Not forgetting Jack
by Doug Brodie
I wrote last week about Jack Welch’s thoughts when he felt he might be dying from a heart attack, and his summary was ‘Damn, I didn’t spend enough’. He followed up the comment by saying to the interviewer that he swore from then that he’d never again buy a bottle of wine for less than $100.
Spending money – your retirement money – starts off being a science and then moves to the emotional, that’s why we have this odd sounding anomalous science called behavioural economics. Morgan Housel writes that how people invest money is hidden, not visible, but how it is spent is the opposite and that may be more insightful.
Money is a utility, it’s for a purpose; if it is simply stored, it does nothing for you, your family or society, it is literally a waste of space. With money we buy safety and security – we buy clothing, housing and food. Once that’s done, we then start branching out into luxuries – and that tends to come when we have discovered how to work to take home more money than we need for those three basic needs.
Yasmine Alibhai-Brown tells a great story of her family living in a reception camp in 1972, having been kicked out of Uganda by Idi Amin. She noted an older male relative sitting with other older men, all laughing. She asked why and they said they had just been told that “..in Britain they close their shops at 5pm, so soon we will be rich here”.
Similar to Jack Welch’s position, we have many clients who have more money than ‘needed’, though I’ve yet to hear anyone suggest upping the price of the wine they buy as a solution to IHT liabilities. Having worked with many folk over the years in wading through this problem, we find that many from the age of 65-ish are concerned about IHT but it is not till people are in their late 70’s. early 80’s that they actually start to do something about it.
The reason is simple and emotional: we spend our life working, earning and building our assets and the way to get rid of IHT is by giving away those assets. Well the time has to be right, because what’s the point of working to accrue wealth if it has to be given away when the account is proverbially full?
For those clients who have no direct beneficiaries we make the suggestion of a ‘settlement’, setting up your own charity. There are many reasons why charitable giving is the right thing to do, and doing it while ‘you’re in charge’ turns it from a simple, disembodied donation, to an occupation. As the founder of your own charity, however small, you get to decide how the charitable disbursements are made, you can visit, research, interview the causes closest to you and see the direct impact of your giving.
Surely better than simply paying more for wine? And since when did a higher price mean simply ‘better’? Surely it just guarantees more expensive and a higher profit margin to the retailer? (If we have yet to meet, I am a Scotsman born in Yorkshire).
The trick is start your planning at the ‘wrong’ end – and that’s precisely what we do. Before we get to the emotionally satisfying lifestyle expenses, we have to have covered the utilities – just because you retire doesn’t mean your bills do. Council tax, car insurance, gas bills, food shopping … all need be covered irrespective of your employment status.
With every client who comes to us, our process is to first map out the basic cost of living in our software, then add to that the available assets. The software has the tax rates embedded and also state pensions, so it will show us/you how much income is available each year, how much income tax is payable and what the surplus/deficit is after the basic expenses are settled. All this is done on an annual basis.
From there, we then finesse the expenses by building in discretionaries, luxuries and gifting. In the income side we move assets around to minimise the tax and maximise the allowances, then we alter the rates of return by shifting cash to investment, investments to ISAs, ISAs to bonds etc. The end result is an organic, indicative chart in which we will make adjustments for age-related issues in your 80’s, and child/grandchild costs throughout.
‘How do I give my kids/grandkids a step up on the property ladder?’ What happens if the kids divorce? Does your gifted money disappear? “If I gift to grandchildren for educational costs I can use their personal tax allowances, but how do I stop them spending it all at 16? 18?” “Should I plan to buy AIM investments when I’m really old?”
The planning identifies pressure points, pinches at times in your life. As a 63 year old, like many of our clients I’ve had to work through parents/in-laws financial items and issues, worried about care costs etc, so we bring that real experienced to the table when talking through the plans.
The plan is never fixed, it’s always draft, because that’s how plans work. Annuities and final salary pensions lock in the income and so remove much of your financial freedom and almost all your financial flexibility. Having cash investments means things change from month to month, year to year. Where, for example, we need to shave income tax from non-pension investment, over and above ISAs, we can use on/offshore bond contracts that allow the income tax bill to be pushed back to your estate, not your pocket.
Phew! I’m sure most have an idea of expenditures, and some have a good idea on income yield, however the planning exercise is at the least a professional double check, normally it is simply essential for removing potential anxieties and insecurities, and best it will make your retirement very secure, make the taxman sad, and make your beneficiaries very happy.
Your plan is what we as your planners, deliver against. It is how we and you measure our work and gauge success – our role is to manage the investment income needed for our clients to deliver on their plans. Fail to plan, plan to fail.