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Weekend reading: Live fast, buy an annuity

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What caught my eye this week.

There are many things I do because I am an investing maniac that you probably shouldn’t.

For starters, I invest actively. That’s why I coaxed in my passively-pure co-blogger to keep Monevator on the straight and narrow.

Here’s another crazy notion of mine – I want to be able to live off my capital.

I don’t mean reach some lump sum that I then dwindle down to nothingness while eating grapes and watching Loose Women.

I mean replace a notional salary with an investment income that exceeds it, generated from an otherwise unmolested portfolio.1

This is a pretty quixotic goal on multiple fronts, as some of you have pointed out over the years.

First, it means I need a lot more money amassed before I can declare I’m financially-free on my terms. Not planning to spend the wodge down to zero has a big impact.

Second, I don’t plan at this point to ever entirely stop working for money. So my notional salary will be topped up by some kind of continuing income for years to come, making it all an even weirder modus operandi.

Third, I don’t have kids, have never aspired to, and it’s now looking unlikely I ever will. So there will be no official heirs to leave a woefully under-taxed inheritance to – only friends, relations, and the metaphorical dog’s home.

Really I should plan to spend the lot on Wine, Women, and Whatever – feel free to re-jig for your own sexuality and alcoholic tastes – and go out with empty pockets. Perhaps I will, but it’s not a goal I have in mind.

But for me, investing isn’t really a means to an end, it’s a means to a means.

When I tell people I don’t care much about money, they raise their eyebrows, given my passion for markets – and this site. Obviously on some level I do care about money, but really even spending it is not what motivates me.

I seem to find it all a big game and a passport to self-purpose. In my head I am a bohemian and I lived like a graduate student for decades despite having increasingly chunky assets because I liked it that way. I rarely judge people for not being able to save as I have, because frankly I found it no hardship.

But most people – even most of you – aren’t like that. You’re investing because you have to. You want to be able to retire in comfort, sooner or later, and perhaps have more to spend along the way. You have kids you’d like to help out. You hate your job and want to be free.

Remix to suit.

Who’s weird, anyway?

What you might not realize is that people like you have puzzled economists for decades.

Indeed, even though some of what I’ve written about myself above probably seems a bit out there, lots of people – especially in the US but increasingly here too since the advent of the pension freedoms – are arguably just as irrational.

The reason – the puzzle – is why most people don’t buy annuities when given the choice?

Theoretically annuities maximize the amount of spending you’ll potentially be able to do in an average retirement. This is because annuities spread the risk of any particular retiree outliving their savings among many retirees.

The alternative – to self-insure against a telegram from the Queen – is an expensive option.

I suspect people don’t buy annuities because the thought of being hit by a bus the next year and leaving an annuity company hundreds of thousands of pounds up on the deal is eye-watering.

But that risk is the price you pay for not running out of money – and for probably spending more than you would have in that year until the bus comes. Your sadly early demise keeps somebody else having fun at 100.

Also, as you’d be dead, who cares?2

I won’t hash it all out here because Victor Haghani of Elm Funds has done a great job for us.

In a post succinctly entitled The Annuity Puzzle, he makes a few simplifying assumptions and then offers the following graph:

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(Click to enlarge)

The blue bars shows a consistent and high spend from an annuity. The red bars show what happens if you have to make sure you don’t run out of money.

It’s a pretty compelling image, presuming the maths checks out. As I say, assumptions are made. Your mileage may vary.

One thing that probably isn’t a valid criticism of the pro-annuity argument though is that annuity rates are too low. If rates are low it’s probably because expected returns from other investments are (in theory) somewhat lower, too.

And low expected returns don’t have anything to do with longevity risk, anyway.

I’m no expert on annuities – they still seem far away so I’ve not crunched the numbers for myself. Friend of the site and IFA Mark Meldon wrote a great post on annuities back in May, so check that out.

And of course you can see all our articles on deaccumulation for the other side of the argument, such as this one from The Greybeard.

You should also read the full article at Elm Funds.

I’ve long thought I’d buy an inflation-linked annuity to cover my basic income floor. Beyond that I’d be the oldest Wolf of Wall Street on the block, and maybe die as one of those mystery millionaires you read about who hoards supermarket vouchers. (Albeit from Waitrose or Whole Foods!)

But what about you?

From Monevator

How to buy and sell ETFs – Monevator

From the archive-ator: Should you buy gilts directly or invest in a gilt fund? – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!3

Speculation ahead of Monday’s UK Budget – ThisIsMoney / The Guardian / FT

Interactive Investor has bought Alliance Trust Savings – CityWire

Is the London property market slump here to stay? – The Week

Very few people are trading those much-hyped Bitcoin futures – Bloomberg

World’s billionaires became 20% richer in 2017 – Guardian

Anger spreads over squalid new homes built by Persimmon – ThisIsMoney

Can ‘co-living’ solve millennials’ housing woes? – Guardian

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(Click to enlarge)

Hedge funds: Still fleecing investors with expensive mediocrity – SL Advisers

Products and services

NS&I changes index-linked savings certificates to track CPI rather than RPI – ThisIsMoney

Active funds fail to keep up with passive fee cost cuts – Money Observer

The pros and cons of the most popular app-only banks – ThisIsMoney

Should you be using Amazon Smile? – Yahoo

Ratesetter will pay you £100 [and me a bonus] if you invest £1,000 with them for a year – Ratesetter

Neil Woodford’s flagship fund halves in size [Search result] – FT

Robinhood app gets almost half its revenues selling customer orders to high-speed traders – Bloomberg

The cost of buying and selling homes in different countries [Search result] – FT

Comment and opinion

Larry Swedroe: Why international diversification works – ETF.com

How often does a 10% US stock market drop get worse? – A Wealth of Common Sense

Academics in defence of active managers – Morningstar

Where is the snowball? – 3652 Days

The case for drip-feeding investing is plausible, but it costs more [Search result] – FT

Ignoring the signs? – The Humble Dollar

Indexing myths that need to be busted – The Evidence-based Investor

Patisserie Valerie: What happened? – Young FI Guy

John Bogle: No such thing as a stock-pickers’ market – Business Standard

Get rich with… lodgers – The Escape Artist

For naughty active types: Year-end rally ahead? – Top Down Charts

Brexit

Ken Fisher: As the Brexit fog clears, UK stocks will bounce back [Search result] – FT

Millennials may lose up to £108,000 over 30 years with no-deal Brexit – Guardian

Why I remain a Remainer [Search result] – FT

RBS plunges on warning Brexit hit to clients may cost it £100 million – Evening Standard

Kindle book bargains

A Million Years in a Day: A Curious History of Daily Life by Greg Jenner – £0.99 on Kindle

Magna Carta: The True Story Behind the Charter by David Starkey – £0.99 on Kindle

You Are a Badass: How to Stop Doubting Your Greatness by Jen Sincero – £0.99 on Kindle

Way of the Wolf: Straight line selling by Jordan Belfort – £0.99 on Kindle

Off our beat

Director Peter Jackson’s colourised World War 1 film looks incredible – The Guardian

Why the world’s recycling system stopped working [Search result] – FT

The Wild West open-world game Red Dead Redemption 2 is a near-miracle – Guardian

Humble exits – Morgan Housel

Remember web bookmarks? [Bookmark Monevator if you do!] – Digg

And finally…

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
– Ben Graham, The Intelligent Investor

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  1. In reality I’d probably continue to tinker until senility sets in. But this would be the high concept.
  2. I know, I know, your heirs and spouse.
  3. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.
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