Fruition

“The secret of our success, such as it has been, was deciding early on to live off just one wage.

It wasn’t always comfortable or glamorous, but it anchored our expectations to an affordable lifestyle.

Our neighbours lived in similarly priced housing, and possessed similarly priced aspirations.

Whenever there was a second wage, the money was carefully invested and left alone to grow.

This meant apart from the very early days, we always had a financial cushion to fall back on when things didn’t go to plan. Children. Critical illness, both as carer and convalescent. Redundancy. That type of thing.”

My mind processed that summation.

It hadn’t been delivered as a boast or a humble brag. Not designed to impress, influence, or delight. Just a statement of fact.

Distilling a lifetime’s worth of financial comfort in a handful of sentences: live within your means.

Simple.

Evidently effective.

If we take care of the basics, then things will usually take care of themselves.

My inner saboteur objected mightily. Chimping raucously inside my head. Serving up a steady stream of excuses dressed up as reasons about why it couldn’t possibly be true. Why it couldn’t possibly be repeatable. Why it may have worked for others in the past, but couldn’t possibly work for me today.

“What about housing prices? Rising cost of living? Hedonic adaptation? The eye-watering cost of raising children?

How about the harbingers of financial oblivion? Death. Disability. Divorce. Delusions of grandeur.”

I thought about each of those in turn.

Their choice of living location had been dictated by what was affordable on a single wage. While wages were higher in the big cities, higher housing and lifestyle costs can more than offset that wage differential.

Their choice of home had been modest. The purchase price determined not by the maximum amount a bank would lend them, but based upon their own cashflows. Leaving them with a financial cushion baked into every pay packet. Creating breathing room for the predictably unpredictables of life.

They hadn’t been clairvoyant or even particularly astute. Instead, they had paid attention as interest rates had climbed from the below 5% levels they had grown up with to an eye-watering 10% standard variable rate by the time they wanted to buy their first home. A level at which rates would remain for the vast majority of their 25-year mortgage term.

Watching as friends and relatives found themselves under increasing housing stress. It was instructive how “must haves” quickly became optional when the alternative was losing their home.

Their choice of housing informed their main outgoings. Utility bills are a product of the size and condition of a property. Size also constrains just how much stuff a person can fill their home with. When times were good, old stuff might be replaced with nicer new stuff, but there remains a hard limit on what can physically fit within. If it wouldn’t fit, then they didn’t need it.

They had enjoyed the mixed blessing of children. A richer family life, but poorer financially for it. Two wages dropping to one, at the same time outgoings significantly increased. Combining part-time work with child care just about added up when there was just one child. The numbers had no longer worked with the arrival of a second. Living out the inconvenient truth that prime earning years are also prime parenting years. Time allocation is a zero-sum game: prioritise or perish.

Many of their friends and neighbours had moved on over the years. Climbing the housing ladder almost as fast as they climbed the career ladder. Each move bringing with it the immediate financial friction of buying and selling costs, followed by long-tail increases in mortgage terms and the cost of filling all that newly acquired additional space with additional heating, cleaning, and furnishings.

A select few enjoyed meteoric rises and stellar careers. Luck, confidence, and ability combined to put them in the right place in the right time. Armed with the knowledge required to recognise opportunity when it arose, and the means to do something about it when it did.

A higher proportion imploded. Divorce financially kneecapping all concerned, as two sets of living costs combined with ongoing spousal and child support consumed their collective cashflows. It was worse for those single parents who had been married to deadbeats, now consigned to struggletown when their former life partners failed to support their children.

Some of the neighbours stayed put. Prospered then stagnated, as age granted experience and career advancement. Until it didn’t. Cashflow sometimes improved as mortgage balances gradually reduced. More often, housing costs were simply replaced. Nicer cars. Exotic holidays. Bank of Mum and Dad.

Yet despite all the common sense wisdom being spoken, something was missing from the equation.

All that had been said had been true, but there was more to the story.

My inner saboteur’s spidey sense was tingling, but he was looking in the wrong place.

There had been no lottery win. No bequest from a rich maiden aunt. No advance on a future inheritance via the Bank of Mum and Dad. Yet survivorship bias and fortune did play a part.

Underpinning the entire journey had been a slowly compounding private pension. Not fast. Not flashy. Not glamourous. Yet despite the glacial pace and age-restricted inaccessibility, the value of that pension inexorably grew over the long term.

The only decision required had been to make no decision at all. Follow the path of least resistance. Accept the default choice, of participation rather than opting out.

In the early days, investment options were constrained and fees were high. Actively managed. Entry and exit fees. High churn. Illiquid, often unlisted. Always opaque. A potted case study of all that is wrong with the predatory wealth management industry. Pension providers selected for the generosity of their corporate hospitality rather than the beneficial returns to employees.

But despite all that, some contributions did manage to penetrate through the endless layers of middlemen and skimming. Every pay packet, additional funds trickled in to top up the pension fund.

Over time, pension choices gradually improved and fees potentially reduced. Affording those with sufficient knowledge and interest the option of improving their returns. Not through increased risk nor financial acrobatics. Just by making smarter pension provider choices, to stem the financial bleeding induced by high fees and wasteful activity charges.

In the beginning, when wages were low, those contributions were tiny.

As earning power grew, the pension contributions grew also.

Never huge. But enough.

Such that by the time retirement age arrived some thirty years later, that steady trickle had silently compounded away in the background to form the basis of an income stream that should help sustain them throughout their retirement.

Supplementing any social security aged pension the newly minted retiree may be entitled to.

Possessing such an income stream provides options. Grants control. Instills confidence.

A select few lucked into a final salary Ponzi scheme. Early enough that there were still sufficient workers contributing to the pot to support those who are taking from it. Relieved they were not part of the subsequent generation, who would be left without a seat once the music stops and the inescapable realities of the unsustainable financial arrangement can no longer be ignored.

Those slightly younger, or slightly less fortunate, found themselves receiving a pension from a defined contribution scheme. The investment burden having shifted from pension provider to pension recipient. Higher risk. Lower return. Reduced certainty. Less control. Better than nothing, but affording a pension income that was a mere shadow of their former salaried earnings.

This is the reality of the financial cliff edge that many retirees will face.

A survivable fall for those who have a sufficient financial cushion.

A home owned outright helps a great deal. Eliminating the majority of housing costs from the cashflow equation. An outcome years, possibly decades in the making. Compounding once more.   

A cashflow buffer, like that enjoyed by our storyteller, helps even more so. Created simply by not living on the limit of earnings, but comfortably within them.

At retirement, when incomes are suddenly reduced, the retiree will be grateful for the breathing room and the options that provides. A shock absorber for lifestyle compromise. Possibly eliminating it altogether.

Which doesn’t make anything our ruminating storyteller said at the start untrue. Their approach had been sound, demonstrably working.

There was just more to their success.

The affordable lifestyle.

Plus the affordable housing.

Plus the workplace pension.

Plus 30 years of compounding.

Plus more than a little bit of luck.

Simple, but not easy.

Possible, but requiring tradeoffs and compromise.

Clever in hindsight, but requiring a leap of faith throughout to trust the process.

Getting the basics right early on, then being patient enough to wait for things to grow to fruition.

Surviving long enough to enjoy the rewards.

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