What caught my eye this week.

Unlike every other personal finance blogger around, I’ve started 2020 wondering whether it’s time I spent more money.

Definitely not going bananas – financial independence is too precious a salve for that!

But making little effort to further grow my wealth.

This is a novel thing for me to consider. Saving comes naturally (genetically?) to me. I’ve mostly left The Accumulator to write posts about mental fortitude and so on, because I’ve no great insights in this area – I just do it. Being in the black has been normal for me since I was eight or nine. I often have to strain my powers of empathy to understand why anyone with a reasonable job and no dependents is different.

And so for decades I’ve occasionally amused myself with compound interest. Even sleeping overnight in a hospital when my dad was in intensive care – and the financial crisis raged abroad – I’d plug in my numbers like some comforting ritual, to see what ludicrous rate of return I needed to catch up with Warren Buffett. (I was also reading The Snowball. And no, I’ve not caught-up!)

So what’s changed?

Well, it’s not that I think we’re doomed to low returns from equities for valuation, or other market timing reasons to act. I don’t see any great evidence for that, provided you’re globally diversified.

And I couldn’t give two hoots about a run-of-the-mill bear market.

Perhaps it’s just getting older? Childless friends my age are forever traveling, urging that you can’t take it with you.

Maybe it is just middle-age? There was a story going around on Bloomberg this week that mid-life misery peaks at just over 47. I’m within shooting distance, but that sort of estimate is usually tied to responsibilities I don’t have, like sleepless children.

Still, I do suspect it’s the ‘years’ field on my old friend, the compound interest calculator, that has set me off.

Because, frankly, when I look around at the world today, I’m more hesitant about entering another 40 years into that box.

Woe is me

Stand down that “actually…”, my friends…

As someone who has often sent people Hans Rosling’s infamously positive TED talk about how the world is getting better – and who regularly includes similar graphs in this round-up – I’m well aware many indicators are going the right way.

I also notice exciting progress in my active investing forays. Genetics-based biotech and the coming-of-age for renewables are two exciting areas to watch.

But I wonder if it’s too little, too late?

Recent politics doesn’t help my mood, obviously. One reason for sharing those hopeful graphs is all the debating with people – left and right – who have become openly scornful of the systems that brought us peace and prosperity – capitalism, markets, a social safety net, international cooperation. See Brexit and Donald Trump for more.

Politics also matters because we’ve had a gun to our head for six decades, and yet nobody talks about nuclear war anymore.

My feelings on nuclear weapons are summed up by this quote attributed to Bertrand Russell:

 “You may reasonably expect a man to walk a tightrope safely for ten minutes; it would be unreasonable to do so without accident for two hundred years.”

When you look at the glib nationalism now prevalent in the UK and the US – and the renewed posturing of Russia and, arguably, China – you can’t help remembering we’ve already been balancing on that tightrope for quite some time.

And then there’s the environment.

Again, not a novel concern – see my post from 2010 on why environmental degradation is the biggest thread to your long-term wealth.

But honestly? I thought I’d probably easily make it out before a true collapse.

If anything I’d become less militant on that front. I’ve got no kids, so why was I curbing my short-haul flights and offsetting carbon via a share of fresh woodland I bought? My friends were constantly in the air with their two or three children who would inherit the results.

Maybe the Australian bush fires are a wake-up call? Evidence has been abundant for years – as a once would-have-been marine biologist I’ve long read about coral reefs dissolving from ocean acidification with dismay – but the Aussie footage is ominous.

Finally, I’ve also just read Dan Carlin’s The End Is Always Near.

As a fan of Carlin’s podcasts I’m familiar with his dour take on the murderous and careless nature of human beings. But you’re whacked over the head with it in his book. It’s hard not to conclude we’re living on borrowed time.

If I told you Carlin wonders whether intervention by an alien caretaker might be one of humanity’s best and only shots, you’ll get the picture!

Enough is enough

The other day I mused whether a Plan B was required in case the politics in Britain continues to deteriorate towards irrationality. A bug-out escape option, maybe, to some more hospitable political climate.

Many readers engaged with the idea. A few said I was being ridiculous or irresponsible for ‘predicting’ such a thing.

Let’s try the maths again, eh?

I’m guessing there is a 5-10% chance of this bug-out option being needed – up from ‘negligible’ 20 years ago. So I’m estimating at most a one-in-ten chance. In other words, I ‘predict’ that nine times out of ten the UK won’t reach this sorry state. That is not a forecast of certain or even likely disaster.

The point is even a small chance of a truly dire outcome is worth insuring against, however. It’s the same reason you insure your house against it burning down, though that’s never happened to anybody you know.

Unfortunately there’s no good Plan B against a global catastrophic dislocation – nuclear war, environmental collapse, the singularity, or perhaps a global pandemic – except to get your business done beforehand.

That is, to spend more money.

You can’t save the world

Before anyone asks (thanks in advance!) I’m feeling fine. I’m looking forward to the wedding of an old friend tomorrow, and I have an interesting date lined up for Sunday.  I do suffer from SAD a tad, but that’s nothing new.

These Weekend Reading posts are a chance to range more widely beyond asset allocation, ISAs, and SIPPs. And I have found myself pondering whether an uptick in living for today might be a rational response to how I see things have been progressing.

Wealthy people are living for longer, and we’ve written before that a retiree at even 65-years old should ideally have a plan that can see them out for 30-40 years.

However not all those years will be healthy, and that raises difficult questions when planning. For instance, should you spend more money on travel when you’re early into retirement? Or should you save more for later, when you may need care?

Very few of us consider the healthy life of the societies – or even the planet – when making such calculations.

That’s a luxury we take for granted. Few societies (including our own) have gone as long as the UK has without some major disruption, be it war, famine, plague, or revolution.

Globally of course the planet has always come through, but from Easter Island to the Mayans to most recently the likes of Egypt, the demise of local natural life-support systems has caused unrest if not extinction.

It’s a bleak subject.

Optimists make the best investors, and that’s the hat I’ll continue to wear when investing.

But as a saver?

Maybe it’s time for some pessimism.

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Let’s explore how you can combine your UK tax shelters to reach financial independence (FI) as quickly as possible and as safely as you deem necessary. I’ll explain my thinking as we go, so you can decide if my safe is safe enough for you.1

First we need to re-state the problem with the standard FI approach.

Legend has it that you are financially independent once you’ve saved 25 times your annual expenses.

Say your annual expenses equal £25,000:

£25,000 x 25 = £625,000 = living the dream!

Except no. That’s not realistic – and I’m not even slagging off the notorious 4% rule.

It’s not realistic because most of us will have our wealth locked up in ISAs and pensions.

And this inconvenient truth changes the game.

Got 99 problems and a 4% SWR ain’t one

Let’s say you want to retire early. Continuing our example above, we’ll assume you’ve got £300,000 in your ISA by age 40 and £325,000 in your SIPP.

You’re at the magic £625,000 mark. Theoretically you can draw an income of £25,000 at a sustainable withdrawal rate (SWR) of 4%.2

But wait! You can’t access your SIPP until age 55 at best. Perhaps not until age 57, or higher still if politicians keep moving the goalposts.

That means you’ll be withdrawing £25,000 from your £300,000 ISA account for at least 15 years – an 8.3% SWR.

Such a rapid rate of withdrawal means your ISA risks running out of money too fast in more than 25% of scenarios, according to work by one of the top researchers in the field, Professor Wade Pfau.

Frankly, that’s an unacceptable failure rate.

I don’t want to entertain a one-in-four chance of having to go back to work before I can tap into my pensions.

• Save the entire £625,000 into an ISA and the problem disappears. Trouble is, it’s far harder to retire early without using the powerful tax reliefs available with pensions.

• Save everything into a pension and retire after the minimum pension age and the problem disappears. But many Monevator readers hope to retire earlier.

The average FIRE-ee will spread their wealth across tax shelters – and the different access times, rules, and quirks can defeat simplistic withdrawal rate tactics.

However, we can crack the code so you can maximise your tax advantages, and hit FI with a realistic plan that minimises the odds of having your dream derailed by a casual cuff of chance.

Ground rules

This is going to be a series of around six posts.

Yes, it’s going to be a bit hardcore. But by the end you’ll have a guide to the key steps, tools, research, calculations, and assumptions that’ll enable you to customise your own plan.

Financial Independence means being able to live off your investments without going back to work. Yes, you can make up shortfalls in savings by picking up work but then you’re not independent. Our plan needs to be robust enough to avoid that scenario if possible.

Of course other income streams can make all the difference if you can engineer them.

Here are my working assumptions:

• Before minimum pension age, we’ll fund our retirement with ISAs and – if your pre-FI income is high enough – General Investment Accounts (GIAs), which are the non-ISA, non-SIPP broker accounts that are taxed at standard rates for capital gains, dividends, and interest.

• For money you’ll access beyond minimum pension age, a personal pension wins hands down as your primary savings vehicle. Some people will hit the lifetime allowance, but that’s a nice problem to have, and nothing to be afraid of. To keep things simple, I’ll assume a SIPP is our account of choice from minimum pension age on.

• I’ll use conservative SWRs as the benchmark for the sustainability of our plan. The SWR metric strikes a good balance between achievability, and relative safety. Our income will be tithed from the total return via capital sales and any income generated by our assets. (Some Monevator readers3 aim to increase their level of security by living off investment income only. I salute them – but it’s a higher bar, takes longer to reach, and still entails risk.)

• I’ve used UK tax rates in all case studies for the sake of sanity. Scottish and Welsh income taxpayers may have to adjust slightly where relevant.

• We’ll take into account low expected returns, given today’s high valuation investing environment.

• We’ll adjust for the fact that much of the historic research relies on benign US investment returns.

• Obviously we don’t know what tax regimes will look like in decades to come. Ditto for investment returns, life expectancies, and the price of fish. All we can do is make use of the best information we have and adapt along the way. So err on the side of caution, have a back-up plan (we’ll discuss those), and let’s not be paralysed by the unknowns.

In part two of the series, I show why personal pensions are much more tax efficient than ISAs and shouldn’t be ignored, even by early retirees.

Take it steady,

The Accumulator

1. Acknowledging that there is no absolute safety in this world. [↩]
2. £625,000 x 0.04 = £25,000. [↩]
3. And my co-blogger, The Investor! [↩]

What caught my eye this week.

Besides a brilliant comment thread, our early retirement Christmas debate concluded with a poll. That’s now closed and the votes are in.

And you, The People – as we must say these days – expressed your FIRE plans as follows:

1,199 readers voted. Wish I’d waited for one more now.

Tempting though it is to present these results as a crushing blow for my workshy arch-frenemy The Accumulator, I’d say it’s really a no-score draw.

That’s because in hindsight the phrasing of the ‘maybe do a bit of work if interesting’ option made it a no-brainer. Only the most dedicated rat race escapee would turn down doing a little paid work they thought was both interesting and useful, surely?

Actually, perhaps the ever-reasonable Details Man really won the debate, given this result.

If so, the prize for victory – diddlysquat, bar the joy of me contesting the results when I see him next – couldn’t have gone to a nicer FIRE-seeker.

Enjoy the links, and your weekend.

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