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Weekend reading: It takes a lot of money to replace a salary

Weekend reading

Good reads from around the Web.

The last time I featured Under The Money Tree as my sporadic blog post of the week, it was because I was taken with the neat way he’d tabulated just how much money was needed as capital to generate an income to pay various household bills.

Now he’s done it again, except this time his table shows the loot you’d require to generate an income to match various earnings brackets assuming a yield of 4.5%, and also how many ISAs you’d need to fill:

earning-power-capital

He Who Dwells Beneath The Canopy of Currency notes:

Upon first glance it might seem quite daunting that you have to save the equivalent of 31 NISA allowances in order to produce a tax free income equal to the take home pay of the average UK salary (£1,748 per month).

It’s no lie that filling ISAs for 31 years to achieve the average UK wage doesn’t sound like a fast track way to financial independence.

Fear not, various things will speed it up. Check out the full post for five of them.

In making the intangible tangible, this table is such a cool idea. Okay, it’s essentially the same idea as last time, but then personal finance is a bit like Teletubbies or In The Night Garden – repetition is effective and reassuring, and there’s not much that’s new to be said anyway.

The same can be said of investing, as I’m sure ever-repetitive Monevator exemplifies (“Yes, okay, index funds, we get it” shout the crowds) but I’ve still gathered three dozen exciting fresh articles for you to peruse below.

Enjoy!

p.s. Thanks to the kind readers who noticed that the ECB did embark on QE this week and European markets did rise in response – as QE had actually NOT been fully priced in, and who then wrote in to congratulate me on speculating as much last week. Alas I don’t intend making a habit of the Mystic Meg bit here, especially not on the back of a week’s coin toss coming good. Now if I had a fund to sell via lavish advertisements in the Sunday papers, that’d be a different kettle of fish…

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

  • The joys of mortgage freedom – Mr Money Mustache
  • Discussing the escape plan with your significant other – T.E.A.
  • More joys: On jacking in the office job – Dividend Mantra
  • What doesn’t seem like work to you? – Paul Graham
  • Apple’s App Store is now bigger than Hollywood – Asymco

Product of the week: ThisIsMoney has calculated that pensioner bonds could be sold out by the end of January, if OAPs keep gobbling them up like Mr Creosote at an All You Can Eat buffet (and why wouldn’t they?) No wonder there have been problems.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Carl Richards: Think exposure as well as risk – NY Times
  • Why we can’t learn much from the ‘Yale model’ – Morningstar
  • Kroijer: 3 mistakes people make [Video, bit old]Morningstar

Active investing

  • Manager ‘truly sorry’ for blowing up his hedge fund – CNBC
  • Housel: Are US stocks dirt cheap or ludicrously expensive? – Motley Fool US
  • Roth: Why most FX traders lose money – AARP [via Mike]
  • Time to buy the 10 most hated US stocks? – MarketWatch
  • Woodford’s successor is buying his bête noire, BP – Telegraph
  • Oil issues provide test for retail bonds [Search result]FT

Other stuff worth reading

  • The most burgled postcodes in Britain – Guardian
  • Rent increases wax and wane with development – ThisIsMoney
  • Bernstein: How to tell if your retirement pot is big enough – WSJ
  • Retiring in a low return environment [US, money nerdy, deep]A.P.

Book stores the week: The ‘Netflix for books’ model is attracting a lot of publisher interest, says Wired. Probably because they don’t want to see Amazon own the market with Kindle Unlimited – in the UK it already offers 700,000 books for £7.99 a month. I’ve also been playing with Readly, which does the same for magazines at £9.99 a month. If only someone would let me have all the tropical fish I want for a tenner a fortnight…

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  1. Note some FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 18 comments… add one }
  • 1 Luke January 24, 2015, 11:02 am

    Oh Lord – my year of industrious ISA investing now provides slightly more income than the pocket money of a teenager 😀

  • 2 nibbler January 24, 2015, 11:34 am

    “ever-repetitive Monevator”? Possibly, but personally I need at least a weekly reminder in order to stop my inner ape deciding it would be advantageous to buy gold/oil/Brazilian forest this week.

  • 3 benrk January 24, 2015, 12:23 pm

    I’m sure I’m missing something, but 0.045 x £673 128 = £30 290

  • 4 benrk January 24, 2015, 12:26 pm

    tax 🙂

  • 5 ChrisS January 24, 2015, 1:01 pm

    The article “Triumph of the classic 60/40 split” caught my eye. I’ve just switched some ISAs from Vanguard’s Lifestrategy 40% Equity fund into their 60% equity. The Reformed Broker’s article supports my hunch that 60/40 is a good mix and 40/60 is too dam’ cautious for anything but short timescales (say 5 years). Is it time to scrap the old advice that says ‘invest the same % in bonds as your age’?

    Give me another 10 years and I may know the answer!

  • 6 The Investor January 24, 2015, 1:19 pm

    A good one I missed early, on how US equity have actually been *lousy*:

    http://theirrelevantinvestor.tumblr.com/post/108752434748/on-the-contrary-u-s-stocks-have-been-terrible

  • 7 Lesley mackin January 24, 2015, 2:02 pm

    I think there is a flaw in this article the tax on the investment part is missing if accounted for the figures in the table would nearly be double for higher earners

  • 8 Lesley mackin January 24, 2015, 2:05 pm

    Sorry just realised missed the point the investment is in a tax free ISA so withdrawals woukd be tax free

  • 9 Gregory January 24, 2015, 2:19 pm

    @ The Investor It’s just game with dates. You can view from 3, 5, 15, 20, 50 etc. years and You get different results. As You know:)

  • 10 Gregory January 24, 2015, 3:11 pm

    @ Me “If you torture the data long enough, it will confess to anything.” -Ronald Coase

  • 11 UK Value Investor January 24, 2015, 4:00 pm

    Thanks for the links TI. I’m still trying to get in the habit of posting a roundup at the weekend, but have failed miserably so far. Perhaps I’ll pen one after I’ve trimmed the front hedge, using your mighty efforts as inspiration.

  • 12 Dividend Mantra January 24, 2015, 8:36 pm

    Invesetor,

    Thanks for including me. Much appreciated.

    Hope you’re having a great weekend over there!

    Best regards.

  • 13 smiling vulture January 25, 2015, 4:43 pm

    wont get anywhere near figures quoted ( : > (

    but a good nest egg ( : > )

  • 14 BrokerNotes January 25, 2015, 10:09 pm

    Very interesting way of presenting the data, thanks for sharing. Also – I found your ETF posts really useful the other day. Thanks for the great info 🙂

  • 15 Richard January 26, 2015, 12:08 pm

    Great article.

    It is, of course, a very high bar if you wish to completely replace your total net salary out of real returns from your nest egg. (I’m assuming the 4.5% quoted is real.)

    Most people will be looking at this from a retirement / early retirement perspective and so will need less income, will already have some pension provision lined up for later on (even if only the state pension), might be able to release equity from downsizing their home, might have an inheritance coming and might be prepared to (or have to) eat into their capital.

    And of course real nest eggs will hopefully have been inflated by real investment returns over the past 5 – 40 years, so the investor doesn’t need to save such a large amount. Indeed the £7,500 new state pension would require a pot of nearly £170k if viewed in the same terms as the numbers on this table.

    But it is the Holy Grail – retire with no drop in disposable income and capital maintained in real terms. Aim high, invest passively, let compounding do its work, and learn to spend less.

  • 16 JohnG January 26, 2015, 12:11 pm

    @ChrisS “Is it time to scrap the old advice that says ‘invest the same % in bonds as your age’?”

    I certainly would suggest you do, and I think general opinion would say that’s over-conservative. If you intend to retire at 65 and won’t touch your pension till then, then why have 40% in bonds 25 years before you need it?

    If you have planned your investments to be sufficient to get you to 100 (35 years of retirement) then you’re only using ~2.5% a year. I’d be inclined to begin moving from stocks from about 50. At 2% a year you’d have swapped 30% by the time you retire (over 15 years) and would effectively be reverse drip feeding over a number of decades. We suggest against trying to time the market going in, it seems sensible to also suggest not trying to time it coming out.

  • 17 Richard January 26, 2015, 1:06 pm

    @JohnG / ChrisS

    Generally I’d agree, partly because I would always include state and other DB pensions as part of my “non-equities” pot.

    Let’s say, for mathematical ease, that annuity rates are 5% and you’ll get the full £7,500 state pension and another £10,000 from other DB pensions.

    To obtain £17,500 from a 5% annuity you’d need a pot of £350,000.

    Thus for most people I suspect that their equity exposure is not likely to be such that they’re overweight compared to pensions when viewed this way.

    Just my take – others might feel that you should be in 40% (or whatever) bonds compared to equities, and ignore the value of your pensions. To me that’s a little bit too cautious.

    I’m not there yet but my aim is to have very little cash (excepting the usual emergency buffer, and my National Savings Index-Linked Certificates) and then nearly 100% equities (passive trackers) with any spare cash. It will be a long time before the capital value of my pensions plus my NS&I I-L Certs is anywhere near 40%. Currently it’s about 75%.

    On the other hand if you wish to retire well before you get your pensions you may want a goodly proportion of bonds to smooth the ride between retirement and drawing those pensions.

    And finally if you think you’re going to live a long time your horizon is not the fewer years to your retirement but the much longer span to your death. You’ll be investing through retirement not just for retirement. And with that longer timescale you might want more risk, and a higher proportion of equities.

  • 18 SemiPassive January 26, 2015, 8:21 pm

    How about just staying in the classic 60/40 split from about age 50 onwards, especially if you’re going to stay invested and use drawdown. You could do a lot worse, and with such a rubbish yield on bonds for the foreseeable future your average natural yield is going to be too low from bonds alone, especially taking inflation into account.

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