Long-time Monevator reader @old_eyes has enjoyed a stimulating career and a healthy income. Sound investing decisions have put his household on a firm footing as he and his wife enter their 70s. The challenge though is that they need to support TWO households. Please enjoy the latest in our series of real-life FIRE profiles.

A place by the FIRE

Hello! How do you feel about taking stock of your financial life today?

I feel that I have reached a good place, with financial independence reasonably secure. There is always the risk of some left-field catastrophe, but if the world continues its journey with a recognisable financial system, we should be okay. So now is a good time to look back on the journey and ask how we got here.

Whether there are any messages for other members of the Monevator community seeking FIRE, I don’t know. I was a late starter with serious saving and investing, didn’t really retire early, and I have not done anything clever or special.

I am also acutely aware how lucky I have been, not only in having a good and satisfying career, but also in being born at the right time. A time when defined benefit pensions were the norm, student debt was unknown (apart from sometimes having to grovel for a tiny, tiny overdraft), and homes were an understandable multiple of earnings.

It is a very different world for the next generation.

How old are you?

I am 69 and my wife 70. We have been together for 46 years and married for 40. (It’s a shock to write those four numbers down!)

Do you have any dependents?

We have two sons. The older is 37 and on the autistic spectrum, the younger 34.

Our older son is totally dependent on us. He has never worked and is extremely unlikely to ever work. He also has some health issues arising from an auto-immune disease.

We have been able to buy him a house in the centre of Liverpool. There he can live independently, something that would be impossible in our rural location. We cover all his bills as the state is unable/unwilling to do very much for him. So, we are effectively running two households. It is better for him to be where he can walk or get public transport to wherever he wants to go, and where there are accessible services and amenities. However, it does increase the costs.

His situation has a big influence on how we think about our savings and investments. They must support him after our deaths for the rest of his life. It is not just financial independence for us, it is lifetime financial independence for him. We can’t see the state becoming more generous to the unfortunate in the foreseeable future. Ours does not feel like a very caring society, and with fewer working people available to support those retired on unable to work, it is hard to see that changing.

Our younger son is married to an American and lives in the Bay Area with their young daughter. He works in marketing and communications for the tech industry. We have had to get used to the ferocious turnover rate that characterises that sector. From one call to the next we are never sure who he is currently working for – or whether he is currently working at all.

Where do you live?

We live in North Wales in a very rural area. It sounds out of the way, but we are an hour from Liverpool, an hour from Manchester and an hour from Snowdonia (Eryri). Unfortunately, rural transport is dire, so we are a two-car family.

When do you consider you achieved Financial Independence?

In 2016 at 62, the job I was then doing vanished out from under me. We looked at the numbers and realised that we had enough for financial independence now, and with a good chance of meeting our remaining financial goal of leaving a legacy for our autistic spectrum son.

I wasn’t aiming at a particular number. I knew I didn’t really want to go on until state retirement age, and the restructuring at work provided the incentive to consider whether I had reached FI. It looked okay so I pulled the trigger. Now I did not need to work anymore.

What about Retired Early?

I ran my own consulting company from 2001-2012. It was quiet across 2012-2016, whilst I was doing a last corporate stint, but picked up again after 2016. Now I have achieved FI, I am much more selective about who I work with. It is now almost entirely not-for-profits working in areas I think are important.

I try not to work more than a couple of days a week, but there are occasional intense bursts of activity. 

I am still enjoying the work and will stop when I have had enough. Unlike @ermine, I never had a burning desire to get the hell out of it. My career was pretty pleasant, and although I suffered under stupid management from time to time, I always felt the work itself was satisfying.

It would be nice and neat to carry on to 2026, the 25^th anniversary of founding my consultancy, but I am not sure I am motivated enough. I expect to quietly fade from view.

Assets: definitely maybe 

What’s your current net worth?

I always find net worth a tricky question to answer.

Well, what are the main assets that make up your net worth?

We have £630,000 in cash and investments (with currently about £64,000 in cash-like assets). Almost all now in ISAs and a small SIPP for my wife.

If I closed my company down today, there is probably about £110,000 that could be taken out (after corporation taxes, but before personal taxes).

I have two defined benefit pensions, a full UK state pension, and a small Dutch state pension (I spent five years in the Netherlands working for a multinational). They currently total £96,000 p.a., so applying the 20x rule for Lifetime Allowance calculations, they are worth £1.92 million. 

Is that part of net worth? I can’t do anything else with it except to take the income. If I still had a regular paying job, I would not multiply my salary by 20 and call that the cash equivalent. It would just be income.

Our house has not been on the market since 1986, so current value is a guess. Conservatively, £400,000. It’s a large house, but in a cheap part of the country.

My wife owns the house in Liverpool where our autistic son lives, bought with a legacy from her deceased father. She has about £80,000 in cash savings left over from that legacy, plus a full UK state pension and the same small Dutch state pension. The house will be passed onto our son. We are currently working out how best to do that.

We try to keep her pension and cash savings out of our thinking. It is her ‘mad money’ for when she wants to run away and join a circus. If we had to dip into it, I’d want to replace it as soon as possible.

What’s your main residence like?

We live in what was a two-up, two-down 17^th Century stone farmhouse, that has been extended over the years. It once had stone shippons on each side – cow or animal barns, beudy in Welsh – and we still have some of those heavy stone walls inside the house. We added our own extension when I started working from a home base in 1998, and then a couple of heated conservatories for the gardener, my wife.

Some land also came with the house, and we manage that for wildlife. It was an accidental purchase, we were not looking for a smallholding, but it came with the house we loved. We have had fun digging ponds, planting trees and trying to keep back the blackthorn.

We own the house and land outright, having finally paid off the mortgage in 2010.

Do you consider your home an asset, an investment, or something else?

I’ve never been able to think of our home as an asset or an investment. It clearly is the first and probably the second, but it is not an asset I can use except to live in or borrow against. If I sell, I must replace it with something equivalent. We may downsize later, but that would likely be at a point where we need better access to urban areas and public transport. Such a property would be higher cost per m².

Judging by the prices of comfortable and conveniently placed bungalows in our area, we would release very little by ‘downsizing’. Yes, I know there are imputed rent savings and all the rest, but I don’t think working that out would help me decide how to save, invest and spend.

Earning: good chemistry

What’s your line of work?

I never had a clearly defined career path. I was always envious (perhaps wrongly) of friends who knew exactly what job they were after, and how they expected their working life to play out.

What I did have was a passion for chemistry. I don’t know where from, but at a very young age (about seven) I was playing ‘chemistry’ with food dyes, water, and various glass bottles in a plastic washing up bowl. By 12 I had a modest chemical laboratory in my bedroom. I think it was the atavistic thrill of creating dramatic colour changes, setting fire to things, and making them go bang.

The passion stayed with me, and I studied chemistry at university without much idea what I would do with such a degree. Finding out that corporates wanted a PhD if you were going to lead research, I started one. Somewhere in the next three years, I decided I really wanted to be an academic, and – PhD in hand – I got a post as a lecturer at my local university.

That was in 1980, just at the start of the Thatcher cuts. (Starting salary £11,000.) A torrid time to be trying to build a reputation and career but I was fairly successful, and by 1986 I had a research group of 12. Unfortunately it was costing me two days a week hustling for money to feed them. I wasn’t sure I could make the impact I wanted staying there.

So, in 1986, I took a senior job with the corporate research group of a multinational. (Starting salary £24,000). I was still spending a couple of days a week on admin, politics, and pitching for budgets, but now I had a team of over 100, more capital to spend, and some really juicy problems to tackle.

In academia, you are often wandering around with a solution asking: “does anyone have a problem that matches this?” And if the problem you are working on is too difficult, you just redefine it. In industry, the problems are real, and will not go away. I liked that.

In 1993 I got a job as R&D director for one of the multinational’s subsidiaries in Europe. (Base salary £99,000). I thought it would be an extension of what I had already been doing, but it was not. Now I was sharing responsibility for the profitability of the company with a whole board of very business-focused people. They taught me a huge amount about what does and does not work in business. I learned that corporate R&D is not the real world. You are still insulated from day-to-day decisions.

In 1998, M&A activity saw the subsidiary I was in transferred to a new owner. There was a lot of fascinating work looking at the jigsaw pieces we had once the dust had settled, wondering what business configurations could be viable. As we sorted it out, I returned to the UK to become Director of Sustainability, working out how we would adapt to the net zero future that was already on the horizon.

Despite this very interesting work, major reorganisation was looming. The acquirer had overstretched themselves and needed to cut costs. As the focus shifted relentlessly to the short-term there was no interest in the longer-term strategies I was promoting. Job satisfaction ebbed away and in 2001 I accepted an offer of voluntary redundancy. (Base salary at that point £89,000).

Now I had to work out what to do next.

Did you leap straight into business for yourself?

My father was a serially unsuccessful businessman. He was okay at the technical side, but hopeless financially. He became a very unhappy man, and I had a very fraught childhood as a result. I swore I would never subject any family I had to the same stresses.

So my first thought was to get back on the corporate horse, but some very senior mentors told me that although I could easily go straight back into another corporate job, it would not make me happy. I was best at starting things, not at running them operationally. In five years’ time, I would be facing the same situation. Why not use everything I had learned about R&D, innovation, and sustainability as a consultant?

It took a lot of people a lot of time to persuade me that I was not my father, and that I could succeed. My wife had stopped working when we had children, so financial stability rested on me. I found that scary, but with a redundancy cheque in my back pocket we agreed to give it a go. Fortunately, some colleagues who had passed this way before told me it would be a year before I got new clients without the help of previous networks, so I did not panic when that turned out to be true. On 11^th September 2001 I was on my way to a meeting with my first potential client, when I noticed people crowding around a shop window. TVs were showing planes crashing into skyscrapers. My meeting was cancelled, and nobody answered the phone for the next six months.

Despite my caution, within a year I started a second business with an ex-colleague targeting a different consulting market. That went reasonably well, but we both had other companies and in the end could not give it the time it needed. In 2009 we stopped.

But my own business grew. The first target was to rebuild the redundancy payment I had started with as a cash buffer. I always felt in the early days that I would be rumbled as a fraud and the work would melt away. The second task was to overpay the mortgage. We had previously experienced two bouts of very high mortgage rates with a new house and a new family. I wanted to reduce outgoings where I could.

I discovered a lot of business problems look the same, no matter the sector, so I found myself working with different organisations, both private and public. One was a government department setting up a new arms-length body. That body started off as a client, became a major client, and ultimately my only client. I did point out that paying a daily rate did not make sense when they had an insatiable appetite for my time. Their response was they liked the flexibility, and probably wouldn’t need me next month. They always did. 

This went on for a couple of years until, in 2012, the government had one of its regular spasms about the number of consultants and contractors they used. I had to choose between becoming full-time staff or stopping work with them altogether. I thought the work was important and worthwhile, and the pay was acceptable (£85,000), so I took the job. I expected to do it for a few years until I had achieved my goals. In the end it was four years, and I left in 2016 to pick up the threads of my consultancy work again.

Since then, I’ve been working with a small number of clients. All in the public sector or not-for-profits.

One of my bosses described my career as “zig-zagging its way to success”, and that is what it felt like. I always felt that each career decision was the last one I would need to make – and I was always wrong.

What is your annual income now?

My current income is £96,000 in various pensions, plus a small salary and dividends from my consulting company. This is right up against the £100,000 tax trap where the marginal rate jumps to 60%. I try and keep to that figure as a limit, but I’m usually a bit over. I would prefer a more logical and progressive tax system – bring the 45% rate down to £100,000 if we must – but I’m not going to complain too loudly. It is a nice problem to have, and we all should contribute.

I may take advantage of the relaxation of the Lifetime Allowance for pensions next year to increase savings a bit further.

How did your salary progress over the years?

Over my career, my salary started at £11,000, peaked at £99,000, and by early retirement in 2016 it was £91,000. These are base salary numbers, excluding any benefits packages or bonuses.

From 2003- 2012 I was taking what I needed from my business as a salary, adjusted to provide roughly £4,000 a month after tax into my bank.

I was also taking the maximum amount of dividends that were tax-free, and from 2010 paying into a private pension.

When did you first start thinking seriously about money and investing?

In 2001 I left the corporate world, and realised that I was now responsible for delivering a sustainable financial future for my family. Up to that point I had always had a ‘regular’ job and assumed that the company pension would meet our future needs.

I had a deferred pension, which provided a base from which to build, but I realised I would probably need more. The first few years of running my own company were just scrabbling to keep all the plates spinning and learning how to be a consultant.

Was pursuing financial independence part of your career plans?

There was no thought of FIRE until I left the corporate world in 2001. In each job I thought that was me sorted until retirement. I had always relied on the prospect of a corporate pension.

I learned about ‘drop-dead’ money from James Clavell’s Noble House in the 1980s. It stayed a dream in the back of my mind, but I did no serious thinking until about 2010.

Did you learn anything about building your career that you wished you’d known earlier?

Understanding that I was not my father much earlier could have helped me. I could have been more flexible in my career if I had more confidence. But my terror of not having a steady income kept me around large corporates.

On the other hand, working in those large corporates taught me so much of what I have used since. I wasn’t unhappy, and I might not have been ready to branch out earlier.

Saving and spending matters

What is your annual spending and how has this changed over time?

I find it easier to think on a monthly basis. After tax I have £6,200 hitting my bank account each month. About £4,000 goes straight back out in the costs of running two households. So £2,200 a month, or £26,000 a year, in discretionary spending. That goes on major holidays, like visiting our son’s family on the West Coast, our hobbies, repairs and upgrades to the homes (recently a new heating system, PV and battery for our main home, and air-con for the Liverpool house), and savings and investments.

Looking back to when the whole family were living together, the equivalent numbers were £3,000 in regular monthly outgoings and £1,000 as discretionary spend. That included school fees for the younger son and private tutoring for our autistic son.

Income has increased, but although some costs have dropped out as one son left home and education came to an end, inflation and the costs of running two household have pushed up monthly outgoings. We definitely have more headroom now, but we have delayed some spending on the house and travel.

Do you stick to a budget?

We don’t have a budget. Instead, I keep an eye on what is going out monthly in immediate and repeating costs. Things like energy, water, food, telecoms, insurance, council tax, cleaner, gardeners, support for our autistic son, and additional carer costs for my 95-year-old mother.

If it starts drifting up, I check whether it is inflation we will have to live with, or whether we are changing our purchasing habits. That means I know how much headroom there is each month for additional saving and investment or building up the kitty for the next big purchase.

What percentage of your gross income did you save?

I never had a fixed saving percentage. By the time I knew about savings rates, I was running my own business and either taking the minimum I needed each month, or taking chunks as dividends and increasing the pension pot.

Do you have any hints about saving and spending?

For us, saving and spending less come to the same thing. There are two keys – knowing where the money goes, and spending with purpose. We have always had a pretty good idea of what is going out on a monthly basis, and how much headroom we have. A lot of friends and colleagues have very little idea the basic dynamics of their regular expenditure.

We spend intentionally, and I hope thoughtfully, on things that matter to us. When we first married, we made do with a mattress on the floor, but had a very expensive SLR camera and lenses. This shocked our parents, who thought we were not behaving appropriately, but we wanted the camera more than we cared about not having a bed. The important thing was not to try to buy both.

Pay for the needs first and then think hard about your wants. Don’t confuse needs and wants.

Do you have any passion, hobbies, or vices that eat up your income?

Astrophotography is my passion and vice. My pride and joy is an automated observatory I built on our land. It was a cool retirement project. I am also part of a syndicate that rents three scopes at an observatory in Spain that we operate over the internet. Astrophotography is like normal photography but much more expensive.

My wife is a keen gardener, with a very large garden and a small nature reserve. She also holds one of the national plant collections. What with acquiring plants, hiring contractors, and getting help with the heavier garden maintenance, costs of heating conservatories and endless bags of peat-free compost, she probably spends about as much on that as I do on astrophotography.

We spend freely on these activities that bring us joy, but not excessively (at least that is our excuse). As is usually the case, to outsiders it looks like we spend a great deal on these hobbies, but we both know people in our respective communities that spend many multiples of that.

That’s how we work it, one major vice each.

A galactic budget: The Orion Nebula, as captured by @old_eyes.

Investing: passive all the way

What kind of investor are you?

My first steps into investing were rather unguided. In 2010 my business was stable enough to give me a good cash buffer and something left over to invest. I went to an IFA for guidance and started a pension, and an ISA for both of us.

I was aware enough to pay for his advice, rather than allow him to manage my funds, but I did no thinking about where the money was going. In particular, I had no idea what the private pension was invested in, it was just a package from Scottish Widows. There were also a couple of individual shares. (Standard Life demutualisation in 2006, and Royal Mail in 2013).

After that initial phase I just kept paying what I could into the pension pot and added a little to the ISAs. Then I discovered the FIRE community, Monevator and other blogs, and began to think more carefully about where I was investing and reorganising things. I read Rowland and Lawson’s The Permanent Portfolio and based some of my thinking on that.

I ended up with something very similar to The Accumulator’s Slow and Steady portfolio. Initially it was 50:50 growth and defensive (all in funds), but I upped it to 60:40 because of my strong pension position. A rational analysis says I should go further still into equities, but 60:40 is far enough.

But passive. Passive all the way. I have no illusions that I have the time, interest, or expertise for active investment. I don’t think I can beat the market.

Right now, I am simplifying the portfolio as it has become untidy over time with funds from different providers that do the same thing. Rationalising funds, switching to simple global equities and so on.

My wife is very intelligent, but not remotely interested in the mechanics of investment. I need create something that requires the minimum of attention and maintenance, with operational instructions that fit on one side of A4. This is all part of building a ‘dying tidy’ file in case I die first. Something that will tell her or her agents everything they need to know about where the money is and where it gets spent.

What was your best investment?

It is a disappointing answer, but when I rejoined the conventional world of work in 2012, I had the opportunity of transferring the private pension I had built up into the civil service defined benefit scheme.

I had previously been stuffing money into the private pension from the profits of my consulting company. I transferred £177,000 into the civil service scheme and that bought me an index-linked pension of £12,000 p.a. with widow’s benefits.

Given my risk aversion, that was probably the best decision I made.

Did you make any big mistakes on your investing journey?

Most of the apparent mistakes are only visible with hindsight. Why was I in bonds in 2022-23? Answer, because I couldn’t have predicted what happened, and the reasons for investing in bonds are always the same and always valid. It’s part of being a passive investor dummy!

My two mortgages were endowment mortgages, and that caused me considerable heartache. But they were very common at the time, almost the default. I did not know enough to check the assumptions the brokers were making, and they were the only products that were offered to me.

What has been your overall return?

I don’t have much idea for the earlier phase of my investment journey, but I did keep records from 2015 onwards. So I can say that annual return (including fees) was:

Tax Year	Return
2015	2.11%
2016	14.68%
2017	1.23%
2018	8.44%
2019	-3.11%
2020	19.54%
2021	7.78%
2022	-4.66%

I have been putting in and taking out money on a regular basis for chunky outlays: work on our house and the house where my autistic son lives, and various ‘bank of mum and dad’ stuff helping our younger son.

Since 2015 the net contribution to the portfolio is only £8,000, yet the pot has grown by 67% from £374,000 to £629,000. Time in the market counts for a lot.

How much have you maximised your ISA and pension contributions?

From about 2010 to 2016 I was using all our ISA allowances and putting money into pensions.

Changes in the pension Lifetime Allowance pushed me to start taking my first corporate pension in 2013. I took a much smaller lump sum because I wanted to get the maximum regular income coming in. Signs of my continued aversion to risk. That meant I could afford to maximise pension and ISA contributions during the time I was working for a salary again.

Since 2016 there have been modest ISA contributions, as and when the cash buffer was full and there were no big expenditures on the horizon.

To what extent did tax incentives and shelters influence your strategy?

I have tried to make good use of ISAs and pension saving without getting silly. In one purple patch of business, I had more money coming in than I could put into a pension or ISA, so I had a largish slug of bare investments. Conversely, in years when I could not use all our ISA allowances, I moved investments into the sheltered accounts.

Now, apart from the cash buffer, we are entirely in tax sheltered accounts. About 86%.

How often do you check or tweak your portfolio?

I routinely check once a month, but that is really for information only. I don’t rebalance within the portfolio. Only when I am adding or removing money or simplifying.

Wealth: flexible finances

We know how you made your money, but how did you keep it?

Running your own micro-company, earnings are episodic. There is not much opportunity for regular savings and investment. So it was always in lumps. A good quarter or a bonus.

Investment was always into funds and pensions. Funds investment was intended to be buy and hold when possible. We have never invested in property. Too much like hard work.

Which is more important, saving or investing?

I think saving is the beginning of financial independence. That cash buffer is critical for lean periods and big ticket items. Once you have a cash buffer you are comfortable with, investment is possible.

Only you know how big a cash buffer makes you feel secure. 

Investment grows your wealth, but savings help you sleep at night. Apart from a mortgage, we have been debt-free since around 1990. All the major one-off items, from holidays to home extensions and heating systems have come out of the cash buffer. And we always rebuild it as quickly as possible.

We know we are not maximising our investments and growing our pot as fast as we could, but it is comfortable. As for leveraged investments – we leave that to people with much better maths and a much stronger stomach. 

When did you think you’d achieve financial freedom?

I wanted financial freedom, not to retire early but to work in whatever way suited me. I hoped I would reach that point before normal retirement age, but I didn’t have any specific timeline or plan until FI was already in sight. Perhaps around 58. Then I started thinking that 60-62 might be possible.

Are you still growing your pot?

I am still putting modest amounts into our investment pot. As and when cash is available.

So far, our needs can be met with the pensions, and we have only taken money from the investment pot for ‘bank of mum and dad’ stuff.

Do you have any further financial goals?

I have three goals: to leave a sufficient legacy to support our autistic son, to have enough money for quality care if we need it later, and to enable my wife to continue to live comfortably, should I die first (pension income would more than halve, and her costs would not).

How much do we need for that? I don’t know. My gut and back of the envelope sums say I can hit two out of three with the current pot, and when I stop consulting and close the company there should be another injection of cash. If the investments keep pace with inflation, I think we are okay.

What would you say to Monevator readers pursuing financial freedom?

I have three messages, none of them original.

Time matters, but it is never too late to start. I did not start seriously saving and investing until 2010 at age 56. Yes, I had great ‘floor’ in a decent pension, but I also need to leave a very substantial legacy. The pot to provide that has been built over 14 years. In the last eight years it has grown by 67% with only a tiny net cash investment, and a very conservative asset allocation.

Think hard about what you want to do with financial freedom. Running towards something is always better than running from something. I have seen many people stick at a job they dislike until they make their number, leave with a fanfare, and then rapidly decline in mental or physical health because they had nothing else. “I want to achieve FI so that I can…” is a better story than “I want to achieve FI because I hate my boss”.

‘One more year’ is a real and dangerous way of thinking. At every major event in your working life, check whether you have achieved FI and if one more year is really necessary. Too many people shift the goalposts as they get close, partly out of fear of some unknown catastrophe and partly from the absence of a plan for what next. 

You can accuse me of hypocrisy because I have kept on working. Am I not guilty of ‘one more year’? Not really. I sought FI to have the freedom to do what I am doing now. To have the choice. Even if I had a much bigger pot than I need for my financial objectives, I would still be doing the work I am because I enjoy it and I think it does some good.

Any other business

Did any particular individuals inspire you to become financially free?

I had many good mentors and bosses in my career (as well as a couple of real shockers). Each added something particular to my philosophy.

Perhaps the most important influence was a main board director of the multinational I worked for. He was an active mentor from 1990 – 2001. He taught me many things over those years, but the critical intervention was when I was agreeing redundancy in 2001. He took me to lunch, and over a couple of hours gave me a clear-eyed analysis of my strengths and weaknesses, possible future, and introduced the idea of setting up as a consultant.

He also suggested an outplacement agency who would ask the question “what do you want to be when you grow up?”, rather than stuffing me into the first executive position they could find and taking their fee. Without him, the second half of my career would have been very different.

The person who drove my desire for financial independence (safety, in effect) was my father. I saw what living on the edge looked like and wanted out. I saw freedom from want as a solid salary, rather than true FI, and I had modest ambitions, but I wanted ‘enough’ so that I did not have to worry every month.

Can you recommend your favourite resources?

Monevator is always where I start on the web. The mix of learning resources, news, and pointers to interesting things makes it essential. It was the resource that got me organised with a clear plan. I am in ‘maintenance’ mode now, but I still read every post and comments – sometimes in wonder and sometimes confusion.

The only other website I check regularly for updates is Simple Living In Somerset (and before that Simple Living In Suffolk). The grumpy mustelid is a brilliant writer, and their thoughts on living in retirement are entertaining and insightful. Like the IgNobel prizes they make me laugh and then think.

Two books have helped me to understand what I am doing in pursuit of FI, what risks I am taking and why. The first is Daniel Kahneman’s Thinking, Fast and Slow. This has a lot to say about how we make decisions, how prejudices and biases get in the way, and how we convince ourselves we are being logical when we are not. It is a book I return to often. 

A much more recent book is Morgan Housel’s The Psychology of Money. It came out after I had reached FI and semi-retired, but it was a great distillation of some of my own conflicts over money and security. It helped me to understand my own psychology a bit better, and hopefully improve my decision making.

What are your thoughts around charity and inheritance?

We give regular moderate amounts to environmental and conservation charities, one-off sums to disaster relief appeals, and intend to leave a bequest in our wills to a conservation charity we have worked with for many years.

In an ideal world we are not great fans of inheritance. Wealth ‘cascading down the generations’ does as much harm as good.

In practice our attitude is dominated by the need to secure the future for our autistic son. Once we accept that, we feel we should make some provision for our younger son to avoid family feuds. We have both seen those in action and they are ugly.

Our younger son knows that he is second in the queue and accepts it (I hope!). And with a bit of luck any inheritance will be so far down the line that it will be of more value to his children.

What will your finances ideally look like towards the end of your life?

For all the reasons given, we hope to die with a big enough stash to provide a 40 year FIRE for our older son and a nice surprise for our younger son.

Nothing super-remarkable in this story, as @old_eyes himself says. And yet also once again entirely personal and full of interesting insights – as well as unique challenges. Questions and reflections welcome, but please remember @old_eyes is just a reader, sharing his story, not a battle-hardened blogger like me. Constructive feedback welcome. Personal attacks will be deleted. See the rest of our FIRE studies.

What on Earth is excess reportable income? We’re glad you asked because this little-known aspect of an investor’s tax obligations is easy to miss or get wrong.

In the following guide, we’ll explain what excess reportable income is, how to use it to calculate income tax due on your investments, how to ensure you’re not overpaying, and where it goes on your tax form. 

Sounds like a chore? Yeah, we can think of better ways to spend an evening too.

So let’s start with a reminder that if all your affected funds are tucked inside a tax shelter – an ISA or a pension (SIPP) – then you don’t need to worry about filling in tax forms on this score at all. The whole concept is moot for you.

But please do read on anyway – if only to learn what you’re getting out of!

What is excess reportable income?

Excess reportable income is the amount of dividends and interest earned by an offshore reporting fund that isn’t otherwise distributed to investors. 

This is additional income that can accumulate in your fund. And the taxman wants his slice.

Fund and ETF providers1 publish excess reportable income in annual documents that you can use to calculate your tax liability. 

Offshore accumulation funds store up such reportable income instead of distributing it – but vanilla income funds can do so too. 

(Incidentally, some people don’t think they owe tax on accumulated dividends and interest. That’s flat wrong.) 

What is an offshore reporting fund?

Most funds that reside outside of the UK are designated ‘offshore’.

For example, Irish domiciled funds and ETFs, naturally enough, count as offshore. 

A fund usually lists its domicile on its webpage or factsheet. You can also tell its home base by eyeballing its ISIN number. If that code doesn’t start with ‘GB’ then you’re almost certainly looking at an offshore fund. 

Our piece on fund names explains more. 

There are some obscure exceptions to the ‘non-UK fund = offshore’ rule. It’s a non-issue if you stick to index trackers but ask your fund manager if you want absolute reassurance. 

Meanwhile, a reporting fund is an offshore fund that reports its income to HMRC (and presumably complies with a laundry list of other infernal demands).

HMRC maintains an approved list of offshore reporting funds. 

Most offshore index trackers have reporting fund status. This is a good thing because without that you’d be stiffed for capital gains tax at income tax rates. Shudder.

Reporting fund status should be mentioned on your fund’s web page or factsheet. If it’s not, take that as a bad sign and a prompt to investigate further. 

Using excess reportable income to calculate your tax

Fund providers typically compile excess reportable income figures on one large and fearsome document per year.

Find your fund on your provider’s list and note its: 

• Excess reportable income amount per unit / share

• Fund distribution date

• Last day of the reporting / account period

• Equalisation amount / adjustment (if any)

The amount of income you potentially owe tax on is:

Excess reportable income per share multiplied by the number of shares you own on the last day of the reporting period.  

For example:

• Excess Reported Income per share = 0.237 GBP
• No of shares owned = 100

So 0.237 x 100 = £23.70 – the total excess reportable income to be included on your tax return.

But wait! This figure may yet be affected by any equalisation payments you were entitled to. 

Reduce tax with an equalisation adjustment

Some funds report an equalisation amount / adjustment. You can use this to reduce the amount of tax payable if you acquired new units or shares during the reporting period. 

You apply the equalisation amount to any shares you bought between ex-dividend dates. 

This equalisation amount may be listed in different ways. 

For example, you may see a single figure listed for a particular reporting period. This is especially likely for accumulation funds. 

Other times, a series of equalisation amounts may be recorded for every distribution date that an income fund declared during its reporting period. 

In this instance, look for the equalisation amount entered for the first distribution date (or ex-dividend date) after each shares purchase you made during the reporting period. 

Your total equalisation adjustment is:

The equalisation amount multiplied by the number of shares you purchased during the relevant period. 

Tot up any applicable equalisation adjustments and deduct them from the taxable income you owe for that fund during the reporting period. 

You can subtract your total equalisation adjustment from your excess reportable income first, then any distributions received, or vice versa. 

It doesn’t matter if your excess reportable income and distributions fall into different tax years.

Capital concerns

Equalisation payments may also make a difference to your capital gains tax. 

Equalisation adjustments are essentially a non-taxable return of capital. They arise because you bought fund units for an asking price inflated by accrued dividends. 

Effectively, the equalisation adjustment reclassifies the accrued dividend (that you have not benefited from) as a return of capital so that you don’t pay income tax on it. 

Note, some funds do not provide equalisation payments. 

Yes, there’s more

Excess reportable income is payable even if you bought your fund shares on the final day of the reporting period. 

Your excess reportable income counts as being received on the fund distribution date. That date also determines the tax year that any tax liability falls due. 

The fund distribution date may be different from other dividend distribution dates. This way, different tax years can apply to excess reportable income versus income paid directly as cash. 

• For income funds, you’ll owe tax on excess reportable income plus any cash distributions that are paid directly to you. 
• For accumulation funds, your excess reportable income amounts to your entire taxable income. That’s because actual cash distributions are zero. 

The information you derive from an excess reportable income document should correspond to the numbers in your dividend statements for the same period. You don’t pay excess reportable income on top. 

If your fund provides figures in a foreign currency then you can use any reasonable exchange rate to convert excess reportable income into GBP. 

How excess reportable income is treated on your tax return

Excess reportable income should be entered on the foreign pages of HMRC’s SA106 tax return form. Other fund income is also entered here. 

Your excess reportable income is returned as either a dividend distribution or an interest distribution – the latter applying to bond funds. 

The fund provider will note whether your fund qualifies as a bond fund in its excess reportable income document. 

In short, any vehicle counts as a bond fund if more than 60% of its assets generate interest. 

• Bond fund distributions are returned on the SA106 as interest in the section ‘Interest and other income from overseas savings’. 
• Equity fund distributions are returned on the SA106 as dividends in the section ‘Dividends from foreign companies’. 

Dividends are taxed at dividend income tax rates.

Interest is taxed at your normal income tax rate. 

HMRC advises entering an estimate of your excess reported income, if a fund manager hasn’t provided its income report before you file your tax return. 

Excess reportable income and capital gains tax

Excess reportable income reduces your capital gains tax bill when you sell shares – just so long as you remember to subtract it from your proceeds. 

Remember that you earn excess reportable income for any shares held on the last day of the fund’s reporting period.

Here’s an example of how to apply it to disposals:

• Net proceeds: £20,000
• Less acquisition cost: £10,000
• Less excess reportable income: £500
• Capital gain: £9,500

If you don’t subtract excess reportable income from a disposal then you’ll suffer a double tax charge: once at income tax rates and again as a capital gain. 

Helpful hints

Google your fund provider along with search terms like ‘Reportable Income’ or ‘Income Report’ or ‘Reporting Fund Status’ or ‘Investor Tax Report’ to find the information you need.

Not every fund will earn excess reportable income. But do check each investment you own every year.

Consult a tax expert

At this stage, we should point out that we’re not tax experts here at Monevator and we can’t provide tax advice. We’re DIY investors combing through information in the public domain.

We heartily recommend you take advice from a tax professional if you’re in any doubt about what you’re doing.

And again, there’s no need to muck around with excess reportable income if all your offshore reporting funds are safely sheltered in your stocks and shares ISAs or a SIPP. 

You can also duck the whole palaver by only investing in UK domiciled index funds. 

Take it steady,

The Accumulator

1. We’ll refer to funds throughout the rest of the article as a generic term that also includes ETFs. [↩]

What caught my eye this week.

Fund managers have bemoaned their benchmarks for as long as I’ve been investing – or at least whenever they’re lagging behind them.

Large cap UK fund managers will try to convince you to ignore BP or Shell or some other big energy stock in the UK market if the oil price soars, for example.

Meanwhile hedge fund fans invariably ask you to look past their (nowadays typically middling) gains to focus on risk taken or volatility endured. Yet as an industry they seem to do this less at the marketing stage and more for the post-mortems.

I could go on, especially given that me and nearly everyone else I know who picks stocks are mentally side-stepping our benchmarks these days too.

Even some dedicated passive investors are making excuses.

Size matters

The cause of this angst is of course the top-heavy US market – and the triumph of the so-called Magnificent Seven tech giants – which we touched upon the other week (see The 7/93 portfolio).

For those napping at the back, here’s an update via John Authers of Bloomberg:

Startling, but some still say there’s nothing to see here. That this sort of concentrated performance happens all the time.

And it’s true that in any particular investing era, a few large winners do tend to be stomping around the top of the index like they own the place.

But what is unusual with this generation of ‘inevitables’ is that they’ve kept at it. Their 2020-2021 market-beating advance was repeated right after their 2022 swoon.

Big but blundering

It’s rare for such dominance to go on so long. As GMO points out in its latest quarterly letter [gated], while the largest firms by no means consistently underperform, over the long-term they tend to trail the average stock:

This lagging makes sense, intuitively. Trees don’t grow to the sky and all that.

Of course mildly big companies become giant companies regularly. Winners do win.

But eventually size, complexity, missed expectations, and disruption by upstarts tends pulls down their future gains.

Which is exactly why the news is full of stories about Elon Musk and Mark Zuckerberg and not John D. Rockefeller the 7th or the CEO of the Dutch East India Company.

Looking at GMO’s graph, whenever it did seem like the biggest trees might keep bolting heavenward and then they didn’t after all, the aftermath was not pretty. Think the Dotcom boom and bust, or the crash of the early 70s.

So it’s all of legitimate concern.

Weight for it

I’ll save my musings on what might undo the dominance of the Magnificent Seven for another day. (It strikes me as potential Moguls material…)

But in the meantime, even passive investors are getting antsy.

Our own passive guru The Accumulator wavered from the true path – aka buy a global tracker for all your equities – in devising his No Cat Food portfolio this week.

And judging from the Monevator comments, plenty of you have similar concerns.

The principle worry for everyday folk is of course that our portfolios will take one between the eyes if and when the big winners finally fall (or fade) from grace.

No wonder! The US market now makes up 70% of a global tracker, and Bloomberg’s graph above illustrates where much of its gains have been coming from recently.

But for those of us who play the naughty active game – whether privately or professionally – there’s also the matter of keeping score.

Which brings me back to the benchmark blues I talked about at the start of this post.

Bench pressed

Fund managers are judged on their outperformance, or more likely the lack of it. The rest of us naughty active investors wonder what our hobby is costing us.

Conor Mac put this well on his Investment Talk blog this week:

So what’s a good compounded annual growth rate (CAGR) for 40 years of work, assuming you invested $10,000 per year?

Opinions on this matter vary, but for the sake of argument let’s say that buying a hypothetical index fund and sitting in it for 40 years would have returned 8% compounded annually.

Suppose after 40 years of hard work you look at your portfolio report and see that you generated a 6% compounded annual return.

One perspective is that you made yourself a small fortune of ~$1.4 million.

Another is that you lost ~$1.4 million because if you had instead invested in the fund you would have earned ~$2.8 million and 4.75 years of your life back.

This isn’t just about ego and beating an arbitrary benchmark, it’s about maximising return and considering opportunity costs.

People want to know if what they are doing is worth their time.

Of course the trite answer is the best stockpickers should have bought the Magnificent Seven companies, sat on them, and smashed their S&P 500 benchmark.

The Mag Seven are undoubtedly some of the greatest (/ least regulated / most monopolistic) companies of all-time, so I’m not being quite as glib as it sounds.

Alas, the best stockpickers also tend to be students of history – and a decent majority are believers in reversion to the mean. This made it hard to buy and hold the world’s first $1 trillion listed companies on their way to their becoming the first $3 trillion listed companies.

At least that’s what I’ve been telling my girlfriend. Who has little interest in my returns and even less so in my investing. I guess it’s been on my mind.

It shifts all the time, but I’ve got only 35% or so in US equities presently. No wonder I’m already lagging in 2024.

(And no honey we can’t finally go to the Maldives this summer after all.)

Of course another flavour of active traders do ride momentum – and they would have been buying these stocks accordingly.

Momentum works brilliantly until it doesn’t though, and it’s more easily done within a computer model than lived in reality.

At least that’s my excuse.

Passive violence

To return to passive investing, its critics also hold up momentum as one of their grudges against index-tracking (and never mind indexing’s superior returns).

Veteran hedge fund manager David Einhorn has even been arguing that the markets are ‘fundamentally broken’ due to passive investing:

“All of a sudden the people who are performing are the people who own the overvalued things that are getting the flows from the indexes. You take the money out of value and put it in the index, they’re selling cheap stuff and they’re buying whatever the highest multiple, most overvalued things are in disproportionate weight,” [Einhorn] said.

Then the active managers participating in that part of the market get flows and they buy even more of the overvalued assets.

As a result, stocks, rather than “reverting toward value” instead “diverge from value,” Einhorn said. “That’s a change in the market and its a structure that means almost the best way to get your stock to go up is to start by being overvalued.”

Personally I don’t believe complex, adaptive systems like markets get ‘broken’. Rather, I suspect if there’s a reckoning due then it’s merely been postponed.

But Einhorn is smart and time will tell.

Stay on target

In the meantime Einhorn says he’s looking to those running his cheap and unloved companies to return capital to shareholders via buybacks and dividends.

Which doesn’t sound too new-fangled to me. But it is more honest a mission tweak than changing your benchmark when you’re lagging, so one and half cheers from me.

Also, Einhorn might take heart from the conclusion of GMO’s letter. The wonks argue that active investors have taken their pain, and sooner or later they’ll enjoy the gain:

Time will tell if the Magnificent Seven turn out to be as fallible as the Nifty Fifty or the TMT darlings that preceded them at other notable times of mega cap outperformance, but the history of mega caps when they are trading at a substantial premium to the rest of the market is particularly poor.

If the U.S. equity market becomes less concentrated – our bet for the next decade – skilled active managers are poised to have a decade for the books.

Allocators who stick to basics, reminding themselves of the virtues of diversification, stand to benefit handsomely.

That would be nice, wouldn’t it?

Maybe next year…

Have a great weekend.

[continue reading…]