November Grab Bag

Hi everybody – sorry it’s been a while, life gets in the way! Nothing bad, just been busy with family and work and nothing has really drawn me in for a full post. So I thought I’d post a few thoughts on two topics today, and some thoughts on upcoming posts.

Inflation & Investing

Most of the talk on the various finance communities I frequent seems to be some variation on “what to do with such high inflation?!?” Lots of variations on a theme: how to protect my investment from inflation, should I buy bonds with such high inflation and low yields, what should I do about an emergency fund so I don’t lose money to inflation, and so on. My thoughts:

  • First, calm down, inflation isn’t that high, when you compare to history or to other economies. 4.2% in the UK, 6.2% in the US – yes, these are big numbers when we’re used to 2% or so, but it’s a long, long way from hyperinflation. Nobody is trucking around dollars or sterling in wheelbarrows!
  • But, interest rates are also extremely low, when usually you can get a risk-free return that matches or beats inflation. The last time inflation was above 5%, in 1990, 10 year treasuries were above 8% yield – today, they’re at 1.375%. Quick graph of 10 year treasuries vs annual US inflation – the UK data I have isn’t as clean, but it’s a similar trend:
Data from NYU Stern
  • So, what to do about it? Realistically, is there anything you can and should do, now that inflation is actually here? A few of the more commonly recommend approaches include:
    • Inflation-indexed bonds/gilts are designed for to mitigate against inflation, but their yields, aside from the inflation adjustment, are practically (sometimes literally) 0%. And any bonds traded openly are subject to interest rate risk if rates rise from their current very low levels. I don’t have a crystal ball to say when or how much rates will rise, but rising inflation feels like it increases the risk of rises in the near future, and we’re seeing the market price that in with mortgage rates coming off their record lows. Plus, inflation is already here, so the higher inflation linked adjustments are priced in – I don’t see these as especially attractive, except maybe as a portion of your overall bond allocation.
    • US I bonds take away the interest rate risk, since they aren’t openly traded, only bought and sold to the US government. And the current rates of 7%+ (all of that being inflation adjustment) are clearly attractive, although that’s only guaranteed for 6 months before the inflation adjustment changes, and you’re stuck with the 0% coupon rate. The 1 year lockup, 5 year penalty on interest, and $10k annual limit don’t help, either, and as UK spenders we take on currency risk with USD investments. I think there’s a place for these, but given the limits they’re hardly a panacea for an inflationary environment.
    • Some people are recommending crypto as a store of value in an inflationary environment. Not sure I buy that crypto won’t be impacted by inflation (no historical data), but I do know the day to day fluctuations in crypto prices make me hesitant to use crypto as a safe store of value even if those fluctuations aren’t linked to inflation. I don’t want my “safe” money bouncing around that much! Crypto as a long-term investment is a topic for a different day…
From Yahoo! finance
  • For me, this is the time to stay the course. If you trust your overall asset allocation and investment policy statement, it’s designed to handle anything life can throw at it, within the foreseeable possibilities. I’m still at my 79% equities, 21% bonds+cash allocation with no intention of changing, except bumping to 78/22 next year as planned. Changing your plans just because people and the media are making a lot of noise is a good way to chase performance and lose out overall.
    • Within the bonds+cash allocation, it always makes sense to move money to the best combination of yield, access, and risk – leaving all your cash in a 0.01% high street bank account isn’t a good idea in any environment! Same if you have a dedicated emergency fund, at least get the best rate you can (probably the 1% prize rate on Premium Bonds, as of today, unless you can lock some of it up for a fix). If you wanted some of your emergency fund in I bonds, that seems reasonable, too.

S&S ISA Experiment Update

I haven’t done a proper update in a few months, mostly because the experiment is going well. I’m within a percent or so of the FTSE 100 – sometimes ahead, sometimes behind, but close. Individual investments are all over the place, with the best (M&S) up 61% and the worst (IAG, owner of British Airways) down 23%. Not through any investing acumen on my part, just my almost-random approach to a DIY index.

I’ll do a bigger update, probably at the end of the year, but so far I call the experiment a success and plan to continue my ISA contributions next UK tax year.

Upcoming Topics – Suggestions?

I keep a running list of topics I’d like to explore – some of the ones that I expect to come up in the next few months are listed below. But I’m eager to hear from you – what would you like to read? More diving into the details of IRS and HMRC publications, tax treaties, and the like? Modeling and projection? My own financial story and approach?

Some topics I might tackle in the next few months include:

  • Expanded US Child Tax Credit and what it means for Americans in the UK – they’ve made it a bit complicated this year…
  • Comparison of US tax filing tools – I’ve used TurboTax previously, just started playing around with TaxAct and I’m impressed so far. Any others you think I should try?
  • Breakdown of my 2021 taxes – I expect 2021 to be a reasonably typical year, might be a good example of what a US tax return looks like for an American in the UK
  • 2021 year in review – it’s been a good year from a personal finance perspective, at least!
  • Tools for tracking investments and FIRE in two countries, two currencies – at least the approach that works for me
  • Impact of Biden’s Build Back Better Bill on Americans in the UK, once/if it’s actually passed…

What else should I take a look at? Thanks for reading!

3 thoughts on “November Grab Bag

  1. Thanks for the post about inflation. I remain fairly stoic about inflation. It’s not something we can really escape, but it’s essential that we try to account for some level of inflation when FIRE planning. My father retired age 55 with a flat-rate company pension and an “ok” social security check drawn as soon as he was entitled. At the time, the SS would have been far less than his company pension. 24 years later, his inflation-adjusted SS now exceeds his company pension check. But did he make the wrong decision to not choose an inflation-adjusted pension? Probably not – he’s now too unhealthy to benefit from any extra cash he could be getting. However, at the same time, I feel a lot of people (mostly gung-ho US podcasts) have tended to ignore the potential impact of inflation (and taxes, and the likely lower stock market returns going forward) because we’ve been in such a “benign” period. The biggest unknown in my FIRE plans is the potential impact of inflation on Long Term Care costs, given that these have been increasing faster than inflation for a while.

    Thanks for your suggestions for Upcoming Topics. I would happily respond with “all of the above please”! However, for me probably the most interesting topics would be your take on TaxAct/TT/OLT and a breakdown of an example tax return. I used to use TT until I struggled to pay for it without a US credit card, which pushed me to OLT. OLT has been okay, but you already need to know what you are doing. I’d be happy to pay for a little more hand-holding if I knew it could handle FTCs/NRAs/exclusion of SS for UK residents/etc *and* it could be paid for via payment method with a non-US address. I love how OLT creates the actual forms before you press the “pay now” button because TT leaves you in the dark as to how they came up with the figures.

    You also mentioned “modelling and projection”. I’ve recently added a more detailed future cashflow model to my spreadsheet based on Wade Pfau’s recent book “Retirement Planning Guidebook” (like a combination of his Present Value cashflow and Funded Ratio tables, p74-75). I’ve tried a few online calculators (including the UK retireeasy.co.uk) but none of them allowed me to model a FIRE plan that included the transfer of assets between SIPPs & ISAs that I needed and transparent control of growth/inflation assumptions. So I definitely prefer my own (no doubt error-riddled) DIY model than a 3rd-party tool that I don’t fully understand.

    Regards,
    Jeff.

    Like

    1. Thanks Jeff, appreciate your thoughts as always.

      On inflation, I completely agree. It, and taxes, and current valuations, should all not be ignored. When I see people projecting 10% real returns on equities forever with no impact on taxes, I get worried. My 5% real returns I use for projections is probably conservative, but I’d rather be pleasantly surprised than bitterly disappointed. Taxes are inevitable – I spend a lot of time thinking about how to manage them and reduce them as much as possible within the law and my own sanity, but they’re going to happen. Hopefully my retirement taxes will be less than the 30% effective rate I paid the UK last year (plus NI and now the new care levy), since it’s much more tax efficient to live off investments in tax-sheltered accounts, but I’m expecting something in the 10-20% sort of range. For inflation, I can only hope and expect that, in the long run, equity returns will adjust for inflation, as the underlying companies raise their prices and their revenues, but there may well be some short term shocks.

      I want to do the tax software comparison for my own purposes, too. I’m honestly tired of fighting TurboTax – it would be simpler to just fill in the forms myself IF the software would check the math and do the cross-references for me. I tried the free fillable forms last year, but I want a little more help on the math and consistency side, too easy to make a mistake just carrying numbers from a worksheet to a form to a schedule to the 1040. From my bit of playing around with TaxAct, it feels much more like they’re guiding you through the form, instead of a questionnaire with loose links to the form and unclear logic around how they get the results. On the forms before payment, they seem to split the difference, showing you the 1040 and associated schedules, but not all the other forms. Helpful, at least.

      On the modeling and projection, I do think the best/only real solution for people in our situation is a DIY model. I’ve built several crude ones in Excel, this might give me an opportunity to further beef up my Excel/Sheets skills. Do some modeling with historical data (the hard being finding good data…) and/or Monte Carlo simulations. A project for after tax time, probably! If you haven’t played with it, I do find the Early Retirement Now toolbox pretty interesting – I haven’t made it a core part of my own tracking/projection processes, but play with it from time to time: https://docs.google.com/spreadsheets/d/1QGrMm6XSGWBVLI8I_DOAeJV5whoCnSdmaR8toQB2Jz8/edit#gid=0 His whole SWR series is worth a (LONG) read, although necessarily US centric: https://earlyretirementnow.com/safe-withdrawal-rate-series/ My modeling probably won’t be up to that level, but want to see what I can do.

      Like

      1. Yes, I have had a cursory look at the Big ERNs blog and one of his spreadsheets. Unfortunately, it doesn’t take long before my head explodes with the level of detail he goes into!

        I’ve also looked at a (much simpler) spreadsheet that comes with Michael H. McClung’s book “Living off your Money”.

        I find Wade Pfau to be the most cautious/pragmatic/conservative and easiest to implement method. McClung has analysed different withdrawn strategies in extreme detail (for drawdown-type assets) but I think a simple Vanguard-style “floor and ceiling” withdrawal strategy would get you 90% of the way there with a much simpler process. (i.e. start with say a 4% withdraw in year 1, then thereafter withdraw 4% of the current portfolio value, but no more than 5% or less than -2.5% of last years nominal withdrawal).

        Alternatively, keep a good sized emergency buffer fund, then use the Excel PMT() to calculate how much you can withdraw each year (using a conservative inflation-adjusted growth rate) in order to withdraw everything (or leave a legacy) before a conservative date of death (e.g. age 95). This does not allow for Long Term Care costs, so this may need to be separately budgeted for (or use the FV value to cover it).

        Jeff.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: