I am sure we’ve all (at least around these rarefied parts) at some time asked ourselves: “Am I saving enough for retirement?”

For years, it’s been a boringly predictable question that has been used to frighten people into upping the amount that they put into their pensions.

Towards the end of every tax year, for instance, the usual scare-story projections are trotted out by lazy journalists looking to file a feature on SIPPs or Additional Voluntary Contributions.

IFAs – those fine, upstanding members of the community – are also keen advocates of the ‘are you saving enough for retirement’ question.

(You’re not? Well, they have just the product for you.)

Most Monevator readers, I’d guess, will have long since learned to switch off when they see the words. Broadly speaking, we will have decided years ago what level of saving was appropriate for our circumstances, and proceeded accordingly.

The savings vehicle of choice might have differed – one man’s SIPP is another woman’s ISA, and all that – but there would be no denying the commitment to serious saving and investing.

Miserly returns

Up until recently, I’d have put myself very firmly in that camp, too.

Now, I’m not so sure.

Take a look at the UK’s latest historic equity returns, as published in the prestigious Barclays Equity Gilt Study 2016, released in March.

Continuously published since 1956, the Barclays study tracks the real (after inflation) returns on cash, equities, and bonds, all the way back to 1899.

Here are the real returns (% per annum) for UK equities, gilts, and cash:

Source: Barclays Capital Equity Gilt Study 2016.

No surprises there, perhaps. 2015 was a dud, and real returns from equities over the past ten years were just 2.3% a year. Only over the past 20 and 50 years do we see serious returns being achieved.

The only consolation is that cash and bonds didn’t do much better, either, although gilts have fractionally outperformed equities over ten and 20 years.

So much for the risk premium, Mr Ross Goobey ¹.

Rear view vision

Now let’s turn the clock back ten years, and look at the 2006 edition of the Barclays Equity Gilt Study.

UK equity real returns (% per annum) as per a decade ago:

Source: Barclays Capital Equity Gilt Study 2005.

You don’t need to have made a recent visit to Specsavers to see the difference.

Ten years ago, the expectations of equity returns, based on past returns, were very different from those of today – and much, much, higher.

And that, what’s more, was in 2006 – in other words, a time when the UK’s stock markets were well into the post-dotcom ‘lost decade’.

Take the equity returns you’d have been looking at in 2005 as having been accrued over the previous 20 years, for instance: 7.4% a year. Incredibly, that’s twice the return of 3.7% seen in our latest figures.

The past ten years? 5.0% a year in 2005 – just over twice the return seen in the latest figures.

Flawed assumption?

All of which matters – at least to many Monevator readers – because the mid-2000s was when many of us were formulating our retirement plans.

Looking back at my own spreadsheets, for instance, I see that I was pumping £530 a month into various retirement-related investment vehicles, by way of regular monthly savings.

That’s net of any tax relief, and also excludes any end-of-year lump sum investments made for tax purposes.

Small beer to some, perhaps. But, totaling it all up, I was probably putting aside £9,000-£10,000 a year.

Again, small beer to some. But significant enough at the time, and especially so given my own circumstances, with one child still in primary school, and one just started in secondary school.

Save more! Save more!

The point is this: doing those same sort of calculations today, and looking at today’s expected investing returns, those Barclays Equity Gilt Study figures suggest that I would need to be putting aside considerably more.

And I’m not at all sure that would be possible, for someone at a similar stage of life, and with similar financial circumstances.

Heck, even though I’m in the fortunate position of being able to invest considerably more these days, it’s still a pinch at times – even though one child has left home, and the other is at university.

What to make of it all?

For me, the bottom line is that even though I was aware – on an intellectual level – that returns over the past few years had been lower, I was unprepared for how much lower they appear to have been.

Or that even though 2015 saw the FTSE 100 finally surpass its dotcom peak – some 15 years afterwards – the intervening years were so dismal as to still halve the long-term returns compared to 2006.

Am I saving enough for retirement? Possibly so. Just.

But I bet many others aren’t, even though they thought that they were.

Note: You might want read all Greybeard’s previous posts about deaccumulation and retirement.

1. George Ross Goobey was the fund manager who in the late 1940s and 1950s famously persuaded pension funds to invest in equities, not just gilts.[↩]

Good reads from around the Web.

A big congratulations to fellow UK personal finance blogger and sometime Monevator contributor, Retirement Investing Today.

After years of saving hard and investing wisely, RIT – as he is known to his friends and to those with carpal tunnel syndrome – has achieved his goal of financial independence.

The recent stock market rally has pushed his portfolio to the £1,014,000. According to his sums, that makes work optional for the foreseeable future.

Somewhat ironically though, the weak pound that has helped lift his assets has arrived in concert with a host of other post-Brexit imponderables that have made that “foreseeable future” rather less foreseeable.

RIT writes:

You’d think we’d be out celebrating. But in the RIT household this week (and in the run up in recent weeks) there has been calm as I’ve actually been umming and ahing about whether I can actually call myself Financial Independent.

The main reason for this is that over the years I’ve diligently planned for just about every financial situation that I can think of.

However what in hindsight I’ve actually glossed over is the risk of politicians just blatantly changing the rules.

In the past few weeks we’ve seen some of this appear via the Brexit vote, which for somebody who intends to emigrate to an EU country as soon as they FIRE has brought real risk.

One impact is that in UK pound terms, the European-based property that RIT plans to sip fancy foreign beverages in until senility comes knocking is now more expensive.

The pounds thrown off by his investment portfolio won’t stretch as far when buying that booze on the continent, either. Nor his bread, his olives, nor his live-in maid and butler.

(Okay, they’re not in his plan. But if they were…)

RIT is also having to think again about his pension and healthcare entitlements in life after Brexit.

It’s yet another reminder that everything can turn on a dime, which for me makes micro-debates about whether 2.73% or 2.74% is a safe withdrawal rate in retirement rather moot.

Still, it’s great to have such options.

Tribal uncertainties

Brexit will sort itself out in time. Being free at 43-years old, RIT has plenty of that on his side.

And that’s the really inspiring part of his journey, for the likes of you and me.

If he can do it, can we?

Like me, RIT began blogging many years ago when there were barely any UK personal finance blogs around. If I recall correctly he started blind, before discovering how others had blazed a trail to financial independence before him.

When I began Monevator in 2007 I’d read some nascent US blogs – and a few influential financial forum posters – but my own journey to financial freedom was otherwise motivated by a personal epiphany.

You probably always need such a ‘lightbulb moment’ to get started.

But once you have begun, there are nowadays all sorts of sites to help and inspire you. I feature many in the links here every week.

Indeed, the Internet is abundant with role models.

• Will you do what a 25-year old friend of mine does, and follow a slew of fashion fanatics on Instagram, spend all your money (literally) on shoes and handbags, and then beg others for a pint so you can cry over your penurious plight?

• Will you work your fingers off and save nearly everything that’s left after food and rent or mortgage payments, in the style of RIT and my co-blogger The Accumulator? (Their patron saint and blogger Jacob also described his methods on Monevator).

• Will you be a bit slacker like yours truly – saving more than almost anyone you know, but still splashing out strategically on nice clothes, the odd overseas holiday, and making more effort to grow your income than to cut back on every last frothy coffee?

• Or will you (and the correct answer is “yes, this one!”) roll-your-own plan?

Your choice – but choose carefully.

US financial advisor Tony Isola wrote this week about the downsides of similar minds flocking together on the Internet, before asking:

[What] if we are genetically predisposed to join a tribe?

The answer is: find the right one!

I know I have.

Your tribe, like mine, should consist of people of high character.

Data and evidence should take precedence over emotion. The focus should be on what the tribe can control. Things beyond the tribe’s influence are rightly ignored.

Investment friction, like taxes and high-fee products, along with global diversification, are prime examples of the former; short-term market returns, the latter.

Finally, your tribe should think in probabilities and not certainties, which are non-existent in the markets.

Unfortunately most investors end up in tribes that spend their time throwing coconuts at each other, like our ancestral primates. They worship false investment gods and create cults of personality.

Deal with it; tribes are a major influence upon the choices we make. Joining the right one to manage your investments is a decision you should not take lightly.

With his blog – and the completion of his first goal – RIT has surely inspired many people climbing towards financial independence.

Not a bad tribe to belong to.

Still crazy after all of these years

RIT tends to update his blog on Saturdays – and often after I’ve done my Weekend Reading links.

This means he actually achieved financial independence a week ago. By now he might have spent it all on fast cars and even faster women!

It’s okay, stand down – I just checked and everything’s good. Rather than withdrawing his cash to head to a casino, RIT is predictably blogging about safe withdrawal rates.

Old habits die hard.

[continue reading…]

A side effect of investing a growing share of my disposable income in pursuit of the dream of financial independence is that I’ve come to rely ever more on a good holiday to refresh the soul.

My response to austerity, no pay rises, the threat of unemployment, and galloping inflation of the past few years has been to save harder. I want to build my financial fortress as soon as I can.

I’ve never been a believer in all pain for some far-off gain, though, and that’s where holidays come in.

Holidays enable us to keep the wheels on our frugal wagon. The memories of getaways past and thoughts of escapes to come keep Mrs Accumulator and I going strong in the here and now.

But holidays and a frugal lifestyle can be dangerous bedfellows. Holidays are an escape – a few days of fantasy that break with the routine. Holidays are also a major expense, especially as I’m not about to prescribe living under a tarpaulin in the local woods, catching rabbits to eat for breakfast.

What living frugally is about is devising strategies that enable you to extract maximum satisfaction and value from expenditure, rather than mindlessly blowing a wad on pretty pictures out of a brochure, just because simply everybody is riding giant tortoises in the Galapagos this year.

I’ve therefore devoted a considerable amount of energy to devising a strategy that enables us to have more positive getaway experiences for less money.

Happy holidays

Some time ago, I heard a piece on the radio about research into the selectivity of memory.

It’s well known that human beings create positive or negative memories by screening out contradictory aspects of past experiences. But what are the key drivers of this process?

The conclusion was that two factors were liable to create more positive memories:

1. Change – a break from the everyday routine.

2. A happy ending – even a bad experience may be remembered more positively if it ended relatively well.

I decided to try and apply these findings to our holidays to increase their value to our lives. To see if there was a way we could get more holiday for less money, just by playing with our minds.

Creating more breaks in our routine obviously means going away more often. With no more money in the pot, that means more frequent, shorter holidays instead of one or two annual blowouts.

Instead of going away somewhere for a week, we now go away for three days (two nights) and do it twice as often.

A shorter break and the obvious bear trap of doubling your travel expenses has a number of implications that feed into the second component of our more positive holiday experience: making sure it ends well.

Happy endings

A good ending means not spending the last day of the holiday being endlessly shunted around airports, enduring delays, frustration, and the stress of not being somewhere at the right time with the right piece of paper just so you can join the next queue.

A good ending means being in control of your own schedule, so if you’re a little late along the way, it’s no drama.

It means keeping travel times relatively short, cheap and ideally part of the adventure (simultaneously dealing with the expense of going away more often).

Let’s face it, I’m talking about a staycation. A good ending is far more likely if you holiday in the UK.

Packing everything into the car for a staycation carries with it nourishing notions of the spirit of independence. “I’m master of my own destiny, I can drive to our destination in my own sweet time, and there’s no worry about passports, baggage allowances, missed flights or security checks”.

Then there’s the freedom of the road (peak hours and bank holidays excepted), which enables you to plan or meander as you see fit. You can even work in a pleasant stop-off on the way home, to break up the journey and increase the chances your memory banks will register a happy ending to the tale.

Most Accumulator holidays now take place within two to four hours drive of our home. We pick a point on the compass and find somewhere along that bearing that we’ve never been.

Staycations are a revelation:

• You discover much you never knew about your own country.

• You find new places where you might want to live one day.

• You stop writing off dear old Blighty as a miserable toilet in the typical British style.

Another way of ensuring a holiday ends well is to not make it the actual end of the holiday. The advantage of the three-day getaway model is that, during a week’s leave, you can time it so you’re back home for the weekend.

No more getting home in the wee hours of the last day, thinking “Oh my God, I’m back at work tomorrow.”

Instead, you’re back with days to spare, with time to sort out any overhanging chores, and time to buffer the shock of your return to everyday life. In the years ahead, you’ll forget the weekend and be left with the pink-hued memories of the time away.

Happy staycation

Obviously this strategy doesn’t work if your holiday absolutely has to involve baking yourself at 40ºC next to a pool, hand washing a Thai baby elephant, or mixing it with the playboys in Monte Carlo.

Chances are though, if that’s the kind of holiday you need, you’re doing it more for the bragging rights back at work.

Try the staycation alternative. Try something less ambitious and less costly but more frequent and full of soul food.

And with Brexit turning the pound into the new peso – making spending overseas around 10% more expensive at a stroke – there’s rarely been a better time to do your bit in Britain.

Take it steady,

The Accumulator