Every year seems weird these days. Maybe it’s all down to the coming singularity.
Certainly 2022’s quadruple whammy of war, drought, inflation, and plunging equity and bond prices has provided enough contrast to please even a late-stage Picasso.
Crops wither while inflation runs wild!
Energy prices soar while portfolios plummet!
Or maybe it’s just the same story of everything running out: water, money, and investment returns.
I had feared tough times were ahead. For example I put wobbly markets and inflation on the agenda in late 2021, flagged underappreciated quantitative tightening in February, and by March urged potential retirees to check their sums ahead of what seemed a nailed-on bad roll of the sequence-of-returns dice.
And in June I – belatedly – warned of rising mortgage costs, too.
Some readers complained this blog was getting too gloomy about markets and the economy.
But if anything I was too bullish about the former, at least in the short-term.
Don’t forget the British Pound is down 15% against the dollar year-to-date before you reply that your subsequently puffed-up US-dominated global portfolio is doing very well, thank you.
Our money doesn’t buy as many US hamburgers as it so recently did – even before it’s been further withered away by inflation.
We voted to be poorer, too
I’ve also continued to remind readers that we’re still governed by the mendacious nincompoops who brought us the most delusional national vanity project since the Millennium Dome.
Every day, Brexit makes Britain poorer, more indebted, and facing higher inflation than where we’d be had it never happened.
The UK economy is an estimated 5% smaller as a result of Brexit.
Remember that’s a 5% shortfall versus the counterfactual every year.
The Treasury will get about £40bn less in revenues annually as a result. The politically neutral Office for Budgetary Responsibility continues to predict a 4% smaller GDP in the long run.
This gap means either taxes and borrowing will have to rise or services will deteriorate compared to a rational world where people didn’t pin their hopes on liars who promised nonsense on buses.
So far, so broadly predictable to all but Barry Blimp.
But please remember this when you hear talk about tough choices during the recession to come. We made things much worse than they had to be.
If you wanted Brexit for political reasons then fair enough, but spare me the financial fairy stories.
It may annoy some readers – which honestly isn’t my intention – but I will never let Brexiteers off the hook for the project’s economic consequences.
Sucker punched
So all that trumpeted, did I imagine consumer price inflation breaching 22% by early next year?
Not on your Nelly.
Obviously I also didn’t foresee a hot war on the edge of Europe with a nuclear superpower.
In fact I thought inflation would be rolling over by now.
Oops!
I’ve mostly expected this because I believed surging prices were much more a result of the on/off pandemic economy and the resultant supply chain disruptions than the Covid support packages that so many countries’ pundits are now fingering for their own state’s high price problems.
I read a lot of company earnings reports, and many of them talked about these difficulties last year.
Of course massive fiscal support that put money directly into people’s pockets and near-zero interest rates that outstayed their welcome – along with home working proving much more productive than most people anticipated – did stoke the inflationary engine.
But it’s the wild swings in supply, demand, and the ability of economies to meet either – as well as surging gas and oil prices in 2022 – that has sent inflation ablaze.
There are lots of ways to show this, from changes in manufacturing output in various countries over the pandemic to the rise and fall of stay-at-home spending as economies shut then reopened.
But this graph of the cost of getting stuff from China to the US gives at least a taste of just one of myriad supply chain shocks to the global economic system:
Source: Global Trade
It’s not just that an importer might have had to pay ten times as much to bring in a container as they did six months previously.
It’s also the multitude of choices that spiral out from these shocks, that cascade to impact other companies’ supply chains.
A particular component of a car assembly, say, that never got delivered. Or, as I was told about last week, a shortage of cardboard due to the online shopping boom during 2020 that subsequently crimped the production of plasterboard which in turn hit housebuilders.
On. Off. On. On. Off. And so on.
No smoke without fire
Until recently – like, last week – the market seemed to agree this inflation had likely peaked. So it was relaxing its expectations for future rate rises from the systemically critical US Federal Reserve.
But Chairman Jerome Powell appears to have kicked such hopes into the long grass at the Jackson Hole pow-wow. And he administered his painful re-calibration via the groin area, to boot.
Meanwhile UK inflation forecasts seem to be rising every few days, with the latest terrifying forecast for energy bills for an average UK household hitting £7,700 a year in 2023.
Clearly this cannot hold. Many people simply won’t be able to pay. But Government action to do something about it will be yet another intervention with a high price tag.
Debt or taxes – or both – will have to rise to pay to offset at least some of the pain. And with UK government bond yields higher, financing state borrowing is getting much more expensive.
I still believe we should make the most of this energy crisis with a war-footing effort to cut energy use, insulate homes, and ramp-up investment in renewables and nuclear.
Simply subsidizing high energy bills will do nothing about any of that.
Incidentally if even this year’s extreme weather globally hasn’t been a wake-up call for you, then feel free to unsubscribe from Monevator from the comfort of your golf club’s air-conditioned Blimp pen, unless you’re (commendably) open to repeatedly hearing alternative points of view. (Also long known as the truth in this particular case.)
Environmental crisis is the biggest threat to our long-term wealth. I won’t be piping down.
Little savings vs big savings
To return to where we started, let’s conflate the water shortage we’re experiencing now with the predicted money drought to come.
We need to make big savings when it comes to both money and the wet stuff.
Yet most personal finance – including much on Monevator – is of the fix-the-leaks flavour.
For instance, you can:
- Review and prune your regular outgoings.
- Ensure you’re getting the best interest rate on your cash.
- Wear a jumper inside until December and keep the heating off.
- Consider remortgaging to a cheaper deal.
- Start a low-effort side hustle.
- Do 101 other little things to save money.
Most of these things individually won’t move the dial much. If you’ve been asleep at the wheel for a few years then you might make some big savings if you come off a standard variable mortgage rate. But otherwise we’re talking £10 here, £20 there.
However do enough of these and soon you’re saving £500 a month. Every little helps, to borrow someone else’s intellectual property.
Notoriously however, the water companies are apparently not doing enough to fix their leaks.
Britain’s pipes are said to be leaking 2.4 billion litres a day. But the corporate calculation seems to be that redressing this up-front means huge investment for long-term returns that will only inflate some future fat cat CEO’s bonuses, while doing little to keep water in the reservoirs for now.
So instead, it’s a hosepipe ban. And while nobody much likes them, they are said to cut water usage by 10% at a stroke. Big savings indeed.
It got me wondering what would be a similarly drastic response in personal finance terms?
Maybe:
- Postponing your retirement for a year.
- Selling your second home…
- …or downsizing your main residence.
- Becoming a one-car household.
- Renting out a spare bedroom.
- No foreign holidays until inflation abates.
- Getting a second job.
- Extreme frugality.
Now we’re talking! These sorts of interventions are the equivalent of turning your water-starved English garden over to weeds. They’re a big deal but you’ll potentially save a fortune.
They can compound, too.
If you sell your second home, maybe it’s easier for your family to get by with one car. Energy use will plummet with just the one property to light and heat. You could spend your weekends on a side hustle instead of doing holiday home repairs, making further big savings. If you find yourself with a huge cash surplus you could buy more equities while they’re cheap, boosting your future wealth.
Both routes to saving are valid. All will be highly personable.
If you’re a wealthy 1%-er with a second home in the countryside where you tend to leave the outdoor swimming pool heated most weekends in summer – yes, I know such people – then with energy bills set to quintuple compared to a few years ago, you know what you need to cut first.
For more modest Monevator readers, trying to combine the commute with an old-fashioned weekly shop at an out-of-town discount grocer might be more the order of business.
Where will you make big savings if you need to?
The point is that if the worst-case scenarios come true – inflation running at 22%, interest rates above 5%, the Bank of England’s predicted 18-month long recession, energy bills that could put a child through college, higher taxes, and worst of all rising unemployment – then now is the time to act.
Remember: the first cut is the cheapest.
You do not want to be taking actions under duress. At the very least, start bolstering your emergency fund if you can.
Monevator has a very economically diverse readership. Our subscriber base ranges from students interested in investing to at least the several dozen multimillionaires that I am aware of.
One reader stated in our comments that not even household energy bills of £20,000 a year would see them return to the office to reduce their own costs.
Meanwhile a young reader asked me recently if I thought they should suspend their pension contributions or instead sell their car and walk one hour to work.
These two individuals face very different choices.
Please keep this in mind before you share any overly disparaging opinions in the comments below.
Onwards and upwards, via a bit of downwards
Yes, things could turn out better than feared.
Indeed even now there are reasons to be cheerful.
Joblessness is very low, for starters.
Higher interest rates haven’t crashed the housing market yet – frustrating for first-time buyers but better for most of us than the alternative, at least short-term.
As far as I can tell we haven’t had a truly hugely significant Covid mutation since 2021’s Omicron.
And while I am very far from a Liz Truss fan, at least she seems vaguely interested in being a politician. I’d prefer a rest from this current crop of political pygmies, but for now I’ll take a change.
Even lower stock and bond prices are great news if you expect to be saving and investing for decades to come. The bond price reset is particularly welcome, given the portfolio buffering potential of higher yields. Albeit forecast returns are still deeply negative in real terms.
Personally I long for a few boring years where nothing much happens and the return of drizzle in the autumn.
But we don’t get to choose the weather – whether that’s economic, political, or atmospheric.
Let’s hope for the best but prepare for the worst accordingly.
Are you making any changes to your saving, spending, work, or retirement in the face of the cost-of-living Ragnarok? Let’s us know in the comments below!
I have one answer that won’t win me many friends here. Like many Scandinavians, I have a small house on the Algarve. Like them, I can turn off the heat here in the UK and live there for three months or so over winter. The internet there is brilliant and, thanks to Covid, my clients have got used to online reviews. Shame though about Brexit and the fact I can only stay there 90 days out of every 180. Brexit, the gift that keeps on giving!
Thanks TI. It’s gloomy for the foreseeable but as you said, that’s reality. I was about to complain that your options for saving reflected a very skewed demographic that reads the Monevator.
Selling a second home?! Downsizing first! As a (nearly) 30 year old, brave of you to assume I have a mortgage at all.
But you covered that in the next section about how people are facing very different economic choices currently, so thanks.
> Like them, I can turn off the heat here in the UK and live there for three months or so over winter.
I am genuinely curious. When I tried in the last house to use just the wood burner, an extension that got cold developed mould. Not a huge amount but enough to make redecorating it a right PITA. How do you deal with that? I am hoping that it was because that room was an extension built in the 1970s and the flat roof above it was not insulated, but if that isn’t the cause, then a UK home left unoccupied in the winter could deteriorate.
Otherwise, the principle of snowbirding is great. Something like the Italian Riviera could work for me for Jan/Feb…
I’ve been thought my DDs and found significant savings (all pcm):
– wound up ltd company (odd consulting ) £80 accountant fees
– dropped the pi/pl insurance £30
– 2 mobile contracts to sim only £55
– sky reduced by £25
– let a “free” family lodger go! ~ £100
– 2 cars to one last year ~£400 (Audi A8)
– cancelled phi policy £10 (not sure I could ever claim)
– had £200k sat in cash at .2% now 1.6% (pref shares down lots)!
– currently in Motorhome in Spain 4kwh daily included for 20€ a night – 41c per unit for extra (not really a money saving plan but happy to rent Stephen’s apartment for a couple of months win-win!)
– willing to do odd contracting in the money and job right
Very strange times
B
For those still number crunching the spreadsheets for FIRE, its good to have an emergency fund, but make sure to budget that when in FIRE to be able to replenish that fund.
I am again changing my 2022 FIRE’d plan and will be looking to change from the “just one more year into 2023” into “just one more year and then a part time gig in 2023” to ride out these uncertain times and get some cheaper equity. That is; should there be some part time work still available next year should the mega sequence of events take hold on the nation(fuel/recession/etc).
Time to finish insulating the loft. Wonder if there will be cheap materials like there was a few years back.
TI comes out swinging!
“Everybody has a plan until they get punched in the mouth”.
I couldn’t agree more with all your points, be pro-active now with the personal finances.
@Ermine. That’s condensation. Either improve ventilation ( leave window open..) or invest in a dehumidifier ( we have 2). And don’t dry washing indoors etc.
My favourite little ‘side hustle’ is growing my own crops, particularly the higher volume year round producing perennial greens. They’re relatively low maintenance, very convenient, and save a few pennies as well. What’s not to like, apart from the odd cabbage white crawling across your plate.
P.S. as someone who has just pulled the ripcord at work 2 days ago (yes, I am questioning my sanity), I would like to thank all of the regular contributors to this site, and especially our hosts, for all of your wise words and wisdom over the years, which has helped me tremendously. A special mention to (the well read) Ermine, for bringing Carl Jung’s “Into the Afternoon of Life” quote to my attention, which i’m sure not very originally i used as part of my resignation note.
I’m already in the low expenses/frugal camp, so I don’t have much to cut. I’ll be interested to see how energy bills impact my personal inflation rate over the next six months.
I can only hope to keep my job and keep investing.
High inflation does make me wonder if I would be better off getting to a part time status sooner, and accept working longer but in a part time role. I was following the liability matching approach as discussed in the Pension/ISA Split series but what to choose now as the inflation rate! Working for longer but getting to a part time status sooner is one way to deal with things I guess although not quite in the true FIRE spirit.
That does sound depressing. Energy bills over twice those here in the US and for much smaller houses (avg 818 Sq ft) that should be cheap to heat and cool versus the average 2,462 Sq ft houses here. Just as people are fleeing California and New York in this country maybe geoarbitrage might make sense if things get much worse there.
Little wins are the way to go. I put up a clothes line in the garden and will only use the big oven on the range cooker for Christmas lunch. I’ve turned the thermostats down on the water heater and modified the time and temps on the central heating controls. I have renewed all the brush strips in the sash window seals, fitted several new chimney sheep in the ope flues and priced up some expensive 200mm loft insulation as top up.
I have asked my power supplier to express the credit in the account as kwhr rather than £`s but I don’t hold much hope for this. Also. I find it hard to see why gas October gas equates to £200 per MWh and yet the domestic cap is £540 per MWh, this especially when Hornsea 2 has a contract rate of £73. I have never liked CFD,s but it looks to me to be a fruitful area for immediate investigation
The metaphors seem to have gone a bit crazy today @TI: adding grist to a mill usually means a helpful addition. Perhaps you want throwing spanners in, or something a bit more floury than that if you can think of it!
I love any excuse for a bit of frugality but the way I’m thinking about the current situation: for anyone living off a wage it’s obvious: 20% inflation, you’ll get maybe up to 10% pay rise so you just have to choose your 10% cutback. But how will it work out for those living off an (unannuitized) investment pot? Will the pot catch up with wages eventually, or prices?
Suspend pensions, or sell car and walk an hour to work? Get that reader a pushbike and point their browser to MMM!
To the young reader mentioned – yes, sell your car if needed or at least walk/cycle to work instead, and definitely *don’t* pause your pension contributions unless you absolutely must. Opting out of a workplace scheme is in effect giving yourself a pay cut and losing ‘free’ money in the form of employer contributions and tax relief. Your older self will thank you down the line, especially if you are in your 20s or 30s.
No doubt it will pop up also in TI’s weekend reading but there an article about this this week in the Guardian
https://www.theguardian.com/money/2022/aug/31/is-it-ever-a-good-idea-to-stop-paying-into-your-uk-workplace-pension-pot
“Remember that’s a 5% shortfall versus the counterfactual every year.”
Actually, no. According to the linked article it is 5% in total since 2016, not 5% per year. Most of which, if their graph is to be believed, occurred before the UK left the EU.
But that quibble aside, the 5% figure must be correct because it is based on an economic model of what would have happened to the UK economy without Brexit, and everyone knows that economic models are very reliable and not at all influenced by the assumptions that the modellers chose to use.
I love these posts, it’s always a good opportunity for the irrepressible Barry Bs to illuminate the proceedings with their intellect.
One day they will deny Brexit.
@Dave — Actually, yes. It’s measuring the size of the economy by GDP. The gap didn’t open up all at once and will likely keep changing (the OBR expects 4% long term). The charge that the gap opened up before ‘Brexit got done’ is more substantial, but I’d reply people knew Brexit was coming and had begun to adjust. (In particular investment collapsed)
@JDW @Bill G — That’s what I’d do, yes. Two hours a day is only just getting above 10,000 steps territory!
@Meany — Yikes! 🙂 Another day, another change to learn something new, thanks. Email has gone but I think I’ll throw a spanner into the article.
I’ve been a quiet non-british reader for many years, now. To me, this blog has been a comfortable read, and I’ve often learned something. So, overall, great job.
Lately, though, there has been more and more personal commentary on political topics. And I must say, it’s starting to just make me check out from a post when I, for the nth time, must read about brexit bad and how you don’t like your government. We get it. Need it be a weekly or biweekly topic?
I’ve been looking to buy a new, larger house for a while. We are very specific about our location – it must be in the village that we currently live in. Such a house has just come up for sale. There are very few larger houses in our desired area and people tend to move in and stay there until they die. So the opportunity to buy one is rare. I’ve decided against even viewing it due to the unknown costs of heating it. It is a larger space than my current house and a barn conversion therefore the insulation is likely to be less effective than my current house. I am an accidental landlord so would be selling two houses to buy this one. That’s two transactions that are not going to take place that would have done otherwise and the £1000s not circulating in the economy. As everyone battens down the hatches like this it makes recession much more likely.
‘we’re still governed by the mendacious nincompoops who brought us the most delusional national vanity project since the Millennium Dome.’ .. yes exactly and hard to see things getting better until that changes ..
I’ve come to the conclusion that working for another year is my best bet .. fingers crossed my contract continues.
@John — Fair enough and thanks for the feedback. I am mindful of reader feelings – I reference them in the article – but I don’t intend changing how I write though or what I write about. There’s not much point in having a blog if you censor yourself.
The fact is the incoming government is about to start gaslighting the public with a bunch of half-truths about the economy. Half-truths because they will not acknowledge this lost output gap — and the big consequences of state funding and spending — in any of their pronouncements.
Even the Labour opposition is wary of mentioning the damage caused by Brexit, as it’s perceived as a vote loser. Partly this is because some people voted for Brexit for political (/sovereignty issues) amongst much else, but it’s also because they don’t want to know / believe / hear the truth about the economy.
I have zero intention of silencing myself on this matter. I don’t think it comes up weekly or bi-weekly, but I agree there’s been a few more references than usual in recent months.
That’s because the UK economy is showing signs of becoming something of a basket case (caused more by energy prices than Brexit in the short-term) and hence it’s becoming a mission-critical issue for UK-based readers of this blog.
Cheers! 🙂
@TI – well, we don’t have a second home to sell and only have one car. Which we just upgraded from the 17 year old Ford Focus we’d had for 12 years. Fab car, never serviced, never went wrong… Now I’m a boy raced in a 3 year old Skoda Octavia Estate!
We’re a family of four (+dog) in a four bed house, not that extravagant, but when I first bought in the late ’90s I always had lodgers, some good some bad, but it paid off the mortgage (I probably partied the mortgage payments, it’s a little fuzzy). But now the spare room is my wife’s office and sewing room so it ain’t going to happen.
When the sun was shining we got the roof done. For a flat roof, the minimum was 120mm of insulation so we put an extra 30mm on. Maybe it should have been 60mm? Oh well, diminishing marginal returns and all.
We went for a lovely holiday driving to Tarragona at Easter and went camping three times over the kid’s summer holidays. Not too extravagant. Same next year too I reckon.
So I’ve delayed retirement a year but it’s happening in April. If there are part time gigs around, I wouldn’t mind working 15/20 hours in Majestic. Is that a little too picky?
Obviously the main thing is my wife keeping her job. And me keeping my wife. With that we’ll be fine.
And I’d like to add my thanks to you and TA for all the great help and infotainment over the years. Not sure when I discovered you, but must be coming up to two decades now? Your site has been a life saver.
The problem with bashing brexit is letting the government off the hook for many things they could or should do.
Sewage dumped into sea – some still attribute it to brexit.
Energy bills missing govt support – again many say it’s due to brexit.
@John, reason TI keeps talking about brexit is because he’s covering up his wrong predictions (or fake research) about immigration not affecting wages. So instead of accepting that brexit did push up the wages, he’s emphasising the other negatives. Fair enough, it does continue to impact economy from an investment perspective, but the blog suffers from quality content if anything and everything is blamed on that.
@The Investor
It’s a growth vs level issue. When you put such emphasis on 5% per year most people will take that to mean GDP has grown by 5% less each year, not that total GDP is 5% less after 6 years. There is a big difference between the two.
@Dave — Growth declining by 5% each year would be an ongoing economic depression. (By way of contrast UK GDP fell about 7.7% peak-to-trough in the 1970s winter of discontent).
A 5% loss in total annual output is absolutely enormous. Total GDP is about £2.2 trillion a year. So 5% off that is £110bn. Assume state revenues are 40% of that, and you get at least £40bn per year less to spend on the NHS and other services etc.
Either taxes rise, borrowings go up, or state spending is cut, with consequences.
This is exactly why I always warned that the economic impact of Brexit should be measured over the long-term. I was never in the ‘off a cliff on day one’ camp.
@Ryan — There has been a bump in the pay of the slice of the workforce most exposed to EU migration. Considering we’ve cut off free and easy access to the supply of such labour, that’s not a big surprise. From memory their annual pay increases are running 2-3% higher than the rest of the population. But this is a small segment of the overall workforce, and it too will suffer from the other costs of Brexit. As I’ve endlessly maintained, we’d have done better to train ‘our people’ into better/more productive jobs or even just hiked the minimum wage than severely damage our economy on the (fantasy for most Brexit voters) pretext of slightly increasing the wages of the lowest-paid.
A couple of years ago, as Westminster convulsed itself , and Brexit got rammed through, I wrote on my own little blog…
“…. it’s going to be fish, carrots, potatoes and broccoli for dinner every night.
Mutton, turnips and kale also likely to feature heavily. We’re going to be the slimmest, fittest and most miserable nation in the Western hemisphere..”.
With the addition of Covid, and now the proofs emerging all around that mass privatisation of basic utilities, rail, water, electricity, energy.., is stupid, plus the attendant truth of … ‘privatisation of the profits, socialisation of the losses’…., I’ve not really changed my views on the underlying theme of the above statement.
For me, I just keep plugging away. Virtually all clothing, bar underwear, quality items purchased s/h on eBay etc.,. Shoes that can be returned to factory for rebuild when worn ( Mephisto in France ). Decided that £6 for my 5Gb pm sim contract was rather excessive, so lashed out £30 for a year for 1Pmobile. ( 5 months in, £10 of that used, wifi at home deals with most of my data useage ). Had a smartmeter fitted, and yes, I’ve cut down a lot on electricity. Not so much by dint of the meter itself, but more the acts of paying more attention. Virtually stopped using the oven in my cooker, replaced by a smart mini oven. (s/h). etc, etc.
Meanwhile, I just keep paying each month into Vanguard, and A J Bell sundry SRI, and ESG funds.
I’m a bit worried that I may be turning into a virtue signaller.
We recently downsized our yacht. That will deliver savings on marina fees and maintenance, which are only heading one way. The new boat is 20 years old instead of the 5 which we had originally budgeted for, so that has freed up a lot of cash, which we will probably invest. Someone once said to me the smaller the boat, the bigger the fun and it is absolutely true. The new boat came with an asymmetric which my wife can easily hoist and more importantly, safely drop on her own. Much easier than our old spinnaker and huge fun. We can also get into places with the smaller boat that would have been much more difficult with the old one. Currently exploring the east coast which would be difficult with a deeper draft boat.
Not much slack to save energy as I am already a Scrooge in that area. I am a great believer in acclimatisation and having a cool house. We rarely heat bedrooms for example, unless we have people staying and my wife insists.
We do have a large pile of wood from a cherry tree that died a few years ago and that might be OK for the wood burner, but I need to check.
I made the leap into early retirement (or maybe it will just be a sabbatical ) in April of this year.
So far I got lucky and dodged some of the market losses due to the way certain parts of my portfolio were due to vest or be given valuations to withdraw before the biggest drop happened.
But of course I’m concerned about a sequence of returns risk so I have:
– Set aside 2 years of income in cash and plan to spend less than my yearly withdrawal rate.
– Moved some money into dividend ETFs to give me a little income to shield my accumulating portfolio.
– Shopped around and reduced my car/home insurance by a significant amount.
– Started shopping at Lidl and I am loving it.
– Opened up debit card accounts that give 3% cashback and full rebates on some subscription services. (E.g Plutus)
– Spent time learning how to maintain and repair more things, from clothes to floor boards.
– Made use of a generous flexipayment on my mortgage so I only have to pay the low (0.59%) interest rate on it for 2 years.
– Continued buying index funds as my stock options become sellable.
– Admitted to myself that I am no market beatet, closed down my fun money investments in individial stocks and moved it into my index funds.
If I have to I am willing to:
– Sell my car
– Go back to work
But in the meantime I am focussing on building a life outside of work and not worrying about the daily ups and downs.
Good luck everyone!
I’m (just) over 60, and ready to stop working, now. I’ve carried on working all year, due to the economy. A positive is that the current slump started in January, so I’ve weathered 8 months worth and kept adding to my pot. But I don’t enjoy work, and I’m ready to leave now. We live frugally, and there is nothing much more that we can cut.
Due to my age, my state pension isn’t far away (this was always in the plan), and we will have 2 state pensions and a couple of modest defined benefit pensions when the time comes. But right now, a sustainable 4% withdrawal rate which is inflation adjusted every year seems like a pipe dream. And as indicated in the article, with the war, global economy and brexit fallout, I can’t see much changing any time soon. But I’m not working one more year, life is too short.
My plan is to hang on at work for as long as I can stand it (which won’t be long), then let the dice fall where they will. My investments only have to sustain us for about 5 years, then top-up our other pensions, and there is absolutely plenty for that. The question is only how much will be left in 5 years? whatever it is will then just add to our other income streams.
Thought provoking article TI and I appreciate the attempts to find some positives in a fairly gloomy picture. You make various comments about the causes of inflation. I have a feeling that Milton Friedman got to the heart of the matter of inflation many years ago. We just don’t like his answer – which is that we are all to blame for voting in governments that don’t balance the books. Here is a clip of him explaining what does and does not cause inflation. https://www.youtube.com/watch?v=F94jGTWNWsA
The current predicament is why the FI in FIRE is so critical. It protects you against a loss or reduction in the value of your income and global diversification hedges you against a decline in your country’s fortunes.
I’ve no issue in continuing to flag the economic fall out from Brexit. The population needs to collectively, at some point, come up with a plan to arrest the economic decline that’s been in play since the 1970’s and has been somewhat staved off from using Privatisation and the bounty of North Sea Oil to lower taxes, joining the single market to boost trade and leveraging up the personal and now public credit card to bring forward future wealth to the present. And now that music’s stopping with other previously third world countries seeking resources and it’s not looking pretty. National Debt will probably top £3 trillion in the not too distant future – no prediction but that could easily be the case. At some point we’ll have to live within our means. I suspect we’re a few govts or a fiscal crisis away from that. The general population are mostly clueless or uninterested. Hard to see past massive wealth taxes coming at some point.
Seems a bit unfair to me to ask future generations to pay for today’s heating bill – equally can’t see people freezing so not sure what to do. What’s quite concerning is, you might not like the Russians, but they’ve got this rather annoying history of being able to suck up serious amounts of pain. What happens if this drags on for five years…..Is the UK going to incur up to another £500bn of debt to pay everyone’s heating for a while?
If I was a bit younger, heading to the US to work, seems very appealing at the moment.
Naeclue – I entirely agree. A smaller boat can be a lot more fun than a bigger boat particularly if you are hugging the coast line and exploring!
I agree with making big savings where we can but from an investment point – are investors feeling the worst with the market is over? I’m not an experienced or avid investor but we seem to be told in the media that the worst hasn’t really started yet? (energy & other price rises to continue so inflation not peaking until probably next year/recession starting end of this year/Ukraine not ending anytime soon and that’s without mentioning Brexit again- well nearly!)
Comments I have read on here about people throwing money into investments, even if passive, would seem that way (and even TI mentioning buying more equities whilst cheap.)
Our economy is in a complete mess with the talk of stagflation soon (and does not seem to be going as they thought in US with rising interest rates etc.) So does anybody think this is a good time for readers to invest instead of just holding cash, albeit at a loss due to inflation but 3.5% for one year fix seems better than a loss. I know passive investors are told not to time the market but does anybody think now is the right time to throw money in only to see it disappear down a black hole or wait until some of the turbulence has passed with the current economic outlook. Just wondered what others think. I know to some extent it’s crystal ball stuff but with economic forecasts being so bad does anybody think it’s a good time to invest?
@Dave S — There are never any certainties, and nobody knows what will happen in the markets. Especially in the short-term, but even in the long-term. Very occasionally things go bad for equities and bonds for a very long time. (A couple of decades). Perhaps we are in one of those rare periods. Perhaps not.
However I can say you shouldn’t look at the news / expectations without equally looking at how markets have corrected to reflect this pain. Lower prices mean more potential upside.
Vanguard recently published a report (going in the Weekend Reading links tomorrow) showing how its longer term expectations for equities and bonds have risen after the recent sell-offs.
https://www.vanguard.co.uk/professional/insights-education/insights/four-points-for-LifeStrategy-investors-as-rates-rise
As usual not personal advice, nobody knows what will happen for sure. Investing is risky, and uncertain.
But I can tell you with some confidence that (a) most people won’t predict the market turn and (b) the bottom will probably come in when the news seems approximately bleakest, in retrospect.
@Naeclue (#27):
Re: “… so that has freed up a lot of cash, which we will probably invest.”
Does this signal a change in the general direction of your plan; IIRC, your plan was not to buy any more equities, or have I just misunderstood?
Timely advice, thanks for the post! I’m in the lucky position of not having to cut down spending which is already reasonably low. But raising living costs do mean lower monthly investment contributions – would rather invest more not less in a downturn, but the numbers don’t add up. On the other hand having a bigger portion of cash doesn’t seem like a bad idea either. Perhaps I’ll be happy for that and all if apartments end up being on sale – I’m in my 40s but so far renting
On the subject of saving on energy bills, I did wonder whether the temporary lift to 4% cashback for Santander 123 accounts could be exploited, say you up your energy provider DD to something huge for the 2 or 3 months the offer is running for, then get it refunded in time for xmas. But maybe 4% isn’t that exciting for cash anymore in current climate?
Cracking article and I enjoyed it greatly. Glad you won’t be making changes for the odd Blimp. I don’t agree with everything said but good to read intelligent criticism.
Sell my second home, never. I’m sat here in 30°C warmth, happily able to run my a/c overnight at 0.8 eurocents per kWh (low CO2 then) for easy sleep. Seriously cheap food (give up eating animals to save money). Top notch cheap wine. Snags are the Spanish subjunctive and that dratted 90/180 days of Brexit. Selling my first home and paying the Spanish wealth tax is more likely.
On that last point, I’m about to embark on the mighty tome re capital by Piketty, to keep my retired brain active.
I’m going to buy some thermals, cut back on the heating a bit. A couple of bottles of Aldi Cava less a week. Down grade from chicken breast to thigh fillets.
On the brighter side, a long lost pension I took out in 1990, paid in for a couple of years. Then stopped paying in to when the kids/mortgage etc became a bigger priority and had completely forgot about it.
Well they found me, and boy has it proved the power of 30 years of compound interest. 2K to 80K
@Al Cam, it does sound like a change of plan.
An underspend on a budgeted one off item is similar to a windfall/legacy and we had previously resolved to give away windfalls to mitigate IHT. But that was before inflation let rip and our savings and investments fell in real terms. Having a plan is the easy bit, sticking to it much harder!
No decision has been made yet though and will not be until January when I re-estimate our future spending needs and look at the value of our cash savings and the equities portfolio. My instinct is to invest the saved cash into more equities rather than top up cash savings or give the money away, but we may not do that once we have properly reviewed where we are.
To add to the windfall, I sold our existing boat for more than I previously anticipated and without having to pay brokers fees. Just posted a message on our yacht club WhatsApp group and nearly had my hand bitten off with interest. It is very much a seller’s market for boats right now.
@TI, Please keep banging on about the economic folly of Brexit.
Johnson’s government was very much in denial about there being any costs and the new one is unlikely to be any different. That means they will unlikely pursue any policies to mitigate the damage being caused. More likely they will just double down on Brexit idiocy by picking pointless fights with the EU, eg over the NIP and blaming the EU, remainers, etc. for Brexit difficulties.
I want to see an end to this fantasy land politics and the best way I can see of doing that is to keep pointing out the bleeding obvious and to continually challenge the false claims being made about Brexit.
@Naeclue (#39):
Thanks for the reply.
Re: “Having a plan is the easy bit, sticking to it much harder!” Amen to that. IMO retaining some ability to flex [your planning] is very useful; I also suspect that this need (along with others!) may wane as we age.
In due course, it would be interesting to read how your thinking develops.
‘Perceived as a vote loser’
Lol, how not to use ‘perceived’ in a sentence 😉
Four elections won there’s no perception in it
Aye there’s the rub!
One has to convince the electorate of the qualities of one’s policies to win power in a democracy
This obviously has resolutely not happened-why?
In a totalitarian state where our betters know best this would not be a problem
Our independent- think for themselves -electorate however not being blessed with these circumstances remain unconvinced and votes accordingly
More thought and effort required ladies and gentlemen if you want to change the ship of state’s course!
xxd09
xxd09
@TI, I’m aghast at energy price rises in the UK. I would be considering emigration …
By way of comparison, my annual energy bill is ~$A1,500, ~15% slightly higher than previous years.
The state government recently gave every household $250 in response to record market volatility and price increases (largely driven by private companies selling gas to offshore markets instead of reserving sufficient supply for domestic use and also years of under-investment during the climate wars – we finally voted out most of the deniers).
We’re starting from scratch, but from a better base, as a resource rich country. To state the obvious, governments matter. Arguably, popularism in politics in the US and UK (and even Australia*) was rocket fuel for markets – it has been fertile ground for looter capitalists.
* Australia is baffling, eg Google scott Morrison, John Howard or Tony Abbot.
I’m Australian – I read Monevator for the politics and the comments.
@The Rhino
Hardly worth the bother. Each of the three Santander 123 cashback categories is capped at £5 per month. For the energy category the cap will be doubled to £10 for those two months so the most cashback for energy you could get would be £20.
@sean good spot, agreed juice not worth the squeeze. £10 won’t touch the sides! Need another stooze pronto 😉 Years ago, my gran used to up sticks to Malta for the winter. Lived it up in a hotel for three months for peanuts. Even then far cheaper than running her leaky old house and oil boiler.
@ermine
I would also guess that you will have either no, little, or patchy insulation. And possibly poor air flow to that room (did you keep the door closed?). Fitting insulation might not be so straightforward as it will most likely require understanding condensation risks to avoid creating more problems.
Getting a desiccant humidifier might be your best bet. And a cheap humidity monitor so you can see the relative humidity. And looking at insulating in the longer term.
Honestly, difficult to read an article on Monevator these days without wincing at the multiple snide Brexit comments. You gotta let it go..
@Vano — I wouldn’t hold your breath, and I don’t think the comments in this article were snide. They were pretty explicit about the self-destructive nature of the project from an economic perspective. 🙂
I voted for Brexit, and find your comments fair enough. I’ll be the first to admit having been taken in by excessive economic optimism. Whilst I tend to think ‘no point crying over spilt milk’, your blog, your rules. Thanks for your ongoing perspectives!
@Northern Lad — Cheers, much appreciated!
Funnily enough I was just looking up exercises for correcting my awful computer-inspired posture a few hours ago!
I’m giving this a try, if links are accepted:
https://www.youtube.com/watch?v=GbGSvAEkE68