"I don’t want to talk about it"
Chapter 7
The elephants in the room
This chapter covers a few topics that aren’t strictly related to investing and personal finance but will have a big impact on your plan. They are relationships, children and the sad fact that, sooner or later, we’re going to die. I’ll also revisit a theme touched on previously, that often we’re not great at talking about some of these subjects, even to our closest friends and family. I can’t stress how important it is to consider these issues when you start building your personal financial plan.
The first elephant I’d like to address refers to having kids – or rather, not having them. When we talk to people and they learn about our early retirement, they often comment ‘Oh, well, that’s because you don’t have children’. I disagree that this is the sole reason for our comfortable financial position. Granted, it’s had a big impact on the timing of our plan but it paints the picture that children are just an unavoidable money pit and that couldn’t be further from the truth. If you have children, you have additional spending that affects your budget, but the principles of making spending decisions based on value still hold true. Similarly, while you might have less ‘spare cash’ when they’re growing up, I’d still argue that the investment approach should be the same; it might just be on a longer timescale with smaller amounts. Estimates suggest (LV 2023) that the average cost of raising a child in 2023 from birth to 18 is around £200,000 in total, or £11,250 a year – and that’s undeniably a lot of money. For that reason, it should also be part of your financial plan, as it’s a commitment that you can’t hand back. It’s great to have a vision for your lifestyle in terms of house, car, kids, etc, but you can’t escape the fact that realistically you need to have some sort of idea about how you’re going to fund that lifestyle.
I’m not saying you have to be rich to have kids but if you choose to have them, you have an obligation to feed them, clothe them and bring them up in a loving and inspirational way so that they can make a positive contribution to society. If anything, you need to be more aware of your finances and your confidence in making sound decisions than someone who’s single or child free. This book is based on our experiences and choices we’ve made but the endgame didn’t start out as purely ‘early retirement’; it just so happens that that was the outcome.
The starting point is to understand what you’re spending on (why and what value you’re getting from it) and having an idea of the lifestyle you want to lead as well as an estimate of what it might cost to fund. Next, review what you earn, proactively working towards regularly increasing that income, together perhaps with some smaller secondary incomes. Finally, put this into a plan that you can follow and keep on track, not forgetting that sometimes plans go off track. But if you know your plan and are able to manage the variables, you can get it back on the rails. When I worked for Amazon, there was a mantra, ‘know the plan, nail the plan’, and this sums it up well. Don’t forget that this isn’t a one-time effort; it’s an approach to your finances that should see you through life and, if you have kids, to share it with them so they have sound expectations and the confidence to manage their own financial futures.
Having children shouldn’t be an unknown in your financial plan. Yes, kids will increase your spending on the basics and may influence other high-value purchases such as cars or where you live, but it’s better to build this into your thinking than not having a plan at all. It would be wrong of me to share any moral judgements on whether or not to have children, or how many, other than I believe it can be a great joy as well as a huge responsibility and it’s a decision you (both of you, if you are not a single parent) should take ownership of.
Over the years, we’ve had friends and colleagues who have driven newer, more expensive cars, gone on more foreign holidays, had expensive hobbies like sailing or golf, always had the latest technology and subscriptions to the gym, Sky and Spotify – and many of them have children. In the main, they were, and are, ‘making ends meet’, so by understanding and reducing spending, there’s scope for those savings to go into investments. Had we decided to have children, I believe our financial mindset would’ve been the same as it has been. Some of our choices may have been a little different and the timeline would have been longer but our approach to finances would’ve held fast because it emerged from the experiences we had and what we learned from them.
There’s a cohort who might say that being restricted by such a plan is far too constraining and you should ‘go with the flow’ because you could get hit by a bus tomorrow. This is true but, in all likelihood, you won’t – and you’ll still have bills to pay. So while it might seem much more fun to be carefree, I can’t highlight enough the benefits of having a plan to follow and, in particular, reducing your personal stress levels by knowing that you’re in control of your finances. It may not feel like it when you start out but your wealth will grow incrementally as a result. Don’t forget about the effect of compounding investment returns; if you start early, however small, your investments will increase over time and the approach we’ve taken can absolutely be followed if you have children.
Relationships and money
The concept of spending less, earning more and investing the difference works equally well whether you’re single or in a relationship. If anything, it’s a little easier if you’re single as you’re in total control of your financial decisions. Although Lou and I are closely aligned about what we spend on and how much, there are obviously some occasions when we disagree and one of us has to compromise. In many cases you’ll be bouncing ideas off a partner – but if you don’t have one, you can do this with a good friend instead. You don’t have to be in a relationship with someone to mull over a big purchase. When I bought my first house, I spoke to my dad. When I was buying a car, I’d invariably talk to a mate – and usually took them with me on a test drive. When I needed some advice on a career move, I talked to my sister. It doesn’t have to be the same person, either; I have a different approach to spending from my sister so wouldn’t ask her about a new car but I would 100% trust her instinct with regard to my career. Being single is definitely not a barrier to having a sounding board for your financial plan. You’ll have the same challenges as anyone finding someone you trust who’s on the same financial wavelength as you and open to supporting you.
However, if you’re in a relationship (or looking for one), make sure you can talk openly to your partner about money. I believe it’s fundamentally important to figure out whether you have similar attitudes to money. People are often labelled as being either a spender or a saver and you can see how opposing views might lead to problems if you don’t agree on how your money should be managed. Although they say opposites attract, in this instance, I don’t think it’s a perfect pairing.
My upbringing influenced many of my beliefs and I’d expect it might be similar for you. My dad was the breadwinner and took all the big financial decisions while my mum stayed at home to look after us. They had separate bank accounts and a joint housekeeping account that Dad paid into but Mum managed all the household spending. I don’t recall them ever talking to us about money or finances, other than my dad once explaining why he was in a bad mood when interest rates hit 15%. In later life, I started helping them with their finances by paying bills electronically and managing their bank account online, as they never really understood nor trusted the internet age. After Mum died and Dad became more frail, we had to have discussions about his care, which was hard to do, not least how much it might cost. Fortunately, Dad had an income from his (DB) pension, so he could afford care but he still refused to discuss his finances in front of Lou. I don’t know why but there was a reluctance to talk about money and his view was that it was a subject for the men to discuss and not something to worry your wife with! Times have changed in terms of gender stereotypes but the reluctance to talk often remains.
Lou is tidy at home, a trait she adopted because her mum was so untidy. In a similar way, my parents’ reservations about talking about money is probably the reason why I’ve taken an interest in sharing my knowledge. You should be having money discussions with your family – your parents, your partner or your children. It shouldn’t be something to boast about or to be ashamed of but it’s healthy to have open conversations about your finances in order to avoid getting into debt and making sure you have sufficient money to live on.
It goes without saying that you have to completely trust your partner – and this extends to finances. Throughout our 25-year relationship, Lou and I have had imbalances in our incomes but we’ve always split our investments between us, based on our joint financial plan. We invested equally in our ISAs and took advantage of personal tax breaks when I was a higher-rate tax payer and Lou wasn’t. We’ve had a joint bank account since before we were married, as it seemed more effort to keep salaries and overheads going out of different accounts when we were already living together. Our view was that it was all ‘our’ money, irrespective of who earned it, and we made decisions jointly on what to do with it. This isn’t for everyone and many of our friends have two personal accounts and one joint account but ultimately you enter marriage as a partnership for life, so why do you need to separate your finances? I know my view of marriage might be a little old fashioned, with the number of people in a legal partnership reducing and divorces rising, but I still maintain that it’s unhealthy not to equalise assets and efforts in a relationship. Irrespective of how you term it, marriage, civil partnership or cohabiting, just be mindful and consistent in how you handle any joint accounts or shared investments and loans as you build your plan.
Divorce
Unfortunately, relationships can break down and when they do, it can have a significant impact on your finances – particularly if you’re married or have children. Not only does it affect you after a split but money is a common cause of it. According to Divorce Online, the second most quoted reason for divorce in 2022 was ‘the other party being bad with money’. In their blog, they cite that this is deemed a fault-based separation on the grounds of unreasonable behaviour ‘that the other person is rubbish with money and/or general finances’. Examples of financial ineptitude included ‘Racking up credit card bills, gambling, hiding money, buying expensive items that they could not afford and many, many more.’
I’m sure no one goes into a relationship expecting it to fail but tackling the question of finances early on would be a sound first step in determining whether or not you and your partner are aligned in your thinking. This needs to be both in terms of how you earn and spend as well as what your vision of your (financial) future looks like.
Whatever your personal situation – single, divorced, married, with or without kids – you can still follow the approach in this book. As I stated at the outset, everyone is different and therefore all your individual plans will vary but the underlying concepts remain consistent. And you never know, you may get hit by that metaphorical bus tomorrow. It might be cancer that shortens your life expectancy or a debilitating illness. And for that reason, just as it’s important to talk about money, it’s equally important to address the next big elephant in the room. At some point, we’re all going to die.
We need to talk about dying
From my experience throughout life, as well as more recently while researching this book, if many of us seem to be a little cagey about talking about our finances, we’re even more tight lipped when it comes to talking about death. It’s likely that you’ve all had different experiences and that will influence how you think about this subject. My sister-in-law’s grandparents are still alive, so my nephews are growing up knowing their great-grandparents, who still live at home, whereas both my parents went into residential care before they died and my in-laws are now in care. You may have had close members of family dying of an illness when they were young, or your only real experience is of older relatives dying of old age.
Either way, it will happen, and it triggers a number of important questions about finance, which is why I’ve raised it. Principally, if you need to go into care, it can be very expensive. This leads to the dilemma of wanting to have enough money to enjoy your retirement. You don’t want to run out and at the same time, you want to hold some back in case you need to fund a care home. You might also want to leave an inheritance for your children.
Paperwork
First off, some administration – and something that came out of a financial review (with an advisor) we did about ten years ago. Make a will and consider a power of attorney (POA). Just the idea of writing a will when you’re perhaps only halfway through your life can be daunting but important, particularly if you have children. There are often campaigns from charities or solicitors providing a free or reduced cost will-writing offer, so take advantage of that if you see one. Equally, be mindful about keeping it up to date, particularly if you have more children or change your relationship.
Dying without a will (intestate) can be challenging for those left behind, on top of dealing with grief, so please make a will. Probably the most meaningful impact of dying intestate would be how your inheritance is shared out, and it might not necessarily where you’d want it to go. This is particularly true if you’re separated but not legally divorced (your ex-partner could inherit) or you’re not in a legal relationship (ie living together) and your partner might not inherit.
A lasting power of attorney (LPA) is a legal document that allows someone to make decisions on your behalf if you’re not mentally capable. Generally, this covers dementia but could be used if, for example, you suffered a head injury in a car crash. There are two types – one covering property and financial affairs, the other your health and welfare. I’d also suggest that, if your parents/guardians are still alive (or you have other elderly relatives), talk to them about an LPA, as it will enable you to help them as they get older. The risk of developing dementia increases with age (Dementia UK 2023), approximately doubling every five years after 65, with a one in six risk if you’re over 80. It will be a difficult conversation, as most people don’t want to relinquish control, or don’t want to admit they might need some help. Either way, in our experience it’s significantly easier to help an older relative when an LPA is in place, rather than trying to arrange it after they’ve lost mental capacity. Equally, you can help your family by having one in place too.
Funding your retirement
Before we get into the details of planning for old age, I want to address why this is important at an earlier stage of your life and where it fits into your plan. There’s the traditional view of working life being akin to a hamster on a wheel – you work, get paid, you eventually retire at an age the government dictates, then you’re given a State Pension that funds you through retirement until you die. It’s no surprise that this was often referred to as ‘being on the treadmill’ – you just have to keep running, with no real control over your destination. However, few people now have a ‘job for life’ and the pension reforms of 2015 mean greater flexibility in terms of how and when you can access your accumulated pension.
Those reforms opened up a completely new challenge for pensioners – the fact that you can now manage your own (private) pension to fund your retirement, meaning you have a number of things to consider to make sure it lasts. Fortunately, the ethos of understanding your spending habits will help you here – but there’s a tricky little subject to deal with and that’s how long you think you might live. You don’t have to manage it all yourself – you could just buy an annuity as described in Chapter 6 – but I believe you can get a better deal if you manage the drawdown yourself.
State Pension aside, for the majority of those with DC pensions, you now have this added choice of what to do with it – so you need to know how long you want it to last. For example, imagine you had a pension pot of £300k, wanted to retire at 60 and thought you’d probably not last beyond your 90th birthday. Ignoring any ongoing investment returns or inflation, you could take a tax-free lump sum of £75k (25%) and pay off the rest of your mortgage and perhaps buy a new car, leaving £225k for your retirement or £7,500 a year for the next 30 years. This is an extremely simplified case but it demonstrates the logic: £7,500 doesn’t sound that much but you might also have some savings in an ISA, you might downsize and release some capital and, of course, you’ll be able to claim the State Pension from your late sixties onwards (depending on when you were born and the prevailing legislation). Alternatively, you might have some underlying health conditions, no family history of long life and realistically don’t think you’d make it past 80. Your £225k now only has to last 20 years or an increased potential annual spending of £11,250.
How long have you got?
The $64,000 question is, when will you die? As Brian Herbert wrote in his 2003 book Dune: The Machine Crusade, ‘The only guarantee in death is its shocking unpredictability.’ It’s impossible to know exactly when you’ll die but you can make some fairly sound assumptions from a combination of historical data and family history. The Office for National Statistics (ONS) reports from the 2021 Census that the average UK life expectancy (at birth) for men is 78.6 years and 82.6 for women. The ONS also provides a tool to show the probability of your death more accurately via their online life expectancy calculator. As a 52-year-old male, my life expectancy is 84, with a 25% chance I’ll live to 92 and odds of 4.1% that I’ll reach 100.
These are only averages, so it’s helpful to consider your family history, as this will give you a better guide as to whether you’re likely to be ‘above or below’ the average. Against my personal figure above, my parents died at 81 and 85, my two uncles in their sixties and while my grandmother reached 99 and my aunt died at 95, all my other relatives died much earlier, so (as a male) I’m comfortable with a ‘planning age’ of 85. I believe that’s a little optimistic.
Having estimated the age at which you might die, you can now think about building this into your plan, as you have a time frame to work with. The reason for having your end of life in the plan is to provide you with a ballpark budget and also help you answer the question ‘Do I have enough money to live on?’ For this, we use similar maths as the example above but the inputs are annual spending and years: if you plan to retire at 60 and think you might live until 85, you’ve got 25 years. If we take the estimated retirement budget from an earlier example (£36k a year), you need to be aiming for an investment pot of around £900k. This isn’t an exact figure; it’s to give you a guide and a target to work towards. If you take this approach and track your progress, you might find you hit that sweet spot earlier and can stop work at 58, or even 55. There are a few people who love their work and don’t see it as a burden, particularly those who own their own business. Your partner might disagree, or at some point your physical or mental capacity might wane – so having a financial plan that you’re tracking is still valid, if only to serve the purpose of knowing you’re financially comfortable.
Back to your financial plan
Our idea to stop working crystallised around five years ago. We had taken to having a bath, a glass of wine and a chat on the last Sunday of every month, so it really was a ‘eureka’ moment! We were nearing completion on our small barn conversion and discussed what it might be worth. You could almost see the cogs whirring as Lou thought through her logic out loud. If our house is worth X (and we’ll eventually move into the cottage) and you’ve got a pension worth Y and mine’s worth Z, plus our ISAs, in total we have around £XYZ in assets. If you live to about the same age as your mum, then if we wanted to spend all that money, we’d need to be spending about £3,000 a month. At this point, we were both still working, had rental income and our monthly living expenses were about £2,000, so next came the crunch questions: ‘What’s the point of still working? Why don’t we stop working and start spending?’
This was the beginning of formulating the plan to retire from work in our mid-fifties, to ensure it was achievable and not based on flawed assumptions. We undertook some financial analysis, specifically some in-depth cash flow modelling with a local financial advisor, and started talking about what our future expenditure would be in order to fund our proposed lifestyle. In a nutshell: what were our total assets and if we were to spend all the money by the time we thought we might be dead, would that cover our expected spending in retirement? Fortunately for us, whichever way we cut the numbers, the plan stacked up, so we took the leap of faith in 2021 to stop full-time employment and start our new lives.
Unless you have a quick and unexpected death (such as a fatal accident), you’ll more than likely have a slower decline into old age, possibly compounded by illness or dementia, that will require an element of later life care. This is likely to be expensive but equally it will happen when your other discretionary spending will drop away, which will help to offset the cost.
