB pension out of the gate.
The difference? Sequence of returns/outgoings, some behavioural differences, and an entirely unquantifiable dollop of good luck. I was chasing income like him, though with the FTSE100 and ITs rather than the oil sector. I was more diversified in the round, prepared to surrender the income bias in the face of the incoming odds. The inflation I fear may never happen. I’m not going to be socialising IRL that much once the kids go back to school, so putting some of my engineering to use and working very part-time isn’t a dreadful option, given much of it is a solitary occupation in the lab.
The one other thing I’d say its’ worth doing as an early retiree is stay flexible, and prepared to change direction if the environment changes. Favour the fox not the hedgehog, I sometimes heard grand plans of BTL empires and holiday campsites and think to myself, oy vey, such a shattering lack of diversification in your latter years combined with leverage, ouch. I was burned by leverage in housing in my 20s, but I had a working life to recover and have a go-around. The early retiree on the final approach, dangerously close to the ground if something goes wrong with grand plans? Not so much. Even at 45, the line ‘twixt success and failure is brittle, fragile and thin I was 49 when I realised it was going titsup for me, but that was a more controlled crash. The difference – merely four to seven years, and it went pear-shaped for her at the high-water mark of a bull market, my option was not open to her even if she had been four years older and similarly minded.
I retired into a world where I’d have to take the pension early and invest my entire PCLS to make up for the actuarial reduction. Things changed. They will change again. I played a weak hand relatively well, but I remember the hazard of those early years, fighting myself to get into the market through the regular retrenchments. It is because I remember those lean years well and don’t want to see them return that I’m played things conservatively.
I also discovered that, once you have enough, a good life is a lot less about money and a lot more about you it ain’t what you do, it’s what it does to you. The birds and stuff at the beginning of this article – it took the pandemic for me to value the local area enough to observe the detail. Sure, Helen MacDonald, Robert McFarlane and Richard Mabey knew that, but I didn’t. Slowing down helps you deepen. I think I have managed to honour some of what my younger self wanted to do at the start
Take it from a food scientist and amateur photographer, food photography is the ultimate in quackery. We foodtechs used to attend the sessions to keep it somewhat real, but even we couldn’t stop them from shellacking the carrots or putting marbles in the soup to float the noodles to the top and artificially increase the amount.
On the financial front, we haven’t taken big hits over 15 years of retirement. Lately we’ve been diversified, balanced , well-managed and passive. Thanks to our DB pensions we get by without worry. We can’t travel due to COVID so we are saving quite a lot actually. And winter is coming in Canada too – trust me!
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shellacking the carrots is OK given the heat of the lighting but the marbles verge on false pretences!
Photographing food is quite the challenge artistically. We were shooting a pic of a roast chicken which had to happen quickly because we were going to eat it so shellacking wasn’t an option. Led astray endless Instagram food shots I went for the plan view. The result had a dreadful Eraserhead aesthetic. Epic fail as a photographer and totally unusable! Never shoot a single food item from above. There’s a reason still lifes are painted from the side or up and to the side…
Marbles aside, the food photographers I met were true professionals, with wonderful cameras and lighting setups. Never an overhead shot, more like taking a photo from 30-45 degree angles. Sort of like taking a pic of a football pitch from high up at mid stadium.
“So yes. You will very probably have lower running costs in many areas than while working.”
Aye, until the age arrives where you can’t manage any DIY, can’t even manage all the gardening, can’t manage all the cleaning, perhaps can’t manage all the care of an ill spouse.
People on financial forums seem to imagine that they’ll stay sixty forever. Or they imagine “I won’t need as much in my seventies”. Maybes.
> Aye, until the age arrives where you can’t manage any DIY, can’t even manage all the gardening, can’t manage all the cleaning, perhaps can’t manage all the care of an ill spouse.
That should be the time of moving to sheltered accommodation. And there is nothing that you can do to hedge all of that to forestall the worst cases. It’s not as bad as it looks, because 4 out of 5 Britons don’t go into a care home.
You already see the trend in me. I CBA to paint anything, I would have paid the washing machine guys the £20 to install the machine.
OTOH it’s not a dead cert killer. I have had experience of engaging a SOLLA IFA to manage an elderly relative’s money self-paying for care. When I initially looked at it I thought there was a hazard of running out of money. They have many problems, but I would say that they will pretty definitely run out of life before running out of money, because the IFA allocated capital to buying an impaired life annuity, which derisked the situation massively before all this kicked off.
The people who get slaughtered here are the people hung up on leaving money to featherbed their children or those who have burned too much of their assets while working paying school fees rather than accumulating for their own retirement. You have to be relatively wealthier in this generation to do that than your own parents were to do it for you.
People who can actually burn down their assets, move when running a house gets too much etc, can make it.
> Or they imagine “I won’t need as much in my seventies”
Nobody I know in their seventies is in that sort of trouble, the kick-up in spending seems to start about 10 years after then, and even in those 80 year olds, they were in poor health in their 60s. The IFS supports the case that people aren’t routinely slaughtered financially in later life, as does this from finalytiq specifically on your U shaped spending assumption and JP Morgan
The numbers seem to favour Al Cam, not you, and not even my relative caution. I’m not saying bad outcomes never happen, but they aren’t routine or even the norm.
I am familiar with quite a few works that seem to “debunk” the U-shaped model of real retirement spending. The IFS paper is new to me however and thanks for the link.
It turns out you could both be correct, insofar as the research generally looks at averages – and, as each household is somewhat unique, some households will not conform to the average. This point is explored for four sub-groups of the sample in one of the US classics on the matter, see, for example, https://www.morningstar.com/content/dam/marketing/shared/research/foundational/677785-EstimatingTrueCostRetirement.pdf
My aim in raising this matter with Ermine was to try and understand his particular journey (to date) rather than the general; especially given his comment that “There is an argument that I have lived less large over the last eight years than I could have been.” which intrigued me. To my eyes this comment shows he has pondered the point and I wondered why he chose to live less large to acquire a pile of dosh that he/Mrs E seem to have little/limited use for? I think the clues are in his comments like “Without an income I was fearful and hoarded resource, I have never properly learned how to trust an ‘income’ gotten from investments.”, and I just wanted to discuss this a bit further. Apologies for not making this sufficiently clear.
Like a lot of us, E seems at times to be rather contradictory – sometimes an apparent visceral fear of failure drives his decision making yet on other points, such as investing, he is uncharacteristically (for the UK) bold with comments like “I need a very good reason to hold cash. “.
> Like a lot of us, E seems at times to be rather contradictory
Welcome to the art of being human 😉
> why he chose to live less large to acquire a pile of dosh that he/Mrs E seem to have little/limited use for
I have a different background from many in the UK PF scene. Most of you are younger, a high proportion (relative to the 7% of the UK population) have been privately educated, many went to Oxbridge. This is not surprising, while you’re not meant to say that intelligence is distinctly heritable, people with money to save will be reflected more among people of that background because on the whole bright people earn more money, and yes, there are other perhaps less meritocratic drivers too. I am not of that background, none of those things apply to me, so I am culturally an outlier.
Britain was poorer in the past, and I grew up among poorer people in that poorer past. My parents married in a registry office in Camberwell Green, and started married life in a rental bedsit with an orange crate for a table. As Carl Jung said,
These experiences are encoded in an atavistic part of the unconscious, and they cast their shadow across the psyche. Compounded with that I was taken by surprise that my white collar career went bad so quickly, it was not planned. So many of you start thinking about retiring early in your 20s and 30s, I was 49. I had to use extreme force to get enough to jump before getting pushed – I learned that money was not more valuable than freedom. I didn’t go on holiday for three years while working to save my way out. It’s not surprising I fear the lean years both consciously and unconsciously more than someone from a richer background who has planned their early retirement for years in a civilised way, rather than running out in front of a collapse they failed to see ahead of time.
I learned to overpower that intellectually as an investor. I invest in things I totally don’t believe will succeed, because I have learned that optimism is beneficial in investing, even if you fake it. As an example, personally I believe that Brexit will destroy, crash and burn UK mid-caps. But I’ve started investing in the sector. I’ve been wrong before.
I don’t share dearieme’s pessimism of escalating costs as I get older. I have seen living proof that this can be leaned against. When I initially looked at that relative’s situation and the cost of care I thought they were totally hosed, but I knew enough to know I didn’t know, and I’ve seen the situation turned round by that SOLLA IFA. I can vouch for the validity of their blurb
They will not run out of money unless there is societal collapse or hyperinflation which will do for you and me, and in the latter case they at least have a fighting chance IMO. The PF scene has absolutely no comprehension of how to invest for later life care because that’s probably not a DIY job. Just don’t even sell care plans to DIY oiks. By the time you are talking about care plans you don’t have long enough to live that the cost of IFA fees are going to catch up with you.
It’s not unreasonable for me to expect to live another 30 years, and even by 35 more years I would not be older than three of my grandparents or my Dad when they cashed in their chips. 1985 was 35 years ago, and it was a very different world. The world in which I spend my last years will (probably) be very different from now. Seven or eight lean years are not so bad to go through to get to freedom – after all, I would still be at work when I wrote this post had I not chosen a different path. Above all else I did not ever want to have to go back to work after I retired
Perhaps I should do the post about crossing the finish line, but it would be a little bit tone-deaf given what’s going down for many of our fellow countrymen. But I challenge one of the hidden assumptions you have made, which is that my life would be better by spending more. As I got older, I came to the conclusion that value and meaning so to be had more by what I become, not what I have or what I do specifically. I do spend more, now, but it isn’t on the big gestures, the travel etc. OK that’s not so easy now anyway, but what I found worth spending more on was only one of Jacob ERE’s tickets, restaurants, shopping trifecta of what kills people’s budgets. Good food, decent wine, restaurants. I spent more on housing, too. I don’t need to spend more to be happy. Change is achieved through mastery and understanding of the Self IMO. Let’s hear it from Carl Jung again
Thanks for the follow up. I get where you are coming from.
As it happens, I am rather more similar to you than the picture you paint of many in the UK PF scene.
The tip re the SOLLA IFA is appreciated.
I do not believe that I made such a “hidden assumption”; rather I was intrigued as to why you did not curtail your Gap earlier. Especially given that you seemed to find the Gap years hard. Perhaps, this is because when you are in the midst of “the Gap” things are less clear cut, and the reality of the overall situation only crystalizes with the benefit of hindsight. Assuming this is on the right track, then I posit that this is something that all mid-Gappers (horrible term, yikes!), like myself, should take note of.
Lastly, your sensitivity “given what’s going down for many of our fellow countrymen” speaks to your humanity. However, I for one would, in due course, appreciate a post about your “crossing the finish line”.
> I was intrigued as to why you did not curtail your Gap earlier
I anchored on the existing DB NRA, I am not yet that old. It was amplified by the fact I lose annual income (the breakeven point after with you lose cumulatively was around 73 for me, though it rose dramatically as I got older for reasons I don’t understand, which is why I have drawn it). I heard the pack drill from my colleague that YOLO. I am not of the opinion I got this wrong. If Osborne hadn’t let me use my AVCs via a SIPP I would have taken it earlier.
I had an entirely conventional view of my career arc until it went titsup. I’d spent 30 years believing I would retire at 60. And remember that while I can comprehend the idea of deriving income from investments as well as anybody else in the PFscene. some part of me doesn’t believe it will hold. I knew I was probably underspending across the intercession, but could not qualify it to a degree that I trusted.
Investing dynamics –
Bridging a 10-year gap with investment income is inherently exposed to more volatility than bridging a 30 year gap. After all, if Covid-19 had been Covid-15 I would probably have been in trouble, and valuations have been high for the last five years IMO. I feared the bear that never growled. My ex-colleague shows that there be dragons
I am not yet convinced that I got this wrong. It is likely that I underspent, but not proven.
> Perhaps, this is because when you are in the midst of “the Gap” things are less clear cut, and the reality of the overall situation only crystalizes with the benefit of hindsight. Assuming this is on the right track, then I posit that this is something that all mid-Gappers (horrible term, yikes!), like myself, should take note of.
And you know what – there’s little you can do to do better 😉 Many things in personal finance have this characteristic. Take TA’s mortgage journey which mentions where I stiffened his spine thusly two years before
Crossing the Gap is the same. Imagine an aviator of bygone days, not GPS, no satellite. You were cleared for takeoff in a stable, sunny airfield of origin, your flight path looked clear, let us say from Idlewild of yore. You have journeyed long and far, you have seen storms, you have passed the point of no return, where you have consumed too many resources to return to the point of origin. You are still in the middle of the ocean, and you must believe in the quality of your charting and your capacity to compensate for crosswinds. It is not surprising that doubt creeps in across the long journey, in that midway point, far from home and far from your destination. You long to hear the gentle burr of “This is Shannon control”. You only hear that in the last 10% of the journey, as tired but exhilarated, you commence the final approach.
The halfway point in long, complex and uncertain journeys is rough as hell. c.f. mid-life crisis. Clarity starts to come rapidly beyond that half-way point. I venture that you won’t find any posts that hint that I might have been underspending in the first 6 years of the 8 year journey 😉
Your journey across the Gap will have similar dynamics. You hopefully planned better, and I hope you started the journey in better psychological shape than I. You will probably be a better investor, with head and heart more in synchronism than me. But you must bring head and heart together across the ocean, and if heart is unsure in the halfway point, head should not cast it into the ocean as ballast, because it will be needed to live the second half of life well.
tl;dr You may find in the last quarter of your journey across the Gap that you underspent. It’s not the worst thing in the world you could have done. Best err that way rather than fall short ‘ere you reach that last quarter, eh? With a bit of luck you’ll have 30 years to spend it on finer living.
Woh, some more great stuff to ponder!
I too focused on the schemes headline NRA as being the optimal pay-out point of my DB. At the next level of detail this is slightly complicated because, like yourself, I was in my scheme for a relatively long time and have several tranches of service – with different NRA’s too. Whilst I remain convinced that this pay-out point is optimal in most scenarios (in pure £’s terms for both myself and my wife if I croak first) I have started to question if this remains the correct approach for us. The questioning probably stems from the realisation that we have no particular need or use for a legacy either – so why hold out for more than “enough”. Having said that, holding out could be viewed as a relatively cheap form of insurance, given how hard it is to actually define “enough”. Lastly, there is a scheme specific issue around survivor benefits that is only now present during the Gap. DB schemes are notoriously complex and mine is no exception to this observation; but, on balance, I feel they are preferable to DC schemes.
Investing dynamics –
I have taken a slightly different approach to you. Mine is more akin to a Floor & Upside scheme. A key advantage of this approach, at least in theory, is it isolates volatility to only the Upside portion. Also with F&U you should be better able to track progress vs plan. The obvious downside is that it will almost certainly cost more and the likelihood of the overall Pot surviving the journey across “the Gap” intact (or even increased – as in your case) is significantly lower than when using a SWR approach.
The half way point:
It is really fascinating to me that you chose to highlight this milestone. A few months back I convinced myself that I will proceed as initially planned until at least half-way through my Gap before I do any significant re-shaping. This meant I consciously decided against buying into the mini bear earlier this year and rather decided to keep my powder dry. I have no regrets about this. I am currently a bit over a year from the half way milestone. Hopefully, as you suggest above, clarity will come quickly beyond this point for me too.
Non-linear vs linear progress:
I entirely agree that paying off a mortgage is non-linear, by which I mean it will take longer (in time) to get to the 50% cleared point than to clear the remaining 50% balance. This is also almost always true for the road to achieving FI, see for example https://fi180.com/2017/06/26/the-milestones-of-fi/.
However, crossing the Gap is IMO strictly linear. The only practical way I can see to accelerate through the second half being to re-define the end point by bringing it forward in time – which I note is what you did in the end; albeit by about one year, I think.
Thanks again for taking the time to share your experiences and thoughts about transiting “the Gap”.
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A couple of clarifications:
> I was in my scheme for a relatively long time and have several tranches of service – with different NRA’s too.
I had two tranches, a NRA 60 for the majority of service and NRA 65 and a lower accumulation for 3
The computation was simple in my case – there aren’t any realistic scenarios in which deferring to 65 would work out better for me, particularly as there was no gain in the NRA 60 for deferring post 60, and you couldn’t take each part separately. I regard that as a crafty way for the Firm to greatly reduce its commitment for the DB in the last three years of my working life reducing accrual and increasing the effective actuarial reduction, and let that go accordingly.
> which I note is what you did in the end; albeit by about one year, I think.
It is a little less than a year. FWIW I didn’t draw early because I ran out of money or changed my view. I drew early because they changed the actuarial reduction factors, for reasons I do not understand. The Firm provided a pension modeller where you could diddle with the early retirement, commutation of pension to lump sum etc.
When I retired, the actuarial reduction was about 5.5% p.a drawn early, most DB schemes are predicated on average life of 20 years post NRA so this is as it should be. Tax reduces the effective NRA. The actuarial reduction drops slightly as you get closer to NRA. In the flight analogy, when I requested clearance for IWLD tower, the actuarial reduction for the last year was 4.5%. The modeller was on the intranet, so once I handed in my pass card I was flying blind, but I had pages and pages of cruft printed off the intranet showing drawing early for each year, a set of alternate flight plans, perhaps 😉
They closed the DB pension scheme in 2018 ISTR, and upgraded the IT system so that deferred members could run an extranet version of the modeller. It was subtly different from my printouts, but nothing that couldn’t be accounted for by the difference that I hadn’t been accruing since 2012, which would make my printouts drift off track increasingly.
Early last year I did this again, and for some reason the extranet modeller started showing reduced actuarial reductions. I rang up the admin to ask if there was a bug, they said no, they would stand by the results. I still suspect a bug, because the modeller showed if I deferred past January this year, I would get less pension drawing in January 2020 than if I drew in December 2019, all the way to May this year, though the deferred pension would inch up Jan onwards,. The actuarial reduction had dropped to about 1.5% and had this anomalous step. I asked ex-colleagues both younger and older (though both were in a different section due to starting earlier than me) to check, neither had this step. Both saw reduced actuarial reductions towards NRA
It would have been irrational to pass up the opportunity of a 1% actuarial reduction, and the step also affected the commuted lump sum.
So I didn’t change my mind about drawing at NRA. The Firm/pension trustees did, by changing the goalposts, in particular the actuarial reduction. I had three years spending in cash, I didn’t need to draw early. That cash and some of the LS I invested over time, and some of it increased my working capital across the short. In practice yes I have a slightly actuarially reduced pension but the difference is less than 1%. Why that should be the case I have absolutely no idea. I’ve retained all the quotation paperwork and the web printouts, if they try and claw that back then I will kick up massively. When the facts changed, I changed my mind.
Everything gets much clearer in the second half of the journey, because the distance you have to cover starts to reduce dramatically as a portion of the overall journey. It makes sense to test your assumptions and make finer course corrections in the final approach.
As I said, DB’s schemes are notoriously complex – and yours seems to pass this test too.
No late payment factors for your tranche of service with an NRA of 60 is, I believe, somewhat unusual.
FYI, for my service in my scheme the actuarial reductions work the opposite way to yours – and increase as I approach the schemes current nominal NRA – and this is true whether they are calculated simply or on a CAGR basis.
IMO, you are actually rather fortunate to have access to an (I assume accurate) extranet modeller. I will not bore you with the details but myself and some of my fellow former deferred colleagues (I stress just some) do not have access to my schemes equivalent facility and therefore have to rely on correspondence with the Administrators. This can be a tad slow and is definitely not free of other problems. Thus, I am limited in the what-ifs, etc that I can do. The trustee is aware of this issue but resolution of such matters in DB schemes is, at best, glacial.
IMO, rule/factor, etc changes are par for the course in DB schemes. Triennial valuations seem to be a common trigger but there are other reasons, or should I say perhaps, excuses used. What is not good is that often deferred members seem to find out about about the impact of the changes in roundabout ways – just as you did recently when playing with your schemes modeller. FWIW, I agree with your your sentiment that “I didn’t change my mind about drawing at NRA. The Firm/pension trustees did, by changing the goalposts, in particular the actuarial reduction.” As you say, when the facts changed, you thought again. The only beef I have is that the new facts seem to be rarely communicated.
> No late payment factors for your tranche of service with an NRA of 60 is, I believe, somewhat unusual.
Although I suspect conspiracy, I still have the pension booklet issued to a bright-eyed and bushy-tailed young ermine in the 1980s. Nary a mention of late payment options there, though actuarial reduction for early payment is stated. So they didn’t take anything away with the change.
> my scheme the actuarial reductions work the opposite way to yours – and increase as I approach the schemes current nominal NRA
That would appear more logical. After all, 10 years before NRA they can always hope you die in the next 10 years, whereas 1 year before NRA they know they’ve lost the last 9 rolls of the dice. I’ve never understood the slow drop in the actuarial reduction to NRA. But the changes were never that huge, perhaps half a percent in it.
> [quotation modeller] This can be a tad slow and is definitely not free of other problems. Thus, I am limited in the what-ifs, etc that I can do.
They were quite proud of it as industry-leading. I had to use the ring up and get a post quote when I reached the halfway point of the Gap, largely to recalibrate the results off the intranet modeller. I’d done yearly quotations off that in my last month at work, but those all assumed I’d work up to the date of the quote, so drifted off track as time went by due to the absence of accrual.
> Triennial valuations seem to be a common trigger
One of the incentives to check all this last year was in theory there was one supposed to be due this year, and I wanted to see what gives to forestall that changing the commutation factor – the plan to draw at NRA forestalled any chance it would have to change the actuarial reduction, Given what I saw, it added urgency to trying to get ahead of any changes. I didn’t commute a large amount to a lump sum, only enough to big up my ISA contributions for a little, I ended up with a (net) commutation factor of 26. Not earth-shattering, but not derisory. Bizarrely taking it doesn’t affect the spouse pension, for which I have no good explanation either. I saw one colleague ‘benefit’ from that wrinkle – the poor devil died of cancer in his 60s, but seeing it coming he had drawn the max commuted PCLS so his wife is better off by that lump sum, and her part-pension is no different.
As I say, DB schemes are very complex beasts.
I laid out some of the areas where complexity often lurks in a comment to a previous post of yours, see my response to GFF at https://simplelivingsomerset.wordpress.com/2019/10/30/bear-markets-are-a-bastard-when-investing-at-a-fixed-time-in-life/
From what I have gleaned, the PCLS not impacting the spouse pension is not that unusual.
To try and stay on top of things I developed a simple and slow but ultimately rather effective monitoring system. I would recommend this approach to any and all of your readers who are deferred members of DB schemes.
The system I have developed has been to ask approximately annually for quotes [to retire on several different birthdays] and when I get them compare them, in detail, to what I expect them to say. You may not be entirely surprised to learn that almost every year I have a string of follow-up correspondence to unravel anomalies. To date and AFAICR, the anomalies fall into one of the following types:
a) typographical error by the administrator,
b) un-published and/or IMO poorly communicated rules/factor, etc changes,
c) genuine errors by the administrator,
d) genuine errors by myself.
What may surprise you is that most anomalies are type b) and c). This may, in part at least, be down to the fact that the admin is sub-contracted and rarely, if ever, do I receive a reply from the same person whose work I query.
What also pleasantly (I think) surprised me was that when I asked for my annual quotes earlier this year I asked an additional question. This additional Q was prompted by your “suspected bug” that you first mentioned in passing a few months back. The answer I subsequently received surprised me and I am still pondering the implications – so thanks for stimulating my curiosity into an area of my own scheme that I thought I had long since fully understood – but seemingly had not.
As a certain telecoms company used to say in their advertising “it’s good to talk”.
> previous post
haha- OMG look at it now, how it was overtaken by events. Fewer than 12 months have rolled by:
Pah – that income stuff that I had to short, FFS, and sell. That high-yielding FTSE100 I had to short and then swap for VWRL which I should have had all along. Flippin’ heck. Easy life? What easy life!
As I said earlier, winning an income from equities is a tough game with Sturm und Drang round every corner. Sure, the passvistas will tell me my three to five year cash buffer was there to smooth all this aggravation, even a pandemic is over in five years, Keep Calm and Carry on. But you have to live it. It’s easy as a young pup in your 30s with your working life ahead of you. Not so easy when you rap on the fuel gauge past the point of no return and suddenly find a fifth of it disappeared in the last five minutes. Fingers crossed the needle’s stuck and it’ll come back after the next left turn sloshing the tank about?
All my Dad had to do with his blue collar DB pension through the dotcom bust that crashed and burned my younger self was dig his onion sets in, and hang the darned things up in the shed in the Autumn. He had some paper share certificates. In value stocks. But his DB pension was enough for his needs.
The best-laid schemes o’ mice an’ men, Gang aft agley, eh?
Bad outcomes tend to happen to people who have been financial disasters all their lives. People who have a tendency to be careful, to accumulate savings, will tend to continue doing so.
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Grade inflation is out of control but it’s not just A levels. I did my undergraduate degree the the early 90s and around 7% received 1sts across the country. That’s now 25%. Surrey Uni gave 40% of students 1sts. Give me a f**king break. Compound that with the fact that 35-40% go to uni (or something they call a uni), vs. 15% or so in the early 90s, and that means the currency called “First class degree” has devalued by about 800% in less than 30 years. First class degrees are definately not on the Gold standard.
The end result is obvious. Thirty years ago a first from a Sutton Group type uni was a guarantee of a good job. Now, when I get applications from grads with firsts from the same unis, they go straight in the bin. If you don’t have a Masters, preferably a PhD, from one of say 5 UK unis, and/or you don’t have a father/mother/friend who can put a word in for you, you don’t even get looked at. Of course, the jobs don’t require those qualifications, those unis or that network, but when you’ve got tens of thousands of applications all with firsts, you have to differentiate somehow. It becomes arbitrary and unfair.
This is a disaster for those, like me, who come from the lower echelons of society. Getting straight A grades and double firsts was a path out of that hole (ok I got the PhD and uni name aswell but it wasn’t compulsory then). Now it wouldn’t be enough. I’d need the right uni name and right network.
We need to go back to norm referencing. Relative is what matters. We need to go back to free uni education for those with genuine ability. Those that don’t have the ability but do have the money can pay through the nose if they wish. They can subsidize those with ability.
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On grade inflation, it’s a great example of how we try to minimise negative volatility (low grades) with a misguided attempt to help students but end up creating less robust individuals. For example at the FS company in which I work at, everyone is annually graded relative to each other. critical for the all important annual bonus sharing. the majority are of course average and so receive an average bonus with a smaller sample size at each end. For young recent joiners (who are the largest cohort) this is akin to failure. From cradle to their first workplace they have been told they are amazing, they have received an A* (or A if they underperformed) at GCSE / A-Level, top degree at Uni and now…for the first time in their life, they are being told, they are, well average. It hits them like a ton of bricks. Every year, I spend hours consoling and then educating them that statistically, one is most likely to be average. Our education system is a misguided bag of balls.
V interesting back and forth in the comments from someone somewhat younger I believe. I understand entirely why you haven’t trusted entirely income for investments and you over saved. S*it happens and no one know what sh*t is coming down the track. The past is an imperfect guide and you only get one shot. If I believed the bulls*it of the 4% rule…(AL Cam, I really respect your links and insightful commentary (genuinely) but had to switch off in the last one the moment the chap wrote – Trinity Study 4% rule = money for ever…ps. here’s the link to personal capital), I’d have checked out of work already. But a 60 year time frame (my upper mortality limit) is a loooooong time to husband capital no matter how big it is and 35 years (for you) is also a looooong time! From progressing to an adult I had no safety net beyond my own capital and hence I spent time accumulating as much as possible.
Winter is indeed coming and we seem to have made a shower of sh*t out of almost everything beyond the financial rescue package side of things but at least we are in reasonable company with a few other countries. The countries intrinsic fabric looks a little weaker each time I survey the wreckage of another policy decision gone wrong. Decades of gently fraying around the edges seem to be starting to have an impact. As I wrote on Monevator all the instinct therefore is to global equities, gold, $ TIPS but….relatively speaking UK equities are damn cheap compared to the US and have been a shocking investment over the last 20 years. Here’s a thought – you can have £1k in apple or £1k in the FTSE 100 (both are worth roughly the same equity wise – I will ignore the debt) – what’s your choice? I’m finding that a tough one. I do over allocate to the UK through vanguard life strategy 100, which satisfies my likely wealth negative creating urge to tinker.
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Re grade inflation – IMO it all starts with glitter glue and over-enthusiastic parents reactions to their off-springs colourful scribbles; behaving as if their sprog is the next Van Gogh – FFS. You have no idea how much time I used to spend at work (before I pulled the plug) trying to re-programme young folks totally unrealistic expectations. On the whole, HR departments do not help either – principally because to recruit they had to spend a lot of time “smoke blowing”. These things might now change, but in any case do not let Ermine hear you inadvertently sing the praises of a Performance Management (or similar) system!!
AFAICT I am about a year younger than E. We also seem to have not totally dissimilar household set-ups. Crucially, however, he is about five years ahead of me on his RE journey and I am following a very similar trajectory; albeit with detailed differences in implementation. I am totally sceptical of the so-called SWR approach, and very much use a safety first approach. However, there is a balance to be struck and I believe in rational risk. IMO it is therefore possible, at times, to be overly cautious and/or fearful. I hear what you are saying about the FI180 link – I was just scrabbling about to find another example of what I called non-linear progress. Maybe not one of my better choices, but I felt that FI180’s graphics made the point quite well.
Why do you need to choose – just buy VG LS – and let them choose for you!
> he is about five years ahead of me on his RE journey and I am following a very similar trajectory
I am intrigued as to how I am 5 years ahead if the age gap is closer. My age is easy enough to infer so it’s probably accurate. It’s not like I am better prepared – I would say your trajectory looks much more measured and competently arranged!
> behaving as if their sprog is the next Van Gogh – FFS
😉 OK, some of that is in the job description of being a parent, but I was never convinced that you should praise effort not smarts and I suspect that’s how we have ended up with grade inflation. It’s not the effort that matters, it’s if you end up any good. OTOH I suspect I have a fixed mindset and a tendency to write things off and try something else rather than improve them.
One of the things that has come clearer to me in this exchange – thank you- is that I think I have acted closer to my values/risk tolerance than I thought I was acting. I believed I may have underspent (and of course I am writing this on the back of a pandemic where caution has been rewarded so I am getting sample bias) but I am less sure of that now.
I have tried to imagine what spending more over the gap would have looked like. I’m not sure that would have given me joy. I did spend quite a bit more, of course, on more house. It’s not like I did the celibate monk in a brothel frugality game, it was just not typical little and often spending on tickets, restaurants and shopping.
The search for income did lead me astray, and I was probably overexposed to equities, that is shifted now. Because I now get DB income, I can live with the paltry yield on VWRL. Paradoxically, at the nominal high-water-mark of my investing career, I can shift passive, because I don’t need to make gains now. My asset allocation is now more like Seeking Fire’s global equities and gold, I use NS&I ILSCs and Premium Bonds rather than TIPS.
One of the other pieces of sample bias you may be getting if you look across PF writers is that success has many fathers but failure is a bastard. You read the reports of people who haven’t fallen by the wayside. Look at the attrition that has happened compared to eight years ago. Many, of course, will feel they have said all they have to say, or Life has overtaken events in 10 years. But you’re more likely to read reports of long-standing people who perhaps oversaved than from people who didn’t leave enough slack and are now stacking shelves at Tesco or driving Uber. If the wisdom of crowds means that PF writers in aggregate will roughly save the correct mean then survivorship bias will favour the more conservative ends of the distribution.
haha, I had a good snarl on grade inflation along the lines of ZXSpectrum48k, but I came to the conclusion it lacked charity so I dropped it. And anyway, he put it better! I was lucky in being one of the academically brighter working class children, so the grammar school system worked well for me. Having said that the averaging of performance management did for me too, I spent my working life claiming niches to have some edge but as The Firm became more of a jobbing shop than a research institution I lost some of this edge. Well, and I got more cantankerous as I got older, welcome to the human race.
Know what you mean about the Milestones of FI article. It’s allegory, like my plane analogy further up. Those are the sequences, but putting number on the milestones is a fool’s game. The confidence in the precision of his working that fellow and MMM have are the hallmark of the young fellow in the first 2/3 of his journey, yet to run into some of the slings and arrows life can throw you that crush the best laid plans. Even things like this
are unreliable as you get older, because in many fields you know more and more about less and less as time goes by, so the job opportunities at the same level as you were working before are few and far between. Once you leave a well-paying job past 45 your chance of getting the same level of pay may be limited.
If MMM’s investments went titsup tomorrow he could earn an income working, and he has life enough left for that to add up to a useful start again position. These guys are not far enough into their journeys that they could not reroute if disaster comes their way. Being able to go back to/continue working gives you options. But young people, there may come a time in life when you just don’t want to continue working, and if you are really unlucky the time may come when you just aren’t able to continue working, either as a result of your infirmity or because your trade gets overtaken by Schumpeterian creative destruction.
In my three year run out of the workplace I ran endless spreadsheets trying to convince myself I could draw the working period shorter, but I could never trust some of those outrageous assumptions. Because I had no option to restart – once I had left work I was on the final approach. I have earned all the money I will usefully earn, there was no go-around. When I see confidence in the SWR and blind faith in the reliability of passive index investing I see a fellow with decades of multi-market-cycle integration time ahead of them, much opportunity for course correction and the lovely confident fire of a young person. Not a burned-out grizzled old git with vapour in the tank lining up for a single pass at a distant runway. But the young do get old, if they are fortunate 😉 The level in the tank gets lower…
It’s patently clear that the West is surrendering its mojo, and to be honest it is burning out internally anyway. All Cultures/civilisations age and get old, the internal assumptions break down get overtaken by a changing world. To assume that the return on capital will be the same as it was in the post-war years seems foolhardly. It is a range – it may be more if AI actually adds value and makes goods and services, but it could also be less if resource limits place a squeeze.
Yes, I roughly doubled by investment capital across the gap, by hoarding resource, living less large. But I did not work a full working life, so my DB pension isn’t as much as that of colleagues that did. Some of that invested money is there to hedge future hazards. Over the next thirty years it is obvious that the NHS will not exist in its current form. I have decent health, but I have seen enough to see that you can’t buy that. But you’ll have to in future, and we seem to be heading down the US route, not the European insurance model. Not burning that capital to the ground across the intercession isn’t the worst thing I could have done. Optionality and resilience have value too.
> I roughly doubled by [my?] investment capital across the gap
IMO that is an extraordinary achievement!
Yes, some of it will be down to luck, but by no measure is it all down to this.
You have done very well and I completely fail to understand why you are so very hard on yourself sometimes.
I assume this is in nominal (non-inflation adjusted) £’s?
And, if I may, roughly how many years of assumed annual spend did you set out over “the Gap” holding?
My default safety first plan envisages depletion of approx 40% across my currently planned Gap; higher confidence plans forecast more depletion. You are not the only one with loads of alternative flight plans! I was fully aware of these values from the outset. These forecast outcomes are just the cost of adopting a safety first approach. About 1 year after “take off”, I set a stretch of landing at the other side with no nominal depletion.
Currently I am exceeding my stretch, but as discussed above, there is still some way to go.
The reasons are similar to yours and, by and large, are not a reflection of investment out-performance.
If I have understood your one-liner re doubling correctly, this crucial piece of information gives some important context to our chat above, specifically:
a) I would be more than happy to land safely at the other side of “the Gap” with my nominal capital intact
b) Whereas, you seem a tad concerned that you have got to the other side with a rainy day stash that is only double the size of the Pot you set off across “the Gap” with
Have I got this about correct?
If I have, isn’t it interesting how long it took for this basic mismatch in our expectations to emerge?
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By my reading, you pulled the plug about 5 years before I finally did – hence you have 5 years more lived experience, etc of ER.
>I would say your trajectory looks much more measured and competently arranged!
Maybe. I have spend an enormous number of hours over several years trying to educate myself on this topic. My wife has often said to me that one day I might wake up and realise just how much time I have wasted on this fundamentally insoluble problem. Ho hum!
I first became seriously interested in the idea of ER more than a decade ago. Around that time I correctly concluded – during a period when I was “between jobs” – and therefore able to dedicate some serious time to the subject – that it was too early. I then did some more learning only to “discover” that I had got the right answer previously, but, for all the wrong reasons. Ever since, I have been determined to try and not repeat that mistake. But we are all human, and therefore fallible and the OH is correct that this is not actually a solvable problem!
> I assume this is in nominal (non-inflation adjusted) £’s?
Yes. It was clarified to me because that ex-colleague started out with about twice my working capital, in our recent catch-up he has burned through about half, though he had an actuarially reduced pension from the get-go. I am nominally past what he started with in liquid asset networth, as marked to market beginning this month, with a decent amount in hand.
Possibly badly phrased, however. I did not double my money because I did earn sporadically in the early years, which defrayed some of my running costs. It’s didn’t add up to much, in total all I have earned since leaving work is a paltry fraction of what I earned in a year at work. Inflation also makes the addition a lot less significant, knock about 30% off for the depreciation.
I entered the Gap with a deferred DB pension (not computed at the time as part of networth), cash savings, some shares in an ISA and AVCs. The AVCs were largely 50:50 FTSE100:Global index. The nominal value of the AVCs were exactly a third of the nominal capital value of the DB pension, computed by the HMRC formula of 16 times the annual pension payable at NRA. I think at the time this factor was 16, it is 20 now. I targeted that value of a third, of course, to permit the full 25% PCLS to be taken tax-free when you add the AVC to the DB pension. And I had three (ok spend) to five (minimum spend) years cash. I even got some of that cash into NS&I ILSCs and I still have these, the emergency never came. I was going to run out of money at some time in the Gap, between three to five years, depending on how slowly I surrendered. At that stage I was going to have to draw the pension, sadly ahead of NRA, to be able to get the AVCs as a tax-free lump-sum cash. I was going to invest that to top up my perhaps 25% actuarially reduced pension.
You don’t have to spend very much time with a calculator to see that 33% of a DB pension invested at a generous SWR of 5% isn’t enough to make up a 25% actuarial reduction *. So my aim in that first two years was to surrender slowly, to stave off the evil day when I would have to draw the DB pension early. The answer to how much can you spend was always “as little as possible”. I was also shattered after working those three years. Spending wouldn’t have helped me much – the absence of pain was win enough.
Two years after I retired, Osborne changed everything. Naturally I saved £2880 p.a. into a SIPP from cash savings and initiated moving the AVC fund into the SIPP, to start running it out under the personal allowance, deferring the DB pension longer. I did not burn the entirety of my SIPP holdings in consumption – some of that was sold and transferred (as cash) to enable me to combine it with cash holdings to fill my ISA each year. So some of the nominal doubling is the transfer of capital from the SIPP. Almost all my investment holdings are in the ISA now. I did compute the AVCs as part of the initial networth, which when added to the cash savings and ISA has now a bit over doubled.
It is much more luck than it looks. I hurled a lot of money into the stock market in 2009 and the couple of years following. You see the trend in the NW chart from 2014 This year has been kind to me too, and TBH I can’t really bitch about the last few years. I happened to start my journey in 2009. My retirement journey started with a lot of capital tossed in the markets in the aftermath of the GFC and is now evaluated having dodged the near-death experience of this March. That’s a pretty straight bear-to-bull run, and this is why it looks good. Not all of that gain is real – the markets will give some of it up I am sure.
The GFC did make The Firm intensify running some of its old gits out of town. All this is situational. You can’t engineer a global financial crisis and stock market crash when you start trying to retire early 😉
> assumed annual spend did you set out over “the Gap” holding?
Three to five – my spend was exceptionally low in the last three years of work, because using salary sacrifice meant I was within spitting distance of minimum wage, and even from that I was saving into the (much lower at the time) ISA limits. The JRF told me that I was below the poverty line if measured by spending. Unlike the poor devils really living on the minimum wage, I had a largely discharged mortgage and the accumulated Stuff of 30 years of working life.
> I completely fail to understand why you are so very hard on yourself sometimes.
Remember that unlike you, I didn’t plan to retire early. I ran out of a toxifying workplace to save my mental and physical health. I knew that I probably didn’t have enough to clear the journey. That marks a fellow. Yes, I took chances, and yes they worked out. I am grateful for my good fortune. I am not proud of my skill. It could have gone the other way. Covid-14 would have bust my ass. In the flight analogy, I did not wait to fill the tank to the top at Idlewild because there was a fire on the runway behind me. So I had to coast and glide across the gap where opportunity presented itself. I was always mindful of Hemingway’s how did you go bankrupt? “Two ways. Gradually, then suddenly.” I played a weak hand well. But I had a lot of luck.
You have planned. You have contingency. I didn’t, and I still remember those times. I had a diligent guardian angel – who got me to apply for internal jobs just before the performance management KO which leveraged a legacy skill, buying me respite from that PM plus three years of saving hard tax-sheltered at the peak of my earning power. It gave me detachment enough to still save into the early post-2012 stock market. And the angel gave me the grace of Mrs Ermine, to slow the decline in the three years of working, and who was working herself through the period. I would have crashed and burned as a single mustelid. I have seen how apparent financial security can unravel on the turn of a sixpence. In January 2009 I was going to retire at 60. In April 2009 I was going to retire just as fast as I damn well could get enough to run with.
Looking back I underspent. Or did I? You say you would be happy to clear The Gap with your capital intact, effectively spending from the usufruct of your assets. Now take a look at the chart for VWRL. My first day of freedom was 1 July 2012. On the 2 July 2012 VWRL is listed on the LSE at £33. It is now nearly £73. More than twice as much. Doubling my nominal capital isn’t such a superlative achievement, though I am happy enough to come out of the gap and the Covid crash with a clean pair of heels. If you started five years later then VWRL was £60 from the get-go, it’s now £73. I have seen much more stormy weather and drama in the first part of my journey than you have. While it was tough going, that counts as good luck 😉
* I am aware that one should probably run down that capital somewhat, but 30 years doesn’t help you much. And I didn’t trust that SWR figure
Just to clarify – are you saying that you set off into “the Gap” with a Pot that was equivalent to some three to five years of assumed annual spending fully intending to, in due course, take a big hit on your DB for early access. Then, because George O changed the rules, you could tax efficiently [in a piece-wise manner] access your AVC’s that until then were locked up in your DB?
If this is the case what number doubled across “the Gap”?
> If this is the case what number doubled across “the Gap”?
Start = AVCs ( marked to market as of June 2012) + total cash + total ISA
End = total ISA marked to market as of start of this month +total cash
I don’t have a SIPP worth speaking of nowadays, it only has the min to keep it open. I had no SIPP at the start
Having re-read your last post, I think you do answer my clarification Q’s.
Note to self: must stop speed reading!
I think I might have just heard a loud clanging from the pennies dropping in the background behind my desk!
It never occurred to me that anybody would set out to cross “the Gap” with only enough fuel to make it about halfway – my bad? Suffice to say, a whole load of your other comments suddenly make much more sense to me. Context is indeed everything.
Apologies for being thick, and thanks for bearing with me.
I’m sure there is a psychological explanation for this which you will enlighten me about in due course.
Hat tip to you and, as our American cousins say, you have some cojones! Furthermore, you are indeed blessed with a very supportive backup team too.
FYI, my fuel tank when I set off across “the Gap” was full, plus I had a reserve tank marked inflation, and quite a few other [full] jerry cans strapped on too. I was never entirely happy about consuming 40% of this traversing “the Gap” but that is the price of safety – and I am still fully prepared to pay it if I have to. So, maybe it is really me that has a visceral fear of failure!
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So, in strictly relative terms & based on just VWRL (which is somewhat simplistic given you had other holdings) which is now worth approx. 2.2 times what it was when you took off. Coming to land having paid most of your passage with twice as much as at take off is IMO still a pretty good result.
Great chat over the last couple of days – which I, for one, really enjoyed
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> Coming to land having paid most of your passage with twice as much as at take off is IMO still a pretty good result.
Agreed, a weak hand played relatively well. And I did spaff a six-figure sum on the house upgrade a little while ago, which somewhat queered the pitch in the aim not to pay any tax on the last part of the AVC/SIPP. I appreciate the conversation too, and you never know, perhaps another desperate fifty-something in another financial crisis with fire at his back may see hope. This thread highlighted how much risk I took too. This is not yer Slow and Steady Portfolio chuntering along over 30 years. The more general takeaway for white-collar workers is save, slow and steadily, as if you were going to retire early, because one day you may have to.
> It never occurred to me that anybody would set out to cross “the Gap” with only enough fuel to make it about halfway – my bad?
Desperate people do desperate things 😉 I would have survived with the actuarially reduced pension, because I was mortgage and debt-free, but it would have been a long stretch to the SP before the sun rose over the wasteland. It might explain the relative hoarding of resources. Your plan is more organised, more competent. I do recognise this, though
> I have spend an enormous number of hours over several years trying to educate myself on this topic. My wife has often said to me that one day I might wake up and realise just how much time I have wasted on this fundamentally insoluble problem.
haha – I know it well. I have a big spreadsheet of what-iffery. It was accurate enough in the three year runout, because the inputs of salary and savings were definable. It was a load of bollocks once I left, drifting way off track in a couple of years. The longer range forecasts are laughable, pessimistic as hell. Too many variables are unknown – the sequence of investment returns, the actual spending. But for all that, it served me well. It anchored me long enough at work to get the critical amount of capital, and cleared me to take off at the earliest time there was a chance to make it. What happened after that was a question of luck and avoiding terminal mistakes. Compared to most writers I am unashamedly non-passive, but it didn’t ditch me across the gap.
> It was a load of bollocks once I left, drifting way off track in a couple of years. The longer range forecasts are laughable, pessimistic as hell.
Thanks for sharing this info. I may well be seeing similar signs and plan to keep the situation under review.
My summary of what I have understood from this long and very interesting chat is that, using the flight analogy:
a) shxt hit the fan – decided only sensible path was to retire early (which was a sudden and massive shock to the system)- saved like mad into Firms DB schemes AVC’s for c. 3 years (AVC scheme was IMO generous as it was available with salary sacrifice);
b) took off across “the Gap” with enough fuel, to hand, to barely make it halfway; refuelling to complete the passage would require drawing your Firms DB pension (inc. AVC’s I assume) early with a 25% hit due to ERF’s;
c) two years into the flight George O’s changes allowed you to access your AVC’s early and, crucially, separately from the rest of the Firms DB pension
d) stocks good run since GFC continued; albeit with the odd bit of turbulence and absolutely no guarantee that this run would be sustained for so long
e) discovered that you could just about get by with less than initially you had forecast
f) somewhere in here moved home and acquired more house
g) landed somewhat shaken up, but safely, at other side of “the Gap”
h) and now:
i) are drawing a minimally actuarially reduced Firms DB scheme (minus the AVC’s) which has pretty generous inflation indexing and about covers a good wodge of your essential outgoings/spending – if you like this is your Floor
j) will be entitled to full state pension(s) in due course- which will add some inflation linked carpeting to your Floor
k) have a stash for everything else that is probably a double digit multiple of your current essential outgoings/spending
Hard won – but a nice place to be just before you turn into your seventh decade!
And, by way of comparison, SWR fans posit that all you need is a Pot of 25*essential outgoings/spending
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A succinct summary of all my waffle 😉 To add some colour
> saved like mad into Firms DB schemes AVC’s for c. 3 years (AVC scheme was IMO generous as it was available with salary sacrifice);
The value my spreadsheet added in that first three years was showing just how valuable saving 40% tax was, and below that, 32% tax and NI.
> discovered that you could just about get by with less than initially you had forecast
Particularly in the early days. But even now, I don’t spend up to the pension on day-to-day running. Although this year is odd – I have bought more hobby Stuff and not so much holiday spending. More shopping, less tickets and restaurants…
The errors in spreadsheet forecasts were twofold – overestimating spending and underestimating returns. I suspect my fearful younger self assumed NO investment return, not even the 4-5% predicated in SWR. Across eight years that adds up.
> And, by way of comparison, SWR fans posit that all you need is a Pot of 25*essential outgoings/spending
Strictly speaking that should be 25 times desired spending. There is also an argument that for the UK it is closer to 3%, taking you to 33 times. It’s living that sort of thing that I found hard. You see horrific variations (25* scaled, indeed) in networth. You have to be a particularly detached and intellectual sort of person to be able to handle that. Sure, you can do your Guyton-Klinger rules, but that comes with a different problem. “Can we go on that holiday/buy a new car/whatever big spend your working self would have saved for five years to do this year?”
“Buggered if I know, I’ll get back to you in four years”
It’s not surprising that investment trusts are popular with greybeards – and look at the amount of stick The Greybeard took in that article from passive purists in the comments. Having said that, ITs were most of what I shorted earlier this year, the premium/discount mechanism offered opportunities, but I’d say if Greybeard stuck with his holdings it probably came/will come good for him.
A HYP as in the case of my colleague, not so much, though he seems to have a very limited awareness of the need for sector diversification. A three year cash buffer will probably see you right, but drawing it down doesn’t feel good.
For anyone wondering why you probably need such a stash, here is a good starter for ten about some of the hazards that may be waiting just outside the airfield to pounce on the recently arrived E:
> It’s not surprising that investment trusts are popular with greybeards – and look at the amount of stick The Greybeard took in that article from passive purists in the comments. Having said that, ITs were most of what I shorted earlier this year, the premium/discount mechanism offered opportunities, but I’d say if Greybeard stuck with his holdings it probably came/will come good for him.
> A HYP as in the case of my colleague, not so much, though he seems to have a very limited awareness of the need for sector diversification. A three year cash buffer will probably see you right, but drawing it down doesn’t feel good.
You might find the following post interesting, especially seeing as GM started the RE part of his journey about a year and a half after you: https://gettingminted.com/holding-my-own/
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Impressive – and I admire his balls of steel. I like to think I would see a 41% retrenchment as an opportunity, but I am not so sure. I have never experienced such a suckout, other than in the dotcom bust, where I did not cover myself in glory.
He’s had much more experience as an investor if he started in 1990. I was drinking beer to drown the loss on the house and spitting bricks about Britain’s favourite asset class being a weapon of wealth destruction and that I would never, ever, come up for air again after that. I think then I had three hundred quid’s worth of BT shares bought from Margaret Thatcher and that was about it in terms of Ermine equity holdings. This was not a seasoned investor doing the Slow and Steady portfolio.
Even in my HYP days I thought I was doing well to win a 5% income from shares. And I did not realise that you get EM income ITs. Sometimes I do wonder if my heavy allocation to VWRL, the HYP, and L&G DevWorldexUK lacks non Dev world balance.
I have (probably, depending on the scale) saved a bit more, but my journey is much more noisy. I was giving up networth from 2015 to 2019 in terms of running down cash and also sinking some money in the house. But this year has been very kind to me, taking the PCLS and significantly increasing it.
GM’s chart is much, much more controlled and monotonic than mine. Though if I didn’t have access to or any representation of the capital represented in the DB pension then the slow surrender from 2015 isn’t that surprising, compared to a journey where you slowly and steadily accrete a DC capital base.
I am grateful for the decent DB pension, because it means now there are certain retirement problems I just don’t have. But the relative inflexibility made for a much rougher early retirement experience, with some pretty bad psychological symbolism. Not only do I start the journey damaged and without enough to reach t’other side without some Micawber-esque Something turning up, but to watch the slow networth surrender, falling back, and falling back and falling back in the hope of an invisible promise cutting in to catch me as I fall was not a huge amount of fun. I was fortunate in the early days that the value of my ISAs and investment gain on the redundancy capital lifted my networth faster than my outgoings through to 2015 before I started to lose the fight/investment returns started to drop. It might explain why I am more paranoid than say GM, because I have seen the other side of the high-water mark*, and that sort of decline looks and feels bad 😉
GM has yet to experience that inflection point, from the looks of the assets chart. They’ve seen market-related retrenchments, but not the turning point that marks the switch from accumulation to decumulation in a pure DC based capital base, unless drawdown is less than the return on capital.
*this is now not true because of the fillip of this year and the PCLS. I wasn’t to know – all I saw was a four year fall in NW, and much as head can tell yourself it’s OK, you will easily make NRA which will arrest the fall watching the altimeter turning widdershins year on year on year feels bad.
I spent many years teaching in universities. At one point my department felt under some pressure from the university to indulge in a bit of grade inflation, and did so. A few years later in a staff meeting I alluded to the episode: my colleagues stoutly denied that any such thing had happened.
One mechanism was to reduce the weight given to closed-book examinations and assign more weight to “continuous assessment”. Another was to simplify the questions in the closed-book exams.
When I was tidying my office before I retired a colleague walked in and had a look at my fresher maths and physics lecture notes and exercises, as I was about t0 consign them to a wheelie bin. “Ha, ha”, said he, “too hard for today’s freshers!”
It’s beyond me how the hell can you be a physicist when field theory is deferred to second year and classed as an option.
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At Imperial we also did some field theory in the first year. And it wasn’t an option 😉
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Hah hah yes. Physics first year at Imperial in the early 1980s was an awakening for me. I remember being told in early lectures that the maths I had from A level would not be adequate and we would be learning the real stuff. It was hard, as yes you needed that maths for the field theory. I got an A in my maths at A level but I always thought that A was easily won even though I did go to a decent Cambridge sixth form college. I had a tutor group peer who worked worked his socks off compared to me, I was convinced he would get a first but he came in the same as me with a 2:1. Needless to say I was very happy with a 2:1 from Imperial and I enjoyed it was well.
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This has been an interesting thread to read so thank you.
The DB pension really is a huge benefit. Beyond the ravages of inflation, which over your (and so certainly mine) life span could well be coming, you have a floor to your income that provides much psychological benefit. I cannot think of many scenarios where I would be willing to trade a higher income for less indexation protection. The downside risk to inflation is very substantial and the upside to low inflation – well not so much. And given no one under the age of 50 can really remind out of control cost of living inflation – note I believe we are seeing asset price inflation (not that this is innovative thinking) – it’s quite feasible we are due a ready reckoning. equally feasible not but nobody knows is the point. I appreciate acquiring a annuity is open to all but they are hugely expensive these days given the low yields – 1.75% at 55 – there really is a great example of asset price inflation – it is also possible a better guide as to what is the true SWR these days but who knows for sure.
Getting Minted’s website, I have found illuminating (thank you if he / she is reading). You can always learn something from peoples experiences. I think reaching for yield is natural but mistaken so I am this guy’s camp –
Equally, passive investing has been easier than its ever been imo this last decade, you buy the index, it only ever goes up and govts are on your side to actively reduce volatility and pump things up every time there’s a whole in the balloon like a pesky thing called CVID. What could go wrong….well a lot eventually as we all know. I wonder how loudly people will be praising buying the index were we to see a decade of the market doing nothing / gentle declines. I’m a long term passive investor as expect to stay that way – I just know that this decade has been easier than most. Also I really do think valuation matters, of course it does, there’s lots of data to show your returns are hugely governed by the multiple at which you buy in to. The point is whether that data is something that you can usefully use to improve your returns. The research shows not generally speaking although some people do. Me, whilst I’m in global equities, I have a passive tilting to the UK, god knows why, the constituents are poor mostly but the multiple is cheap and it feeds human nature’s inability not to fiddle.
Following the plane analogy further, I’m roughly 15-20 years behind you on the journey but dare I say it, lucky enough to be flying at a pretty high altitude. I’ve been in a high paying career, saved voraciously and benefitted from the market. On paper enough to switch off the engines and glide all the way into the destination whilst I indulge myself in avoiding the boredom of flying but the destination is a long long way away and my few passengers in the back of the plane will not thank me if in ten years time I say actually we’re a bit short, can you sort yourselves out with a parachute. Equally I’m expecting some turbulence ahead (it would be silly not to) and so wouldn’t it be a good idea to keep the engines running. Mind you, I’m also missing out on some of the fun the passengers are having at the back of the plane. It’s a high quality problem to have I admit. At the moment I’m pretty sanguine about the market direction but if I was no longer earning there is no way I’d be comfortable without at least a substantial number of years in cash reserves – jerry cans as Al Cam nicely put it. Who cares whether that’s inefficient – there is no price you can put on the ability to sleep at night soundly.
IMO, the greatest benefit of a DB scheme is that it significantly reduces or even totally removes longevity risk. Sure there are a hundred and one caveats around this assertion e.g.: strength of the schemes [employers] covenant, your spending, inflation indexation, spousal benefits, etc – but to a first order this is the case. The next key step may be to maximise the amount of your foreseen consumption in retirement that is covered by the DB/SP combo. This may require you to cross “the Gap” between pulling the plug and drawing your “optimized” DB pension. This thread is essentially exploring “the Gap” in some more detail.
Not everybody will try/or even need to cross “the Gap”. For example, some people may work until their schemes NRA, some people may not have a DB pension, …
Incidentally, there is rather a lot of related/relevant academic literature – from of all places the US. The analogous American situation is around strategies to maximise social security (SS) benefit – which usually involves delaying commencement to around age 70. This is typically some 5 to 10 years after US folks leave the workforce, hence “the Gap”.
I first found GM’s site just over a year ago , and I understand he has no recourse to a DB pension. Thus, apart from SP benefits his Gap runs until he and his spouse expire – which could be a rather long time.
I too find GM’s site interesting and have had several useful back & forth chats with him via his site over the last year or so. To my eyes his approach is rather risky – but he may well be correct – nobody can foretell this. I personally lean towards the Floor & Upside approach – even for crossing the Gap – until my DB takes effectively becomes the Floor. By way of contrast with GM, my Upside is less risky than his overall Pot! I remain curious.
In terms of becoming interested in RE and planning for it, I think you started a few years before me – this already gives you some earlier insights. In terms of you actually getting to RE, ideally, you will get there when it is right for you & your family or, possibly – and indeed like rather a lot of folks – when the prevailing circumstances force your hand. The latter happened to E, my pulling the plug was a bit more of my choosing – but my path to that point was definitely not as originally foreseen. Shxt happens and things change.
If our chat around the houses about “the Gap” has helped you (or anyone else) in anyway then that is just great.
P.S. a couple of specific points if I may:
1) do you have any entitlement to a pension from a DB scheme in due course?
2) whilst intellectually I entirely share your sentiment “Who cares whether that’s inefficient – there is no price you can put on the ability to sleep at night soundly.” I have seen enough during my time in “the Gap” to assert it is a very different thing to actually watch money seemingly drift away – even when you are sleeping well – once you stop having an income. This is just one example of why I particularly value what I call other folks “lived experience”.
I have no DB pension beyond SP. Well stocked SIPP although who knows how things play out to drawing. One thing is for sure, putting it into index linked gilts at this age with negative YTM makes no sense even if equity valuations are elevated. I agree with your second point entirely of course. My point was that if I did go down that route, I would want to make sure I had many years of cash reserves that I could use to smooth the up’s and down’s in dividend income or >say 50% market declines.
The psychological challenges of withdrawing from a portfolio of say 70% equities with its inherent volatility is not to be underestimated. I recall reading a US investing type book in around 2008 and laughing at the portfolio modelled returns as the 8 years from 1999, when I started out, had been so shocking. Of course compared to this decade, all looks good – nothing to see here. Hence why a lot of people turn to yield or ‘dividend investing’ as if that is the magic panacea without realising they are actually often taking on more risk not less given sector concentration etc – I also travelled that road for a while. I am extremely sceptical of those who suggest investing in companies to obtain 4% dividend yield avoids sequence of returns and believe this years events is bearing that out. I also am wary of castigating those who follow that route too much as it is an indirect proxy for value investing, which is due a mean reversion and hence my overweighting to the UK to feed the beast.
I could not do what GM is doing unless I had no choice but I know enough to know not to say it is the wrong approach per se, it’s just not the right approach for me. I am fairly sure I will just continue for a while until I am exited by work not the other way around. I’m in a not entirely dis-similar position to ZX…once you are out, there’s unlikely to be any coming back. Winter is coming and hence I might as well keep making hay whilst it’s not raining! Appreciate the feedback.
To Seeking FIRE:
If handled correctly and with the correct mindset “being exited by work” can be a blessing in disguise and a financial opportunity. Based on my guesstimate of your age and the comments you make above I suspect you have options and such an outcome would be far from disastrous. Having said that, what may not have occurred to you yet is that what you perceive as your core competencies and/or skills will be far from the only things that you have to offer. I mentioned above that I had a period between jobs – which, with the benefit of hindsight, was one of the best things that ever happened to me. The initial exit was a tad rough. However, I deliberately took quite a while out to get my shxt together and then, remarkably easily, found another role. The new job provided me with lots of opportunity to use skills/experience that I had in abundance but had never personally particularly valued. Furthermore, being free from the baggage of a near lifetime of workplace politics, and armed with the knowledge that my wage slave days were all but over, etc was nice too. All of these factors made the new job rather rewarding.
But as you say, each to their own.
To Seeking Fire:
> I appreciate acquiring a annuity is open to all but they are hugely expensive these days given the low yields
> I have no DB pension beyond SP
Are you familiar with the ideas described at Section 10 (Funded Ratio Management) at: https://www.challenger.com.au/-/media/challenger/documents/thought-leadership/The-Yin-And-Yang.pdf
If not, then this approach may provide you with some idea of how to view your situation.
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Another UK-focussed source of IMO useful: info, ideas, opinions, etc is Ned Cazalet’s 2014 homage to the Beatles, see, for example:
Click to access cazalet-consulting-when-im-sixty-four.pdf
I found his explanation of sequence effect memorable – but that probably just shows my age as I can remember seeing that sketch first time around
Not sure what happened to the link I gave above – which I have repeated below.
If the link is till AWOL below just search for Cazalet when i’m sixty four
Click to access cazalet-consulting-when-im-sixty-four.pdf
That part 10 is an example of how my relative was advised. Even as I started my journey in my early 50s, I looked at the cost of annuities as if i were 60, 70, and they get a lot cheaper as you get older.
This is easier, of course, for the childfree – parents are always fearful that the world we have created is hostile to the interests of their offspring, which makes them want to featherbed them with a legacy. That is their cross to bear, I have no answer to that, buying an annuity destroys that part of your legacy. But if you can surrender some of the capital into an annuity at a later stage that can help in the way that section 10 says.
We should not lose sight of the fact that the State Pension is an annuity. Most people will have maxed theirs, but early retirees should take steps to make sure their SP is maxed by the time they reach SPA, or have a damn good reason why not IMO.
The FI/RE movement despises financial advice with a vengeance, and yet from what I have seen of the IFA looking after my relative’s finances, I would have no hesitation in staging my finances to include financial advice:
Ermine-managed to about the time I am 70, with a gradual shift to Mrs Ermine. She is 10 years younger, so she needs to know enough of the issues to do this for herself. Possibly pay for an IFA review at this stage – a one off hit, to ask if there is anything we are missing.
Should I get to 80, and she get to 70, then perhaps use IFA management – this will be largely Mrs Ermine’s call. Yes, the aggregate IFA fees do add up over time, which is presumably why there is so much opprobrium towards IFAs in the FI/RE space. But the facts change as you get older.
I did consider managing that relative’s finances myself, along the lines of Getting Minted, but only for about five minutes. The responsibility scared the living shit out of me. There’s an obvious potential conflict of interest, for starters, and it is not my values to do that. But more importantly, if I cocked up my own retirement, I could in theory go back to work, even if it is minimum wage. They can’t. The whole later life investing scene does my nut in. There are options that we don’t even talk about in the PF scene, the way you take the output of an annuity matters for tax purposes and can be tax-free. Subtle wrinkles abound. Dearieme does have a point. People in financial forums do imagine they will stay 60 for ever. They won’t. Even I am shifting, perhaps belatedly, away from a young pup’s balls-deep in equities to a more conservative spread. I want to think less about finance in the years to come, because there is more to life that FI/RE. I had to give it that much attention over the last 10 years, because it was apparent that I didn’t really start out with enough to bridge an 8 year gap.
I am toying with a post on the symbolism of early retirement. The FI/RE movement has a lot of high-fliers who are massively invested in their work as self-image – Arthur Brooks article shows you guys are badly exposed to that outcome. I can almost forgive Brooks his dreadful abuse of the Carl Jung quote (tl;dr – Jung wasn’t talking about your career arc, he was talking about overcoming the Shadow in the process of individuation, though it served Brooks’ purposes as metaphor). The FT is tolling the bell for many fifty-somethings of you high-fliers – the wizened Ermine perhaps has a role as Ancient Mariner to light a spark of one way to make the psychological journey. Like the Wedding-guest, you will not listen, until halfway across the journey you come to a crisis point and must stake all on taking your heart with you or surrendering it to the storm. FI/RE s not just about the money.
> That part 10 is an example of how my relative was advised.
The book by Noonan and Smith is IMO quite good but has a lot of stuff about embedding the ideas into a advisors practice. I found these topics reasonably interesting but most folks might glaze over a bit. The central ideas are expanded fairly well in the book – including how to measure fundedness, the basics for calculating an actuarially fair priced annuity, and managing to what they call the Annuity hurdle. The latter point is essentially a lift of the paper Modern Portfolio Decumulation: A new strategy for managing retirement income by Richard Fullmer.
> would have no hesitation in staging my finances to include financial advice:
This is what Dirk Cotton refers to as frailty risk. It is a real thing – and there is even some evidence that such behaviour manifests itself in financial “mistakes” (including over-confidence in own abilities) before it is obvious in other areas. Search, for example: Finke and Old Age and the decline in financial literacy
> I am toying with a post on the symbolism of early retirement.
Sound like a great idea. A lot of the more mature US PF sites quickly move away from dosh towards well-being, philosophy, building dog kennels, etc once the writer has achieved RE. I can see no reason why that should not be the case in the UK too. As to whether such a move gains or loses readers I cannot tell, but this link may provide food for thought:
And in any case you may not really care about foot fall!?!
Hesitant to join in with the ‘grade inflation’ ‘better in my day’ fun and games, but I think there is an important point about the purpose of any public exam and norm versus criterion referencing that we constantly mix up.
If the purpose of A-levels is de facto a national entrance exam for universities, then by all means make them as fiendish as you like and just release the raw results. Grades add nothing. The system could perhaps be improved by Universities using a draft system like American Football to spread the outstanding talent around, but essentially everyone would be able to see the results of the same exam on the same day for all applicants.
The problem is the same exam is supposed to tell employers about the capabilities of the candidates, which it doesn’t if it is norm referenced. For that job you want criterion referencing, because it does not (or should not) matter how they performed against their peer group in a sudden death one-day test of memory, but what they can actually do. Proper criterion referenced qualification would be a much better tool for employers than the norm referencing (still capable of being gamed, but I would argue less easily for criterion referencing because you can show the actual evidence). It would address the perennial complaints that school-leavers are innumerate, illiterate, poor communicators, poor team players, or whatever the current “Eee when I were a lad” issues are.
When I was recruiting for a multinational, the thing I and my colleagues were most interested in were ability to think, ability to communicate that thinking, a degree of bloody-mindedness (read as perseverance), openness to new ideas, ability to work with other people and ‘T-shaped’ skills (proven depth in at least one area, with evidence of a broad range of other interests). A-level grades and Bachelor level degrees were poor indicators of the characteristics we were looking for. PhDs were better, not because of the depth of specialisation, but because as my boss remarked: “you know they have looked into the abyss, suffered and survived”.
I think we have an education and examination system that can’t make up its mind what it is for, and that is the root of the problems we have.
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I take the point that there are two constituencies that use exam results as a proxy for suitability. In the past employers took/had to take more responsibility for their school leaver intake, presumably because they weren’t so damned focused on academic ability. Modern employers have become lazy – beats me why since the costs of taking on the wrong person are just as tough if not tougher now. Universities and FE also use this, it is more suited to their requirements, because they are in the academic training biz. When I went to university 11% of school leavers went, now it is a lot more, so the focus on the academic university entrance side of A levels is that much more. That looks like a strong argument for norm referencing to me. But then I would say that, I was on the right side of the norm so I had a good experience of that, and I accept the obvious bias!
A question I’ve never understood from advocates of criterion referencing is the frequently cited challenge that one year might be more able than another which is unfair on the others. Apart from the obvious riposte that their way seems to indicate every single year is more able than previous years, the worry seems ill-conceived. About 250,000 people take A levels every year. I find it hard to believe that one year’s cohort differs hugely from the previous year in academic ability, when averaged over that sort of number. The spread in academic ability isn’t stupendous, if it follows that of IQ then the standard deviation is about 15% of the mean, and a quarter of a million samples should be enough to reduce variations in the cohort mean – the standard error in the derived mean is less than a tenth of a percent if I computed it right. This relatively stable divisor would better track out variations in the exam difficulty year to year. There are a lot fewer questions on an exam paper and it seems a given to me that variations in exam difficulty will be much worse than than variations in cohort average ability.
Criterion referencing seems to be devilishly hard to get right. It’s hard to set questions for, and it’s hard to achieve enough spread in the question bank for to get enough spread across ability ranges. It’s hard enough when you are testing a physical ability/aptitude where you don’t need to vary the test year to year, eg the driving test. Doing it where you do have to change the test seems a really tough game. Norm referencing roughly tracks exam difficulty variance out year on year, and you didn’t get the carping about grade inflation that you refer to, because it didn’t happen. The temptation to inch criterion referenced standards down will always be there, and it will be a cumulative ratchet effect. Paul Newton’s Cambridge paper I referred to spent a long and erudite few pages asserting it didn’t happen, couldn’t have happened, but a moment’s inspection of the A level pass chart in this article shows that something happened in the mid 1980s and it kept on happening for 25 years.
I am (nearly) of genuine retirement age. Four decades have passed since I took my A levels. When I work with people to solve problems, I do not see convincing dramatic evidence of the Flynn Effect as implied by that increase in A grades. I am not saying I am cleverer than young folk – sure, I have more experience and a less genuinely chaotic life for all the usual reasons which gives me an edge in some areas. I wasn’t that terrific at getting up in the morning on time when I was 20 either 😉 They have more fire, less cynicism, an openness to new thinking and a wider solution search space that gives them an edge in many other areas, and if it involves a mobile phone I am deadweight. But I do not struggle to keep up. Whereas the spread in A level grades would make you think that were the case. I got two As, a B and a D. That’s the equivalent of dimwitted roadkill in today’s environment. Those lousy A level results were the equivalent of somewhere in the upper 10% of academic ability in those days. Something has gone wrong with A levels.
I agree with much of what you say, but for me, the core problem with norm referencing is teaching to the test. The curse of modern education. I am also a long way from my A-levels (nearer 50 years than 40!), but I watched my son go through his GCSE and A-level courses and was appalled at the narrowness of approach. A combination of A-levels as the entry exam to your future (fail at your peril) and school league tables (teachers and headteachers fail at your peril), has been very damaging. The focus on exam passing at all costs severely restricts the scope for learning and experimentation. Courtesy of Gove and Cummings, Gradgrind rules our schools. I think many young people today are bright, smart and interesting in spite of the education system, not because of it.
This is not entirely new. When teaching masters courses 35 years ago, many of the students would ask when any new topic was introduced “is this examinable?”. If the answer was “no, but it is interesting”, they would instantly switch off. That was some of the population then, now it is pretty much standard from what I can see and has infected our schools.
I suspect that grade problem reflects something real. If the teachers and pupils have been doing what the system asked them to do over the years – get better and better at passing exams – then we would expect the raw marks to rise over time and for the spread of results to reduce (assuming exams of equal difficulty). If you use a grading scheme with norm referencing, then it seems to me that the allocation of grades, particularly at the boundaries, would start to become fairly random and not necessarily a measure of the student’s capabilities. This what seems to have happened with this year’s algorithm mess up. By ignoring (more or less) the centre awarded grade, and making major use of the rank ordering of students, you get the mess of people with good performance across their courses suddenly dropping a couple of grades or moving from a good pass to U. That is what norm referencing as practised in the UK has done. I think the mess this year has revealed how the system is designed to work.
What frustrates me is that exams clearly measure something about the candidate’s capability in rote learning, and stress and time management, but I am unconvinced that they reveal anything about a candidate’s capabilities either intellectual or in their ability to do something interesting and useful in the examined subject.
Thinking about this discussion a bit more (I do have other things to do, really!) it dawned on me that we only very lightly touched on possibly the biggest risk on arrival at the other side of “the Gap”. That is, the myriad of potential threats to the security of your DB pension. Dirk Cottons starter for ten list refers to this as “Employer Insolvency Risk”. Without wishing to dwell on the details of these threats (inc probable underlying causes, likelihood, etc) what occurred to me was that having travelled across “the Gap” you have gathered some very useful insights as to how, or even if, you (and yours) could cope with this scenario. Given your relatively high dependence on your DB pension scheme income – which is also probably the case for lots of other folks lucky enough to have a DB scheme – this would be pretty close to a doomsday scenario for the majority. However, you at least now have a pretty good idea of how things would be in this situation. Forewarned being forearmed and practice making ….. and all that. And does this suggest a mandated “the Gap” experience for all rather than the usual early life gap year to find yourself or similar. What do you reckon?
> to how, or even if, you (and yours) could cope with this scenario.
I am specifically less concerned than others because of the history of The Firm, which meant HMG is on the hook for the pension scheme liability if The Firm goes titsup.
But if that weren’t the case, in not too long a time I would be over the NRA and the 90% rate of the PPF (which doesn’t apply in my case) would fall away. If it managed to last OK till SPA then the SP + the investment capital would be enough to live on, though in somewhat straitened circumstances comparatively.
The main hazard I perceive is of inflation overtopping the 5% indexation cap. I don’t really have a terrific answer to that, other than VWRL and gold. I am not sure I want to hold gold for over 5 years. There is an argument that when I receive the SP my risk profile could tolerate returning to 100% equities, I have time enough to think about that.
This is something I worried about, although since I have reached SRA, I should in principle face no compensation cap. Still worry about the whole PPF going tits up under the weight of defaults.
My plan, for what it is worth, was to see the risk of both DB pensions (one private one public sector) going bad together as unlikely and to assume the smaller (public sector) was good. Then apply the compensation cap to the private sector one. Add them up with State Pension, look at size of my investment portfolio and breathe a sigh of relief. It would hurt, but it wouldn’t kill.
An interesting thing to think about is the compensation cap has recently been ruled illegal under age discrimination laws https://www.clydeco.com/en/insights/2020/07/ppf-compensation-cap-ruled-unlawful-by-recent-cour. Doubt if that is the end of the story, but interesting nevertheless.
Of course. But then again HMG has never been known to change its mind (sorry the law) as it sees fit, especially around pensions. The outcry in your DB’s case would surely be less than if they set about butchering the SP – which IMO they did to an extent in 2016 – but apparently nobody noticed as they buried the changes in complexity.
FWIW , IMO, the biggest issue with the PPF is not the 10% haircut for folks under the schemes NRA but actually that the indexation it pays is less than the legal minimum, yes really less than the legal minimum. And, if the PPF is struggling, it can ask HMG for permission to further cut the benefits it pays out. And, did you know that the PPF itself is not guaranteed by HMG or anybody else for that matter. On the other hand, there is a possibility, as I understand it, that in due course the PPF could become rather wealthy!
I hear you about inflation and I am old enough to remember the 70’s too. As I mentioned somewhere before, most DB schemes have it within their rules that they can provide discretionary increases over & above those “contracted”. And, from what I understand, provided the firms were doing OK, some did do this in the past. But, past performance ….
Another main risk to DB pensioned folks is sometimes around the spousal/family cover under various scenarios.
Re returning t0 100% E’s, FYI: Pfau, Kitces et all refer to this as a post retirement rising equity glide path.
In all discussions about Equities I always try to remember that there is no law of nature that says equities must always rise over any time scale.
You are completely correct re that court case. And, I agree this issue still has a way to go. IIRC, the PPF haircut was originally introduced as something of a temporary measure. But we all [should] know about HMG and temporary measures – my favourite being income tax that was introduced in 1799 by the then Prime Minister William Pitt the Younger, as a temporary measure to cover the cost of the Napoleonic Wars.
I also agree that your logic re the respective security of your two DB schemes reflects the current situation. However, at some point the penny will drop with the tax paying public and they will finally wake up if/when they are having their pensions slashed and they are still paying for others (public servants) whose pensions are not being cut. Now what was that about we are all in this together. Having said that – MP’s, no matter how daft they often seem to be – as a group are very unlikely to be the first Turkeys in history to vote for Xmas.
Al Cam – Many thanks for your link to Ying and Yang. I read with interest, it was similar to other documents I have read by Wade but v interesting none the less. I agree I have a DB pension through 2 full SP (partner and I), which today is circa £19k a year that is quite useful. As you say above employer risk here is an issue given the govt is at liberty to take this away or adjust at any time subject only to the constraints of civil unrest! With a very long time frame, I fall into the more probabilistic camp (noting the inherent limitations of this) as the safety first camp is broadly investing your savings into a fiat currency. If I had say a 20 – 30 year timeframe (like the parents in law) then probably fine, with a 60 year timeframe, that feels a big risk and global equities seems a safer route to preserving capital than index linked gilts or tips etc. As it stand today I suspect I will probably follow your route with a floor and upside as I hit closer to normal retirement age (which is a loooog way away !), which the state pension will hopefully form to some degree a component of that.
To Seeking Fire:
No problem. The Ned Cazalet paper is good too.
> As it stand today I suspect I will probably follow your route with a floor and upside as I hit closer to normal retirement age (which is a loooog way away !), which the state pension will hopefully form to some degree a component of that.
Notwithstanding that things do change, and surprisingly quickly/often too, I would suggest that if you were to invest in one text book you purchase Retirement Portfolios by M Zwecher. It remains my go to text for an awful lot of things, and there is virtually no discussion of F&U details in the UK PF blogs. It is not the easiest read but, IMO, it is packed full of good stuff. Included in the book are chapters about how to transition from your acquisition portfolio to a floor and upside stance. There may be some additional opportunities if you plan the cutover over a long enough period – albeit that rates are working against you currently – but that might not last forever. The book is, again IMO, by far and away the most complete treatment of the approach – but is not for the casual reader. It took my a few reads to get what it was on about in certain places, but it rarely fails to have the “theoretical” answers to most of my Q’s.
I was interested to find mention of my blog in this discussion on 26 August (thanks Al Cam). It’s interesting to get feedback on my approach of relying on the natural yield of investment trusts that focus on income to fund draw down. When it is described as “rather risky” (Al Cam) or “I admire his balls of steel” (Ermine) or “I could not do what GM is doing” (Seeking Fire) it suggests to me that I have a high tolerance of risk. Hopefully I have a high enough capacity for risk. So far so good.
I can confirm that I started investing early in 1986 and stepped out of the workplace at the end of 2013. The graph on the top right of my blog home page https://gettingminted.com/ tracks my assets at each 31 December from a value of 0 in 1985 to 123 in 2019, via 1 in 1990, and 100 in 2013. So, although I started investing five years earlier, I only had 1% of my “retirement stash” by 1990. I experienced the crash of 1987 with not much skin in the game. I will update the graph at the end of this momentous year but I am currently at 111. Using only the year end value in that graph takes a lot of the mid-year drama out of the graph. That may support looking at things less often if you are content with your approach.
The capital graph in my latest blog post has the month end values since 31 December 2013 with a low of 87 and a high of 123 and with nineteen of the eight-one month’s being below my starting point of 100. I agree with Ermine that these are market retrenchments and not yet an inevitable decumulation. The 41% year to date retrenchment as at 19 March reduced the capital from 123 to 71 but was not sustained, although it may yet be revisited.
I agree that I have been “reaching for yield” (Seeking Fire) but I now feel I have enough yield to start reaching for growth, unless I am hit by significant dividend cuts.
I did also use my approach for an elderly relative for seven years https://gettingminted.com/investing-for-the-tenth-decade/ with a reasonable result, I think. These results would look less good this year so I can understand why Ermine balked at using my approach for his relative.
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Has your friend with the DB Pension considered taking its current value in a lump sum? The value should be very high right now since interest rates are so low (they payor needs more principal to reach the eventual defined benefit when expected future returns are lower). The kids at Millennial Revolution wrote about this recently.
Or maybe there’s an unbeatable feeling of safety in having someone else guarantee you an income at that point.