What did you want to be when you grew up?
Astronaut? Ballerina? Builder? Fairy Princess? Firefighter? Pilot? Sporting star?
No child ever aspired to be an actuary. Occupational health and safety officer. Prophet of the Church of the Flying Spaghetti Monster.
Yet our current job titles are far more likely to appear in the second list than the first.
So what happened? We grew up. Reality set in. Preferences evolved. Compromised to survive.
Lacked the desire, drive, opportunity, or skill required to achieve those childhood dreams.
Of course, as children, we had no idea that the majority of jobs existed. How many seven-year-olds have heard of behavioural economists? Phrenologists? Upscale security officers?
Even those jobs we thought we knew about, we didn’t understand the day-to-day realities. Auditions. Continual Professional Development. Meetings. Paperwork. Planning. Rehearsals. Training. The invisible hard work behind the scenes, required to make those rare magical moments a possibility.
We saw only the end product.
The hero saving the day.
Scoring the match-winning goal.
The virtuoso performance, leading to a standing ovation.
As children, our main source of career information was what we observed. Both in person, and more often, in the media. The adventures of Bob the Builder and Sofia The First informing the everyday lives of tradespeople and princesses. Given the choice, wouldn’t we all rather be Indiana Jones or Jean-Luc Picard, than Ali the Auditor or Heather from Human Resources?
Today, we’re going to play a childhood game of dress-ups.
Fear not, I won’t be asking you to enter the curious world of plushies, nor become a contestant on Ru Paul’s Drag Race.
No, today we are going to dress up as financial planners and play a game of make-believe.
You may imagine you are wearing a sharp business suit and sitting in a fancy office with a killer view.
But you shouldn’t. This would immediately set off warning bells for potential clients. How is that view being funded? High fees and advice better for the advisor than the client.
Perhaps you picture wearing a short-sleeved polyester shirt, and sitting in a run-down suburban high street office located between a betting shop and a charity store.
But you shouldn’t. The faint whiff of body odour tinged with desperation sets off different warning bells. It is unwise to accept advice from someone who achieves demonstrably underwhelming results.
Eventually, your mental picture settles on the classic financial planner stereotype.
Projecting confidence. Just enough success to be worth listening to, without raising alarm bells.
Middle-aged, because nobody listens to financial advice from a twelve-year-old with no life experience. Nor does it carry much weight coming from someone still grafting away past pension age.
Diplomas and professional accreditation hang from the walls. Evidencing education. Signalling competence. Not the same thing, but subliminally reassuring nonetheless.
A photo of a smiling family posing in front of an upper-middle-class suburban home. A couple of kids, possibly a dog. The “everyman” family. Financially successful people, just like the clients aspire to be.
For this game, we will assume you are one of the rare breed: a good financial planner.
Not one who lazily hides behind a black box computer algorithm or tickbox checklist of standardised questions. Churning out pre-defined reports containing generic charts and homogenised projections, before swiftly moving on to the next paying customer.
No, while your job title may say financial planner, you are also part guidance counsellor and part sports coach.
Wanting to understand what is really important to the client?
What drivers and motivations sit behind their hopes and dreams, today and in the foreseeable future?
Looking for alignment between behaviours and stated values. Calling out conflicts or inconsistencies.
Equally comfortable providing friendly guidance or delivering tough love.
More interested in helping attain the client’s desired outcomes than in retaining their business. When done right, it becomes one of those exceedingly rare genuine win-win business relationships.
Now because this is a game, we’ll skip past the boring stuff. Compliance paperwork. Sales patter. Upselling. We’ll also assume your clients have all the basics in place. Legal will. Enduring power of attorney. Term life insurance to cover the mortgage. Up to date legacy binder.
Most importantly, that they have the means to pay for your independent, transparent, and fully disclosed fee-only advice. You are running a business after all, not a charity!
Living the average
A new client walks in and asks how to achieve financial independence?
Nothing fancy. Just leading an average comfortable existence, without the need to work.
Not a nirvana-like version, as evangelised by FIRE seekers who have not yet achieved it themselves.
Nor the humble brags on Reddit, which may or may not have been written by a troll just for chuckles.
Definitely not the sales pitch laden exploits of the select few who claim to have been there, done that, and are now touting the secret formula so that you can too. Time-limited exclusive offer. Selling fast!
No, the client wants evidence-based facts. From a qualified professional. Backed by indemnity insurance.
What would you tell them?
What evidence might you provide to support your advice?
Backtested Monte-Carlo simulations using historical data?
Free web-based calculators, which confidently spit out indecipherable magic numbers?
Peer reviewed academic papers?
Pseudonymously written blog posts, whose content is regularly interrupted by confidence undermining random advertisements for haemorrhoid cream, lottery tickets, and Mongolian throat singing lessons?
What risks and issues might the client face on their journey?
What alternative approaches should they consider?
Before you answer, consider the ask: “an average comfortable existence”. The median percentile.
“Average” varies by locale, so let’s consider the English version, as told by the statistics.
Their pensions, investments, savings, cars, and other possessions are worth a combined £133,600.
Giving them a total net worth of £286,600.
This means they house, clothe, feed, and entertain the whole family on £81 per day.
Through the looking glass
Let’s do some simple calculations to explore what it would take to replicate those median earning levels today, using investments rather than work.
At the time of writing, the dividend yield of a low-cost global index tracker was 1.34%.
Were they to rely upon the natural yield from a simple one fund investment portfolio to replace their earned income, it would require a portfolio size of £2,876,865. 10x their current net worth. Yikes!
Of course, we should always focus on total returns rather than yields alone. Capital gains can be taken at a time of the investor’s choosing, and are often taxed more favourably than dividend income.
Suspending disbelief about past performance being a proxy for future returns, the client could potentially replace their earned income with a portfolio of £771,000. A trifle over 2.5x their current net worth.
The wisdom of the internet would have us believe that annually consuming up to 4% of our initial capital, adjusted annually for inflation, should see us run out of time before we run out of money.
If true, the client would require an initial portfolio of £963,750. A slightly more intimidating 3x their current net worth.
A common trap for FIRE seekers is including home equity in their initial baseline portfolio value when calculating withdrawal rate amounts. Should they intend to remain living in their home, then it is unlikely they will sell off 4% of it each year. In that scenario, home equity does not belong in that initial portfolio balance!
Correcting for that mistake, the required portfolio multiple increases to more than 7x their current net worth excluding home equity.
Higher returns are possible, requiring more risk and are hard to achieve repeatedly. Actively managed funds. Business ownership. Landlording. Leverage. Private Equity. Stock picking. Venture Capital.
The client shuffles uncomfortably at the intimidating size of that ask, looking somewhat ill. They admit that much of their current net worth is held in the form of depreciating assets like cars and furniture. Items that lose value over time and generate no income.
Their next question is how might financial independence be achieved?
You trot out the personal finance greatest hits.
Invest the difference.
Rinse. Repeat. And wait.
Use tax advantages where practicable, being mindful of any strings that might be attached.
Before the pandemic, the median household consumed £27,305 of their £29,900 disposable income. A savings rate of just over 8%.
The poverty line is drawn at 60% of median disposable income, or £17,940. This highlights there is only so much belt-tightening that is safely possible, frugality has a hard lower limit. At median income levels, a savings rate exceeding 40% would see that average family living like those in poverty.
Earning more is potentially an option. However, not everyone has what it takes to earn megabucks. Founding a unicorn. Torturing computers. Trading complicated interlinked leveraged financial instruments that few fully understand.
Many of us start at the bottom, gradually climbing the career ladder as we develop our skills, experience, and network. Sooner or later, we top out professionally and our wages plateau. Few careers offer a snowball effect of endlessly compounding wages or stock options. Most peak, then flatline.
Some turn to side “hustles” or second jobs to try and boost earnings. It is important to evaluate the toll these take on quality of life however, as in practice few offer a good return on the time invested.
An inconvenient truth is that even with modest expectations, the help of geographic arbitrage, and a great deal of luck, financial independence is beyond the reach of many of us. An impossible dream.
At these income, expenditure, and savings rate levels it would take that average family somewhere between 21 and 56 years to accumulate a sufficiently large investment portfolio capable of sustainably replacing their earned income.
Given their current ages, that average family would reach retirement age well before that point. Their earned income potentially replaced in part by some combination of state and workplace pensions.
The client visibly deflates.
Challenge the premise
Remember earlier, when we said you were one of those rare good financial planners?
You don’t let the prospective client shuffle dejectedly out the door at this point, feeling like a failure at the mathematical infeasibility of their financial hopes and dreams.
Nor do you make unrealistic promises about helping them achieve their stated goal, providing they hire you to manage their wealth, generating you a recurring income stream of fees and commissions.
Instead, you dig into the motivations behind the stated desire for financial independence.
Financial independence is a milestone, not a destination. An enabler, rather than the ending.
It provides control over time investment decisions, free from the financial imperative.
Often sought as an escape. Financial distress. Horror commute. Pointy headed boss. Unfulfilling job.
Sometimes addressing a work/life imbalance. More time spent on “have to” chores or jobs than invested in “want to” activities or projects.
Perhaps a change in priorities. Recognising that time is a finite commodity. Children grow up and leave home. Cognitive decline and physical frailty catch up with all those who live long enough.
Many of these underlying motivators will be things that can be addressed today, at least in part. They needn’t wait until full financial independence has been attained.
Aligning behaviours to desired outcomes.
Making better choices. Each one taking the client a little bit closer to achieving their goals.
Finances certainly play a role in this, but only a small part. Few answers reside in spreadsheets. Located instead in our everyday decisions.
Now it’s your turn to play make-believe. How would you advise your new client?
UPDATE: The UK Value Investor recently raised a very valid point:
Without thinking about it very hard, I think those average stats are bogus.
You can’t just say that the average person is white, 40, owns a home worth £250k, has £100k left to pay off, etc, just because those components are average within their own datasets.
He is absolutely correct. To be completely accurate, our picture of “average” would need to be compiled by asking the exact same sample population all of the questions from the various statistical surveys conducted by the ONS and Which? Unfortunately, that isn’t how the survey process works.
Acknowledging that shortcoming, the composite picture of “average” presented here is merely intended to provide a straw man for the reader to consider their own financial circumstances against. Nobody actually lives the average. Thanks to John for calling this out.
- Bank of England (2016), ‘A millennium of macroeconomic data‘
- BBC (2017), ‘Didcot is ‘most normal town in England’, researchers claim‘
- Child Poverty Action Group (2021), ‘Measuring Poverty‘
- Disney Television Animation (2012), ‘Sofia the First‘
- Garber, S. (2018), ‘Shrinking homes: the average British house 20% smaller than in 1970s’, Which?
- HIT Entertainment (1997), ‘Bob the Builder‘
- Listen To Tax Man (2021), ‘UK Tax Calculator 2021/2022‘
- Maverick, J.B. (2020), ‘What Is the Average Annual Return for the S&P 500?’, Investopedia
- Networthify (2021), ‘Early Retirement Calculator – 8% saving rate‘
- Networthify (2021), ‘Early Retirement Calculator – 40% saving rate‘
- Office of National Statistics (2019), ‘Household debt in Great Britain: April 2016 to March 2018‘
- Office of National Statistics (2019), ‘Research report on population estimates by ethnic group and religion‘
- Office of National Statistics (2019), ‘Total wealth in Great Britain: April 2016 to March 2018‘
- Office of National Statistics (2020), ‘Birth characteristics in England and Wales: 2019‘
- Office of National Statistics (2020), ‘Families and households in the UK: 2020‘
- Office of National Statistics (2020), ‘Population estimates by marital status and living arrangements, England and Wales: 2019‘
- Office of National Statistics (2020), ‘Population estimates for the UK, England and Wales, Scotland and Northern Ireland: mid-2019‘
- Office of National Statistics (2021), ‘Average household income, UK: financial year 2020‘
- Office of National Statistics (2021), ‘Family spending workbook 2: expenditure by income‘
- Office of National Statistics (2021), ‘Median house prices for administrative geographies: HPSSA dataset 9‘
- Paramount Pictures (1981), ‘Raiders of the Lost Ark‘
- Paramount Television (1987), ‘Star Trek: The Next Generation‘
- Vanguard (2021), ‘FTSE All-World UCITS ETF (VWRL)‘
- World of Wonder Productions (2009), ‘RuPaul’s Drag Race‘