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Weekend reading: should retirement be retired?

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What caught The Detail Man’s eye this week.

I have long thought that the traditional concept of retirement needs to be put to bed.  So I was heartened to read a thoughtful discussion in the Financial Times on what it means to be retired in today’s world:

If ever there was a word that needed to be retired it’s retirement.

What kind of mental picture does this word conjure up for you — sunny beaches and no longer having to set an alarm clock? Or a stressful feeling about how much longer you will need to work to afford such a lifestyle?

Just as our working lives have changed immeasurably over the decades, so has our concept of retirement — not to mention how our long-term savings are structured. So in my own (very happy) retirement, I have been working hard to try and redefine it.

Retirement has an image problem…

I remember as a young(er) lad following my mother around as she visited old lady’s homes to do their perms. Many, at least in the area I grew up in, lived spartan lives. No central heating, old gas stoves, furniture and furnishings from before the moon landings.  And they were better off than the poor folks in the run-down retirement homes…

So growing up, my image of people in retirement was one of poor health, poverty and often loneliness. It seemed like a miserable existence.

This image is hard to shift.

…Our memories are stuck in the past

I see a similarity to the late, great Hans Rosling’s arguments that our world view needs updating.

Extreme poverty has fallen by half in the past 20 years, but my mind’s eye clings to the vivid images of famines in East Africa and civil war in Sierra Leone. Sierra Leone has enjoyed three back-to-back democratic transitions since 2007. My view needs updating.

Updating our view on retirement

Hans Rosling’s catch-phrase could have been: “Let My Dataset Change Your Mindset

So what does the data tell us about retirement?

It’s good news.  Those aged 65 to 79 are the happiest in society and pensioner poverty has fallen dramatically:

I accept it’s not all sunshine and rainbows. There are still many retirees in poverty and large levels of inequality. Especially between those nearing retirement (and on drastically lower benefits) than the actually retired.

But overall, the financial picture is relatively healthy for Britain’s senior citizens. Back to Don Ezra in the FT:

For starters, few people I know of traditional “retirement age” want to stop working completely. They might want to spend less time working, or do a different kind of work, but they still want to be active.

While more specific, the phrase “life after full-time work” is a mouthful. So I created an acronym for it, using the first letters: (l)ife (a)fter (f)ull-(t)ime (wo)rk, and it came out as LAFTWO. Aha, I thought, that’s how my Texan friends would say “Life Two”. And suddenly three years of assembling thoughts fell into place, and acquired a structure, purpose and much more.

Life One is our grown-up working life. Life Two is what follows. It’s the best part of life, so much so that Life One is just the long prologue that finally gives way to the main event, when enjoyment, happiness and fulfilment peak.

I think Life Two is quite catchy.  What do you think?

P.S. Normal service will resume next week with The Investor back in the seat – so look forward to more Brexit rants and fewer tenuous links…

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Weekend reading logo

What caught my eye this week.

Surprise! For reasons still not clear to me, The Investor has handed me his beloved babe – Weekend reading – for a special guest edition.

Before you collectively drop your monocle in your soup, have no fear. I’ll have a little joyride before safely parking back at Monevator Towers.

That old skool reference leads me to what caught my eye this week: the trends that may end with the baby boomers.

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Why your pension won’t be plundered

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There’s a school of thought out there that the pension is an endangered species. As doomed as an orangutan surrounded by palm oil company bulldozers and men with matches.

The alarmism goes like this:

  • State Pension – forget about it. It’ll be abolished or gutted by the time you’re 70 or 80 or whatever age you’ll actually qualify for it.
  • Personal pension – the government’s been screwing with this for years. It’s a matter of time before the tax reliefs are slashed. And even if you build up a decent pension it could be seized by state theft.

These arguments are variants on the theme of:

The Government is out to get you. It’s run by a clique of vampires siphoning away our wealth into offshore tax havens. Democracy is about as real as a shadow puppet show, everything’s getting worse because, well, I’m afraid of getting older and cynicism is a really hot look.

Cards on the table: I’m against reflexive pessimism like this because it paralyses us. It feeds into a climate of distrust that undermines our faith in vital social institutions.

With regards to pensions specifically, this kind of thinking is anti-vaxx for personal finance. Bad ideas spread like superstition during a medieval plague. Those seeking guidance are misled by those who should know better. In our eagerness not to make a mistake or be played as the patsy, we can end up falling prey to both.

Our best defence? Critical thinking.

Our pension system is beholden to the political, social, and economic realities that face our country. Let’s weigh those up and see what we can deduce about the future of pensions.

The balance of power

Governments don’t stay in power by shafting those who vote for them. That may seem controversial given the Carry On Politics level of buffoonery unspooling in Westminster, but it’s true all the same.

Governments stay in power by racking up achievement points with their supporters, neglecting those they cannot court, winning the spin wars, avoiding catastrophe, appearing more credible than the opposition, and kicking the really toxic cans down the road.

Your pension is protected by that political nutshell.

Britain is ageing: 18% of the population is over-65 now and 27% of us are predicted to be over-65 by 2041. Future governments oppose the core interests of those voters at their peril. Especially when that group is pretty spry around a polling station – in 2015 10.6 million baby boomers voted, heavily outgunning the 6.4 million millennials who turned up.

It’s no coincidence that the Tories increased pension and health spending even in the midst of austerity while cutting welfare and school budgets. They knew the grey vote was and is a critical part of their base and tailored their policies to keep them onside.

And what politician wants to go down in history as the one who let poor pensioners freeze by gutting the State Pension? That’s an unwinnable PR battle in a way that squeezing welfare during a financial crisis is not.

Some fear that the State Pension could become means tested. That’d be hard to justify given that most people pay in for decades with the promise of a pension at the end of it.

Old age is a universal experience – nobody can claim it’s a lifestyle choice. It’s difficult enough to end free bus passes, so any income bar would have to be set so high that it would only affect a tiny minority of voters who could live with the change.

Is the pension system affordable?

The State Pension is not affordable, according to the latest report of the Government Actuary’s Department.

National Insurance Contributions won’t cover all payouts beyond 2032 due to waves of retiring Baby Boomers.

Potential remedies include:

  • Hiking National Insurance Contributions.
  • Raising the State Pension age still further.
  • Ending the triple-lock policy of upweighting the pension by the greater of consumer price inflation, average earnings, or 2.5% per year.
  • Life expectancy stalling. (Hey, good news on that front.)
  • A young immigrant workforce producing lots of juicy NICs to support our seniors.
  • A booming economy.

Lucky for us we’re not going to gamble those last two get-of-jail free cards in favour of living in an ideological fantasy-land, eh? No siree!

The bottom line is more old people means a more expensive system.

I can’t see the triple-lock surviving. Taxes are liable to rise, but that could take any government a decade to face up to. It’s obviously politically easier to push out young people’s pension qualification age by another year or so. But there’s a limit.

I’m more sanguine about personal pension reliefs. UK retirees rely on personal pensions for about 30% of their income versus 5% in Germany and near-zero in France where the state pension does all the heavy lifting. Any UK government that undermined the saving incentives for personal pensions would come under heavy attack for planting a pension time bomb.

A retargeting of State support seems possible: I can easily imagine a future Labour government abolishing 40% tax-payers’ relief in favour of a higher flat rate (say 25% for all), tilting the benefit away from higher earners.

But on the Tory side, even George ‘Austerity’ Osborne left 40% relief alone.

Let history be your guide

I’m not arguing that UK pensions are as untouchable as Trump’s underpants. However I like a bit of nuance when I’m spluttering over the latest outrage on my news app.

Obviously our society faces profound challenges and we’re naturally fearful in the face of uncertainty. But not every change can be chalked up as a loss. Course corrections often play out in our favour, right a historical imbalance, or are needed to keep the whole show on the road.

The last decade of pension adjustments has created winners and losers – see my scorecard below – but few of us have been on the receiving end of every change, all the time.

The UK remains a rich and politically moderate country (despite everything). We’re not likely to need nor accept extreme action. Personal pensions and the State Pension are still the best vehicles we have for securing a happy retirement and I believe they will remain so in the decades ahead.

Of course, that’s a matter of probability not certainty, but whatever happens keep calm and carry on investing in your SIPP.

Take it steady,

The Accumulator

Bonus appendix: Pension wins and losses in the last decade

Wins

The triple-lock – albeit it was a sop to older voters, is inter-generationally unfair, and will have to go sooner or later.

Pension freedoms – spend your pension however you like! A bold experiment in trusting people with their money. There’s bound to be casualties but the unexpected consequence could be better retirement education.

Tax relief on pension contributions – remains unmolested for most, although a rich sliver of society had their style cramped, see below.

Automatic enrollment – default opt-in has been a massive win, with participation in workplace pensions more than doubling (32% to 67%) from 2012 to 2018.

New State Pension – you’re likely to be better off if you qualify between now and 2030. See the Losses column for the rest of the story.

Losses

New State Pension – slightly more people are projected to lose than win by 2040. The DWP predicts the average loss will be £11 per week. A hefty 68% are predicted to be down by £14 per week by 2050, in comparison to the old system.

Rising State Pension ages – women have been qualifying later in life since 2011 while men have only seen the bar rise from December 2018. On the plus side, most of us are living longer. Well, until the latest life expectancy data came in.

Personal pension age – rose from 50 to 55 in 2010. The government announced the minimum age would rise to 57 in 2028 and would maintain a 10-year gap from the State Pension age thereafter. They haven’t actually got around to legislating the change yet. (I guess they got – ahem – distracted?)

Tax reliefTo whom it may concern: the annual allowance for pension contributions maxed out at £255,000 in 2010-11. Your lifetime allowance was £1,800,000 that year, too. Cutting this relief for the minority helped increase the personal allowance threshold for the majority.

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What caught my eye this week.

Here’s a tenuously introduced quote from one of the greatest films ever made, The Matrix:

Agent Smith: It seems that you’ve been living two lives. One life, you’re Thomas A. Anderson, program writer for a respectable software company. You have a social security number, pay your taxes, and you… help your landlady carry out her garbage.

The other life is lived in computers, where you go by the hacker alias ‘Neo’ and are guilty of virtually every computer crime we have a law for. One of these lives has a future, and one of them does not.

What a movie! What a two-hour paradigm shift!

My only excuse for quoting it here is that I’ve found it popping into my head recently whenever I’ve read about the storming performance of the US stock market over the past decade.

Because as a British investor – where the FTSE 100 is barely higher than it was 20 years ago – who reads a lot of US investment blogs, one can feel like a bit of a Mr. Anderson.

Source: Bps and pieces

In one life, it’s party time!

In the other, the Brexit-aggravated boondocks.

British steal

Yes, that FTSE 100 return doesn’t include the hefty dividend stream an investor would have received over the two decades, which would appreciably boost the return.

And yes, the wider UK All-Share has done a little better.

No, a private investor shouldn’t have all their money in the UK market anyway – arguably only about 5-10% – so this isn’t the last word on the fate of Monevator reader portfolios.

Granted, all of it. But that’s not what I’m writing about here.

What I’m talking about is a US stock market performance that is edging into the euphoric.

Albeit one where there’s been enough consternation about valuations over the past few years to perhaps work against a classic late-stage market mania – so far.

American markets made great again

The US market experience really has been exceptional, even as it’s crept up on us. As Michael Batnick writes at The Irrelevant Investor:

Looking at the numbers, one can easily make the argument that we just lived through the best ten-year period ever for U.S. stocks.

Surprised? Check out his graphs for a glimpse at investing nirvana.

The danger always is to extrapolate the recent past into the future. As I say, plenty of people have been burned by actively steering away from highly-rated US equities over the past few years – including many commentators on this website. But their misfortune at missing out only increases the chances of a can’t-lose mentality taking US equities to bubblicious heights, as ever more people throw in the towel and belatedly chase performance.

Incidentally I’ve missed out, too. I’ve been underweight (though far from zero-weight) US equities for years.

Like bonds in the aftermath of the financial crisis, the maths tells you to be wary. Then the subsequent returns inform you that you were an idiot.

That’s stock markets for you – making the majority of people feel like dummies since the 17th Century.

Smorgasbord investing

Happily, my nervousness at US valuations (particular in my beloved tech sector) has mostly been tempered by a hard won humility as an investor – as well as a respect for momentum in markets.

Hence I’ve always kept a varying-sized slug of US equity in my actively-managed portfolio, rather than bailing out entirely, despite my queasiness.

Most of us will do better to invest passively in a broad global tracker specifically because it hides what’s in the sausage from all but the most curious. Smart passive investors know enough to know that they don’t know better…

Either way, it’s paid to keep exposure to the US, and it’s cost you to be invested elsewhere.

And carrying that opportunity cost is just fine.

I often rail against what I call ‘in or out’ thinking, where someone will say they are avoiding equities because they’re too expensive or that they’ve no money in Europe or the UK because they hate the politics or they’re putting all their money into gold or Bitcoin.

All are fast track paths to being a terrible investor – and that’s true even if your hero call pays off in the short-term. Because nothing lasts forever, and I don’t believe anyone has ever proven their ability to perfectly switch all-in bets ahead of slumps and booms. (Remember the patchwork quilt of annual asset class returns?)

Indeed it’s at times like these that it’s most important to remember why some of those laggards in your portfolio got into the mix.

Comparing out-of-favour assets to the underappreciated human appendix, Phil Huber writes:

…certain aches and pains are part and parcel of owning a diversified portfolio.

The biggest mistake an investor can make is to put their holdings on the operating table and remove the very thing(s) they might need or want the most when the anesthesia eventually wears off.

In other words, there’s hope for my UK value stocks yet!

Have a great weekend.

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