Big picture, my approach to FIRE ¹ has followed all the usual principles:

• Minimise spending where possible
• Maximise my earnings
• Invest wisely and aggressively

But, contrary to my expectations, the further I get, the less certain I feel.

Initially, the strategy seemed clear. Multiply your expenses by 25 and then charge towards that target as quickly as possible.

But at the same time as I worked towards that goal, life was happening. My expectations were changing. My priorities were adjusting. 

At one point it was all about finding exciting work that would stretch me and position me for the next promotion. Now I have children, and I get more enjoyment from playing with them at the weekend than jetting off to a conference.

These days I’m even less sure what my target even is. But I’m still making good progress towards financial freedom.

I’ve started calling this path Laissez-FIRE.

The background

I’ll save you the long history of my childhood.

The short version: I grew up with frugal parents and grandparents. I knew my way around a savings account, and how to avoid over-spending at the supermarket.

I tested these principles in the corporate world. My first job involved finding ways to slash spending in the wake of the 2008 financial crisis. It was every bit as grim as it sounds.

On the plus side, I was fortunate enough to come across the FIRE movement in my twenties. At that point, I lived in a mortgaged flat with my girlfriend.

Fast forward a few years, and we’re married with kids. We now live in a mortgaged house – close enough to London to maintain our careers.

On paper, that’s not the set-up for a rapid advance to financial independence.

Investing the boring way

In the intervening years though, we’ve been stashing as much as we can into passive global equity funds in our ISAs.

At first, we could only afford £2,000 each year, but in recent years we’ve been able to max out the £20,000 ISA allowance.

We have both earned above-average salaries since graduating and have maintained mid-five-figure salaries over the years. And by my reckoning, we have directed more than 50% of our net earnings into either the mortgage or investments for several years now.

Perhaps I should have made it to six-figures. But I was always the one who would leave the office when the work was done, rather than get stuck into someone else’s pet project after hours.

Not too many regrets there, in all honesty.

We’ve also taken advantage of employer pension schemes of varying quality, and transferred the investments out to SIPPs whenever we got the chance, gaining more control over our investments.

FIRE in the hold

I’ve been hoovering up FIRE blogs and articles for over a decade, so it seems like this is where I’m supposed to talk about my progress.

• How many years are left until I hit my FI goal?
• What percentage of my ISA goal have I achieved?

But I actually don’t know. I haven’t set any goals yet.

It’s about the journey, not the destination

A couple of things have repeatedly caught me out over the years.

I’ve discovered I’m an awful market timer. Just ask me about the Bitcoin I sold for the price of a Big Mac before most people had even heard of it.

At least I’ve learned my lesson there. All my investments are passive now!

Another is that – despite being a habitual planner – I either can’t or don’t account for all of the things that might crop up in life.

Everyday life decisions with big ramifications

After graduating, both of us had found work in London.

Now, I wasn’t too fussed about living on the tube map. But equally, commuting from Stoke for 8am starts in the centre of London didn’t seem like the smartest move.

We knew we were buying property in an expensive suburb, but that seemed a fair trade-off. Living close to the capital helped both of us to earn decent salaries. 

Eventually, I figured, we’d sell up and move to the North or the South West.

After all, property only seemed to go up in value. And once we sold up, that might give us enough to buy the next place outright.

I’d also calculated that having kids wouldn’t be financially ruinous. We were quite happy to scour charity shops and rely on hand-me-downs. Nursery would be expensive, but there were ways to mitigate that.

Sounds good so far.

Where you live can be surprisingly sticky

Suddenly though, I’ve got a young kid in an ideal school that I fought tooth and nail to get them into. If I move to another county, all that hard work goes up in smoke.

Grandparents are visiting all the time, too, and the kids love seeing them.

Additionally, I’ve unexpectedly become a carer. Proximity to relatives and specialist hospitals is not just a convenience, it’s a central part of my life right now.

The upshot?

Having kids has actually been surprisingly cheap, in terms of day-to-day costs.

But with my plan to move to a cheaper area thwarted, I need to find a suitable house for the next decade or so. In one of the most expensive parts of the country.

Oops.

Children skew house prices

What I’d once though basic features of a family home, like a driveway and a garden you can kick a football in…around here those come with properties approaching seven figures.

And if I also wanted to guarantee my kids access to a top-performing secondary school in this area? Well, catchment area house prices are the ultimate middle-class stealth tax. I’d be straight into the £1m-plus house price bracket.

The point isn’t that we deserve sympathy or a high-performing school. I’ve accepted that I’ll bleed mortgage interest to stay near grandparents, maintain my caring commitments, and give my kids a potential better future.

Rather, it’s that I’ve often been caught out by things I didn’t anticipate.

When I originally scouted out suitable suburbs for our jobs, it never occurred to me that a few years later we’d have tied ourselves to the area we chose.

In turn, I had never expected to be debating the merits of £1m houses, or contemplating mortgage terms that could end beyond my ideal retirement age.

But here we are.

So is my whole FIRE plan scuppered?

Let’s talk numbers. Remember those ISAs I mentioned?

If we followed a 4% Safe Withdrawal Rate and assume that our expenditure rises only with inflation, the ISAs could cover about 90% of expenditure – excluding the mortgage.

I don’t know if you found the 90% figure surprising, but I certainly did. I’d never actually checked until I decided to write about it.

As I said, I’ve not set any targets, or even thought about them. But plugging away and cost-averaging into index funds gathers steam over time.

Add the SIPPs on, and we’ll be in a good place in a couple of decades when we can (hopefully) access our pension cash.

The key achievement here is building resilience.

There’s enough in the ISAs to weather some time between jobs, and enough in the SIPPs for us to maintain our current spending when we reach retirement age.

You may be thinking this is about to pivot into a smug retirement post. But that would be ignoring those key words above: excluding the mortgage.

Yes, as good as things look, I’ve got a six-figure hole in my plan.

And it will probably get worse.

What’s next?

We have some fairly big choices to make.

The main one is deciding on the next house.

I’ve drawn a fairly tight oval in Rightmove of acceptable postcodes, taking into account everything from family to hospitals to secondary school catchment areas.

But even within that boundary, there’s a vast range of properties – from terraced shoeboxes to century-old semis with generous living spaces.

A FIRE purist might say buy the cheapest house you can, and retire as early as possible.

But I’m expecting to live in my next house for at least a decade, with children growing up. Right now, they might be happy with a tiny bed in the corner of a room and a teddy, but eventually they will need their own spaces to live and study. If we’re lucky, they’ll have some friends they want to invite over.

Finding a comfortable house for all of us could mean borrowing hundreds of thousands of pounds on top of my existing mortgage – and paying potentially six figures in interest costs alone.

I’m less worried about the interest than you might think, given that inflation will reduce the value over time. But servicing it each month is still a strain.

Even with the perfect house, nothing is certain

Unless the UK magically fixes its housebuilding problems in the next ten years, when my kids reach 18, they’re unlikely to immediately rent their own properties to live in. Let alone buy.

So perhaps I’ll be moving at that point to find a place with an annexe – or as I’m told they’re now called, grad pads.

Or maybe I’ll be surprised again and find we are all so settled that even I’m opposed to relocating somewhere cheaper.

Eventually, once our children have their jobs sorted, we might be weighing up whether to raid the ISAs to see if the Bank of Mum and Dad can help with house deposits.

The only conclusion I can draw is I don’t know what life will be like in ten years, let alone 20.

Some off-the-cuff principles of laissez-FIRE

I wouldn’t want to suggest that the laissez-FIRE approach is best for everyone.

If you’ve got a solid plan that you can stick to, more power to you.

However I’ll try to boil my personal principles down to some key pointers:

• Focus your spending on a few specific things that give you happiness. You don’t know when you’ll retire, so it’s important to enjoy the journey.
• Figure out how you can earn money without driving yourself crazy. A slightly longer but happier journey will work better in the long run.
• Automate your investments and then ignore them as much as possible. As Charlie Munger once said, the big money comes from waiting.
• Measure success by experiences and life goals at least as much as financial targets. If every bit of spending is construed as a delay to your FIRE date, you risk stripping out all enjoyment.
• Projections and targets are best when they’re vague. There’s no point disappointing yourself when the goalposts inevitably move.
• Be kind to yourself! You can’t get every promotion, smash every bonus and choose the optimal financial option every time, so relax and trust the process.

What does ‘Retire Early’ look like for me?

Some people will say their only goal is to retire completely, as fast as possible.

I used to feel like that.

Thankfully, I’m not completely burned out on my career yet. If anything, I see career flexibility as part of the plan.

I’m quite happy to try out different jobs and employers, to see what works for me and my lifestyle at the time. The job that suited me ten years ago wouldn’t suit me now, and I’m sure the same will be true in the 2030s.

I want a role that pays me enough to feel worthwhile, but doesn’t excessively drain my energy and mental health. To my mind, it’s madness to run myself into the ground just to build a bigger retirement pot.

In the long run, I’d like to emulate a friend’s ‘stick it’ retirement. As he puts it, he takes on various contracts and ad-hoc pieces of work, with sufficient money in his SIPP that when he finds himself disliking the work or the people, he can tell them where to stick it.

If my ISA swells, that might give me more scope to support my kids. It could give me more flexibility over when and where I move, and give me more freedom with work.

Or maybe my ‘stick it’ threshold will have fallen so low that I’ll barely be working at all!

The one thing I know for sure is that my situation will change again before I’m ready to retire.

I have no idea what I’ll do at that point.

But thanks to my laissez-FIRE habits so far, at least I’ll have options.

1. That is, Financial Independence Retire Early.

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Hey, do you know your tax brackets? I’m talking about the bands that determine whether you’re a basic (20%), higher (40%), or additional-rate (45%) taxpayer.

Everyone knows their height and their shoe size. An occasional show-off can even tell you their inside leg measurement.

But many of us have no idea where the various tax brackets start and end – nor where our income falls within these bands.

True, the ongoing – and increasingly controversial – freezing of personal tax allowances and income tax thresholds has made people more aware.

Yet too many people still don’t know how much of their salary they get to keep, or even how to work it out.

Let’s address this with some concrete numbers. We’ll then see what your tax bracket means for your take home pay.

2026/2027 UK tax brackets

The rate of tax you pay depends on your total income from all sources. This includes salary, interest, dividends, pensions, property letting, and so on. ¹

You add up all this income to get your total income figure.

You then subtract your personal allowance from the total to see which tax bracket you fit into. More on that in a moment.

For England, Wales, and Northern Ireland, the income bands after allowances are currently:

Source: HMRC

Note: If your non-savings taxable income is above the starting rate limit, then the starting savings rate does not apply to your savings income.

Scotland has its own (similar) tax rates. Refer to the Scottish Government for the gory details.

If you prefer to think in terms of tax bands – that is, before deducting the personal allowance – then for England, Wales, and Northern Ireland these are:

• Personal allowance at 0%: £12,570
• Basic rate 20% – £12,571 to £50,270
• Higher rate 40% – £50,271 to £125,140
• Additional rate 45% – £125,141 to the moon

The freeze on the personal allowance and higher-rate thresholds has been extended until April 2031. This means fiscal drag will continue to pull more people into higher tax bands as wages rise.

Complicating factor alert! If you earn over £100,000 you’ll pay a marginal rate of 60% on some of your income. What joy! More below.

2026/2027 personal allowance

The tax year runs from 6 April to 5 April the next year.

All of us have a basic level of income – whether we’re employed or self-employed – that we can earn during the tax year before we pay income tax.

But once your allowance is used up, the government starts to take its cut via income tax.

Everyone starts with the same personal allowance:

• For 2026/27, this personal allowance is £12,570

Your personal allowance may be bigger if you qualify for Married Couple’s Allowance or Blind Person’s Allowance. It’s reduced if your income is over £100,000. We’ll get to that in a minute.

Note the £12,570 personal allowance is the same as it was in 2021/22, and it’s currently frozen until April 2031. This fiscal drag strategy has generated extra government revenue by pulling ever more income into taxation over time.

As your salary rises, proportionally less is covered by the tax-free personal allowance. You’ll therefore lose a greater share of your income to tax.

Pensioned off

Another consequence of freezing the personal allowance is that very soon it will be insufficient to fully cover the state pension.

Following a 4.8% hike in April, the state pension for this tax year is £241.30 a week, or £12,547.60 a year – just under the £12,570 personal allowance.

But if the pension continues to rise while the personal allowance stays frozen, then over the next few years millions will pay tax on their state pension. That seems a clumsy way to shuffle money between the state and its pensioners.

Even today, it only requires a small amount of additional taxable income from other taxable sources to take a pensioner over the personal allowance.

Blind Person’s and Married Couple’s allowance

There are two other personal allowances you might qualify for:

• Blind Person’s Allowance – £3,250
• Married Couple’s Allowance – £1,260

These are added to the standard personal allowance, if you qualify. They can give you or your spouse a slightly higher personal allowance.

• MoneySavingExpert has a good guide to the Married Couple’s Allowance.

The 60% tax trap for those earning £100,000 or more

If you’re on a six-figure salary then I’ve got some unpleasant numbers for you.

Anyone with an income of over £100,000 sees their personal allowance reduced by £1 for every £2 of income above the £100,000 threshold.

This effectively pushes up the marginal rate of tax you pay on income between £100,000 and £125,140 to 60%.

On earnings above £125,140, the 45% additional tax rate applies.

Ironically, you’re taxed at a lower rate on your income above £125,140 than on what you earn between £100,000 and £125,140. That’s because your personal allowance has been totally whittled away by this point.

The effective 60% marginal rate you’ll pay on the £25,140 chunk of income between £100,000 and £125,140 is far higher than official tax rates indicate.

Apparently it is the second highest marginal tax rate in Europe, beaten only by a small village called Munkdeal in Sweden with a 70% marginal rate.

Note: there are extra complications to consider if your family is eligible for Child Benefit or support for free childcare. See below.

Take cover!

If your income falls within the £100,000 tax trap band, there’s a strong case for increasing your pension contributions by enough to reduce your taxable income to below £100,000.

Rather than paying 60% tax on your income above £100,000 to HMRC, you’ll instead get generous tax relief on your extra pension savings.

Remember: you can put up to £60,000 into a pension every tax year.

The child benefit booby-trap

Got kids? There’s a similar effective hike in the marginal tax rate when either parent earns over £60,000 a year.

Child benefit is available to parents of children under 20. But this benefit is progressively withdrawn above the £60,000 threshold, via a fiddly High Income Child Benefit Charge that sees you repay 1% of your child benefit for every £200 you earn above the threshold.

The High Income Child Benefit Charge starts at £60,000 and fully removes child benefit at £80,000.

For example, if you earn £70,000 – that is, £10,000 above the income threshold – then you would need to repay 50% of the full child benefit amount. (Because £10,000/£200 = 50).

At £80,000 you’ll pay it all back. (£20,000/£200 = 100).

Depending on how many kids you have – and hence how much child benefit you’ll be repaying – this could equate to an effective tax rate of as much as 56% on earnings between £60,000 to £80,000 with three qualifying children.

Again, you might consider increasing your pension contributions to keep your child benefit whilst improving your financial future.

How tax brackets determine the tax you pay

Let’s run through a couple of examples to see how this all works.

Basic-rate tax payer

Let’s say you will earn £45,000 in 2026/27 from all sources. Your taxable income is £45,000 minus your personal allowance of £12,570.

So £32,430.

This means all your income is in the 20% tax bracket, as it’s less than £37,701 in the first table above.

In practice you’ll pay no tax on the first £12,570 you earn, and 20% on the remaining £32,430.

You’ll therefore pay £6,486 in tax on your income.

Higher-rate payer

Now let’s imagine your total income adds up to £60,000.

By the same method (£60,000 minus £12,570) your taxable income is £47,430.

The first £37,700 of this will be taxed at 20%.

The rest – £9,730 – is taxed at 40%.

You’ll pay:

• Basic rate tax of £7,540
• Higher rate tax of £3,892
• Total tax paid is £11,432

In nearly all cases you’ll also pay additional and hefty National Insurance contributions.

National Insurance

National Insurance works separately from income tax. But in practice it’s just an extra tax you pay on your earnings.

The rates come with their own fiddly rules – and in recent years the Government has been prone to messing with them.

National Insurance rates

Currently, most employees pay employee National Insurance at 8% on earnings between a ‘primary threshold’ and an ‘upper earnings limit’, and 2% above that.

In terms of your salary, these so-called Class 1 contributions are charged at:

Source: HMRC

Your employer also pays National Insurance contributions, based on your salary. This leads to the technique known as salary sacrifice.

With salary sacrifice you give up some pay in return for another benefit – usually extra pension contributions. You get the benefit, and you and your employer also pay less National Insurance.

However the government is planning to restrict salary sacrifice from 2029. Act now if you want to make the most of the existing opportunity.

Self-employed people make different National Insurance contributions, depending on profits. These are worked out via a self-assessment tax return.

National pastime

Most people find it even harder to keep track of what they’re paying in National Insurance than income tax. National Insurance rates are therefore less politically contentious than income tax rates when raising extra revenue.

Hence the National Insurance rates and thresholds have been repeatedly moved around over the last few years.

For example, you may remember there was a hike in employer National Insurance contributions (NICs) in the October 2024 Budget. The net result was a higher ‘tax on jobs’, as the tabloids and opposition MPs put it.

You don’t directly pay employer’s NICs. The company does. But the odds that employers absorbed all the cost of these hikes without a hit to wages or job creation seems remote to me.

Anything else we could write about National Insurance will not be exhaustive enough to stop someone saying “what about X?” in the comments.

Don’t blame us! Blame the labyrinthine UK tax system.

In a sensible world we’d merge National Insurance with income tax. This doesn’t happen because (a) supposedly the money raised is set aside for state pensions and other welfare funding (it’s not) and (b) no UK government wants to be seen setting an income tax rate that’s explicitly above 50%.

• You’re a masochist? The government has more on National Insurance.

Your tax bracket determines your take home pay

Like many students, I was philosophically a left-wing tax-and-spender.

It was a pretty low-stress position to hold when I paid no taxes…

…but then I got a job.

Suddenly I saw how much money was taken out of the meagre pay I received for ramming my head into the coalface for 40 hours a week. Economically speaking, I turned more to the right. ²

As my dad used to say, quoting someone else:

If you’re not a socialist at 20 you haven’t got a heart.

If you’re not a capitalist at 30 you haven’t got a head.

I’d add: if you don’t know your tax bracket then you haven’t got a clue.

Most of us care about what we get to keep, after tax. We’re not so preoccupied with how our taxes help to fund the NHS or to pay interest on the UK’s national debt – vital though all that may be.

So when we start working – and start paying taxes – we’re shocked by how our pay shrinks on the way to our bank accounts.

Beyond the sticker shock

Knowing your tax bracket is about more than just stopping you from fainting when you see your take home pay, though.

Armed with your knowledge of tax brackets, you can be more strategic about adding money to ISAs and pensions.

As we’ve seen above, the tax system gets progressively more punishing as your salary passes through various thresholds. You might therefore prefer to put more of your higher-taxed earnings into a pension, for example.

Thanks to pension tax relief, you’ll sacrifice less of a share of your post-tax disposable income, while you’re also building up a bigger retirement pot.

A fiscal drag

The tax take from British workers has been rising for over a decade.

This was partly achieved by ‘fiscal drag’.

Fiscal drag sees rising salaries pulling more workers into the higher-rate tax bands, because the tax band thresholds and allowances are frozen or only raised by a bit – despite high inflation.

After the financial crisis of 2008/2009, the threshold for higher-rate tax was actually explicitly lowered, despite inflation running above target. That move dragged millions more people into the higher-rate tax bracket.

National Insurance rates also rose for higher-rate tax payers. And the wheeze that cut the personal allowance on incomes above £100,000 was introduced.

True, the additional rate of income tax was reduced from a short-lived 50% to 45% in 2013. And eventually both the personal allowance and the higher-rate tax thresholds were lifted.

But as we’ve seen above, they were later frozen – a freeze lately extended to April 2031.

In short, if you remember the arcade game Frogger, that’s a good analogy for the ever-changing UK’s income tax landscape.

Bring me higher (tax) love

Some may quibble with my simplified narrative. But it’s directionally correct.

See this graph from the IFS, and pay particular attention to the yellow line:

Source: IFS

You can see that the numbers paying higher rates of tax (yellow line) has hugely increased since 2009 – let alone 1990.

Perhaps that’s fine. You might even argue the rise in higher-rate taxpayers is a reflection of rising income inequality as much as frozen tax bands.

We can debate that another day. I’m just pointing out how things have been going – and what might happen next.

We just lived through a period of historically high inflation. After peaking in double-digits in 2022, inflation was still an above-target 3.5% as recently as March 2026.

Yet the personal allowance and the higher-rate tax thresholds remain frozen.

Unless the government changes course, as many as one in four workers will be paying higher-rate and additional-rate taxes by 2031.

A higher calling

If you’re a higher earner wondering why you’re not feeling as wealthy as you thought you would, higher taxes will have something to do with it.

Okay, and higher mortgage rates and energy and food bills since 2022.

(Not to mention hedonic adaption! But let’s stay on-topic.)

The reality is being a higher-rate taxpayer no longer means you’re wealthy.

Yes, I’m aware that the gross median annual earnings in the UK for full-time employees is still under £40,000 – and so well below the higher-rate bracket. Nobody needs to get on a soap box to shout at me.

But the point stands. Paying higher-rate tax no longer makes you Bertie Wooster.

Resistance is tax-efficient

I’m all for taxing, spending, and the UK offering a decent welfare safety net.

But I’m not going to leave a tip.

I’m a law-abiding citizen. However there are sensible and legal steps you can take to mitigate your total tax bill.

• Use your ISA allowance and/or a pension to shelter your savings as much as possible.
• Take steps to manage capital gains tax.
• You could also consider VCTs and EIS schemes if you’re up for the research, extra costs, and greater risks.

Higher-rate taxpayers should consider making maximal contributions into their pension. Most people are allowed to pay up to £60,000 into a pension in a year without any tax penalties ³, so there’s lots of headroom.

If you can cut your spending to allow for very big pension contributions, then you might be able to get the higher-rate tax you’d otherwise pay entirely wiped out by tax relief. Depending on how much you earn, of course.

Bigger pension contributions accelerate the growth of your retirement pot. Just remember you’ll almost certainly have to pay some tax when you drawdown your pension income later.

The bottom line? Taxes are continuing to rise. Take cover, or take the pain.

Note: This article was updated in June 2026 with the latest figures for UK tax brackets, personal allowances, NICs, median pay, and more. Comments below may refer to old numbers. Please check the dates if unsure.

1. There exist allowances and reliefs for some of these income sources, such as dividends and savings. These can reduce how much of that income is taxable.
2. To be clear, I’ve no problem with a reasonable level of taxation, public spending, and redistribution. But back then I had no idea what was already being taxed and spent!
3. Or 100% of income, whichever is lower.

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What caught my eye this week.

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The portfolio’s strong track record, simplicity, and appealing balance of attack and defence has convinced a broad swathe of the public that they can dip their toe into the stock market without getting their leg bitten off.

The problem is the 60/40’s track record conceals a major weakness.

While its long-term returns are good, those numbers are the average of different eras.

Decompose the 60/40’s returns by these divergent periods, and the industry standard portfolio looks more like a car that cruises along in fair weather, but struggles to start on cold mornings.

Here’s the break down in inflation-adjusted annualised returns (GBP):

The 60/40 portfolio is 60% World equities and 40% All Stocks gilts – rebalanced annually. Data from JST Macrohistory ¹, The Big Bang ², Before the Cult of Equity ³, A Century of UK Economic Trends ⁴, St. Petersburg Stock Exchange Project ⁵, World Financial Markets ⁶, MSCI, FTSE Russell, Millennium of Macroeconomic Data for the UK, ⁷ and ONS. May 2026. All returns quoted in this article are inflation-adjusted total returns (GBP).

The long-term average return since 1900 is absolutely fine. Achieving 4% annualised is a decent result.

But that average conceals a 27-year period of gross underperformance from 1947-74. The 1.7% annualised return earned during that era is 60% worse than the 4% long-run trend.

Experiencing that kind of outcome could mean delaying your retirement dreams, or you having to pour in more money to stay on-track.

Then again, the 60/40 has been in rude health ever since. It notched up a mighty fine 6.1% annualised from 1975 to the end of 2025. ⁸

Era checking

Unfortunately, those years from 1947 to 1974 weren’t uniquely blighted. It wasn’t a problem with all the vacuum tubes they used or something.

Rather, the record shows a repeating pattern of sub-par performance by the defensive component of portfolios when solely reliant on bonds. (And cash doesn’t look good either).

• UK government bonds lost 76.4% from 1947 to 1974.
• Cash lost 28% in this era, too.

And you wouldn’t have meaningfully staunched the losses by switching to some other bond type. We’re dealing with an intrinsic vulnerability of fixed income assets (bonds, bills, and cash) that was glossed over while the 60/40 was firing on all cylinders from 1975 to 2020.

No super subs

All would be well if I could just point you to a simple upgrade for the defensive part of your portfolio. Or if you could just swap in one of the many multi-asset funds that populate the 60/40 investment space like rows of slightly different shampoos in the supermarket.

I will come up with some suggestions by the end of this two-part series. But in truth the alternatives mostly come with the enough baggage to get you thrown off a Ryan Air flight.

At the very least, the solutions introduce complexities that are liable to prove unpalatable to the very people who most need a 60/40 type product.

Consequently, I think I should start by laying out as clearly as possible what ails the 60/40 portfolio, if you happen to rely upon it at the wrong time.

Rising rate eras: bonds on the blink

Bond prices typically drop when market interest rates ⁹ rise.

If interest rates trend up for years then we’re living in a rising rate era, typified by increasing bond yields, falling bond prices, and bad times for bond holders.

The dynamic works in reverse, too. Long periods of declining bond yields are associated with rising bond prices and impressive returns on your bonds – a falling interest rate era.

1947-74 was the textbook rising rate era, while 1975-2020 was a dream falling rate era.

The next chart shows the four interest rate eras that prevailed over the past century and a quarter.

Data from JST Macrohistory ¹⁰, Millennium of Macroeconomic Data for the UK, ¹¹ and Bank of England. May 2026.

The differing path for interest rates in these eras have a clear impact on bond returns:

​​The chart starts from 1900, though the left-hand rising rate era began in 1898.
(See the table below and the next chart.)

Here’s the cumulative bond returns per era:

The mechanism is straightforward enough. An interest rate rise forces down the price of existing bonds. That price drop means a capital loss for bond holders.

Why bond prices fall when rates rise

As an analogy, think about your situation if you put £100 into a five-year fixed rate savings account at 3%. And then imagine the next day an identical five-year product hits the market with a 4% interest rate.

Now you’re stuck in an uncompetitive savings account for the next five years. FML.

But what if you could sell your 3% savings account including your £100 deposit?

No-one would give you £100 for it, that’s for sure.

They would give you about £95.56 for it though. ¹² At that price, the buyer would still trouser a 4% yield if they held your weedier 3%-returning savings account until maturity.

The point: that 4% yield is the same as the 4% interest rate they’d earn by popping £100 into the shiny new 4% 5-year Cash Grabber+ saver account that just shot straight to the top of the Best Buy tables.

That’s the basic background.

When rates only rise

The upshot is that rising rates inflict capital losses onto existing bond owners.

That’s okay. The price will swing in the opposite direction as and when rates fall again. Or you’ll eventually make good the loss over time by reinvesting the proceeds of your bonds into new higher yield issues.

But what if the market keeps demanding higher and higher interest rates for holding bonds?

And you own a portfolio full of 10 to 20 year maturities?

Then the capital losses keep mounting up for your musty old bonds with weeny interest rates long since superseded.

That’s the root of the terrible nominal bond returns in rising rate eras.

The same clockwork unwinds in reverse during falling rate eras. Now your long bond is a must-have collector’s item. Market interest rates keep dropping, so buyers are prepared to pay you top dollar (or pound) for a 10-year gilt bearing a fat coupon rate ¹³ from the good old days.

Again, if you held a 6% five-year savings account in 2009 when interest rates were evaporating, then you held onto it for dear life.

Are we in a rising rate era?

I can’t help but notice that rising rate eras generally follow on from falling ones in the yield chart above.

There have been sideways eras. But not since – um – the 18th Century.

Moreover, the shortest era in the table above was 23 years long. These trends seem to persist once they take hold.

It doesn’t help the case for the 60/40 portfolio that ten-year gilt yields have climbed like Spider-man since they bottomed out in 2020.

None of which is to pronounce that bonds are doomed. But the historical record does counsel caution.

There are still reasons to own bonds, but perhaps shorter duration ones than has traditionally been the case for mainstream British investors.

You might also want to think twice about holding a default 60/40-type fund if it’s full of conventional bonds, and doesn’t tilt towards the shortish end of the market.

Do two rising rate regimes make a pattern?

You may not need any further convincing but I hate to waste a good chart. Here’s how the regime change switcheroo has played out since 1703:

This pattern has form – including an idyllic century of moderate yield decline from 1798 to 1897.

It’s also intriguing that the April 2026 All Stocks gilt yield of 5.3% sits just north of the long-term average of 4.4%.

So you could argue that falling gilt returns since 2020 are the consequence of a normal yield reasserting itself.

One plausible scenario then, is that gilts now represent reasonable value, and no longer expose their owners to the risks compressed into the anomalously low interest rates of 2020.

Plus, there’s enough wiggle room in the chart above to disbelieve the notion that we’re condemned to some Kondratiev-style cycle of bond boom and bust.

But for me, this isn’t about trying to predict the future.

It’s about pointing out the gaping holes in the 60/40 portfolio risk story that appear when you don’t skip over the awkward parts of investment history.

How do bonds perform during the worst stock market crashes?

A critical role for bonds is reducing portfolio losses when equities implode.

So do they really? Including during rising rate eras?

The next chart shows how bonds performed during every World equities bear market of the past 126 years:

Data from MSCI, Before the Cult of Equity ¹⁴, A Century of UK Economic Trends ¹⁵, Robert Shiller, The Big Bang ¹⁶, Bank of England, Millennium of Macroeconomic Data for the UK, ¹⁷, Alan Stocker ¹⁸, British Government Securities Database ¹⁹, FTSE Russell, and ONS. May 2026. Pre-1970 World monthly returns are market-cap weighted UK and US equities returns (GBP).

And yes: UK government bonds only worsened the situation once – during the disaster of World War One.

The table below summarises the action above:

Better negative returns means that bonds weren’t as bad as equities. That reduced portfolio losses during the bear market.

That’s not unusual. Often it’s the best our defensive diversifiers can do.

Rise and fall

If we zero in on the three rising rate era bear markets then bonds did badly and exacerbated the situation once (WW1), responded positively once (Flash Crash ’62), and were just less bad than equities once (1970s). Whup.

By contrast, during falling rate eras bonds always improved 60/40 portfolio returns during a shock, responded positively four times, and were the lesser of two evils twice.

On this evidence, it looks like bonds’ ability to hedge equity losses is impaired during rising rate eras. Though it’s worth noting that six out of nine bears pitched up during falling rate periods. ²⁰

On the defensive

I’d like more to go on, so let’s see how bonds perform as a diversifier when we examine every world equities’ drawdown from 1900:

When the gilt 12-month return line (ice blue) is above zero, it’s actively countervailing equity losses with positive returns.

When the blue line drops below the red stain, bonds are making things worse.

If the blue line is below zero, but doesn’t penetrate beyond the red, then bonds are losing money but less so than equities. At least that means they’d have hedged portfolio losses, though we might not thank them for it.

What I like about this chart is you can tell at a glance that the government bonds’ flight-to-quality story mostly holds up in falling rate eras.

But it’s much flimsier (though not non-existent) during rising rate regimes.

Notice, too, how gilts suffered a bear market loss in 2022 while equities did not.

Rising rate era corrections and bears

If I redo the diversification score card for the rising rate eras (including 2021-2025), and include every equity market correction beyond a 10% drop, then the picture becomes clearer:

Bonds still mostly reduce losses when equities retreat, it’s true. But sometimes bonds aggravate your losses.

Mostly gilts are positively correlated with equity declines. Both assets sink together, but bonds don’t fall as far.

More to the point, bonds lost 5% on average per year during the rising rate eras of 1898-1920 and 1947-74.

That’s a steep price to pay for the leaky defence offered during those years.

Where does that leave us?

What fuels rising interest rates? Pick your favourites: ²¹

• Heightened fear of inflation
• Deteriorating public finances
• Mounting debt and fading belief in the capacity of the authorities to manage the burden
• Increasing risk of sovereign default

Hmm, nothing to worry about there then!

Actually my argument isn’t that bonds are broken, or bonds are fine, or that we must be in the grip of a new rising rate era.

My argument is that over-reliance on any single asset is setting yourself up for a fall because they can all fail to deliver for decades.

Though I’ve yet to discover a period when they all failed at once.

Multi problems

Multi-asset funds present a particular problem because while they may look diversified, they’re typically chock full of highly-correlated nominal bonds.

This means that a traditional 60/40-adjacent product will probably do just fine if rates fall again or even drift sideways. But it’s likely to disappoint if rates trend interminably upward as they have in the past.

In that scenario, standard-issue multi-asset funds are woefully under-strength in the assets that tend to compensate for nominal bond failings: specifically gold, commodities, and individual index-linked gilts.

For that reason, I can no longer cheerfully recommend all-in-one fund-of-funds to my friends and family who don’t give two hoots about investing but still need a pension.

The best answer is maximum diversification customised to your particular circumstances.

But I get that’s a heavy lift for most of my nearest and dearest – plus many visitors to Monevator.

So in the next episode I’ll do my best to come up with a minimal viable alternative to the current 60/40 default.

Take it steady,

The Accumulator

1. Jordà O, Knoll K, Kuvshinov D, Schularick M, Taylor AM. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
2. Kuvshinov D, Zimmermann K. 2021. “The
   Big Bang: Stock Market Capitalization in the Long Run.” Journal of Financial Economics,
   Forthcoming.
3. Campbell G, Grossman R, Turner JD. 2021. “Before the cult of equity: the British stock market, 1829–1929.” European Review of Economic History. 25. 10.1093/ereh/heab003.
4. Chadha J, Rincon-Aznar A, Srinivasan S, Thomas R. “A Century of UK Economic Trends.” ESCoE, NIESR and Bank of England.
5. Radchenko P. “St. Petersburg Stock Exchange Project.” Yale School of Management, International Center for Finance.
6. Moore L. “World Financial Markets, 1900–25.” Working paper.
7. Thomas R, Dimsdale N. 2017. “A Millennium of Macroeconomic Data for the UK.” Bank of England.
8. The only reason I’ve cut off the study at the end of 2025 is because I haven’t updated my spreadsheet for 2026 yet. But 2026’s numbers don’t make any material difference to the point of this article.
9. i.e. The prevailing rate of interest demanded by the market in exchange for holding a particular bond. This is influenced by, but not to be confused with, central bank interest rates.
10. Jordà O, Knoll K, Kuvshinov D, Schularick M, Taylor AM. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
11. Thomas R, Dimsdale N. 2017. “A Millennium of Macroeconomic Data for the UK.” Bank of England.
12. Dial-in face value ‘100’. Coupon rate ‘3’. Market rate ‘4’. Years to maturity ‘5’. Days since payout ‘1’. Coupon frequency: annual.
13. Coupon rate is just bond talk for the fixed interest rate paid on a bond.
14. Campbell G, Grossman R, Turner JD. 2021. “Before the cult of equity: the British stock market, 1829–1929.” European Review of Economic History. 25. 10.1093/ereh/heab003.
15. Chadha J, Rincon-Aznar A, Srinivasan S, Thomas R. “A Century of UK Economic Trends.” ESCoE, NIESR and Bank of England.
16. Kuvshinov D, Zimmermann K. 2021. “The Big Bang: Stock Market Capitalization in the Long Run.” Journal of Financial Economics, Forthcoming.
17. Thomas R, Dimsdale N. 2017. “A Millennium of Macroeconomic Data for the UK.” Bank of England.
18. Stocker AJ. 2024. “Total Returns for UK Gilt Sectors of Different Maturities from 1870 Onwards.”
19. Cairns A, Wilkie D, ESCoE Historical Data Repository. “Heriot-Watt / Institute and Faculty of Actuaries / ESCoE British Government Securities Database.” ESCoE.
20. As you’d expect. Rates normally plummet when economic demand collapses.
21. Not intended as a comprehensive list.

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The year was 2010 or early 2011. A pub in Clapham. I was having a debate with the girlfriend of an investment banker pal of mine. She was more scornful than he was of my hobby of picking stocks.

The post That’s what makes a market [Members] appeared first on Monevator.

What caught my eye this week.

The post Weekend reading: a big government pensions report and a FIRE-side chat update appeared first on Monevator.

Cumulative performance

Nominal cumulative total returns 2015-2025. Data from JST Macrohistory ¹, FTSE Russell, and British Government Securities Database ². May 2026.

This kind of data is so ubiquitous it’s only natural to believe it must be helpful.

For example, it enables you to make quick fire comparisons over what seems like quite a long period of time:

The conclusion looks obvious in this case. Gilts (UK government bonds) have been a disaster. Cash has quietly ticked along. If you want a defensive diversifier to offset equity risk, then the numbers speak for themselves.

Except they don’t. They’re only telling you something about the recent past.

Given the way we’re wired, though, it takes a hefty dollop of willpower not to extrapolate those numbers out into the future. Like an implicit join-the-dots exercise.

But on your guard or not, the table is still an attribute substitution honey trap! What we want to know is whether an investment will do well in the future.

That’s an impossible question to answer so the table plays to our cognitive biases, and invites us to subconsciously smuggle in an easier question, “What has the investment returned over the last 10 years?”

Beguiling figures like this fulfil our need for a quick resolution but deny us the full picture.

A postcard from the last war

The five and 10-year gilt returns in this table don’t tell us that bonds are broken or that cash is the superior investment over time.

Rather, it’s mostly a record of one seismic event: the interest rate shock of 2021 to 2023. When rates rise sharply, existing bond prices fall.

UK government bonds lost over 40% in real terms during that period. ³ And that asteroid strike is now baked into the return figures like the line of iridium which marks the end of the dinosaurs.

This isn’t evidence of a chronic problem with bonds. Gilts had one very bad year in the past half century. (Indeed 2022 was the second worst year on record in real terms.)

But that loss – when spread out across the ten-year return average in the table – makes bonds look like a long-term loser.

The nuance, the underlying cause and how it applies, the market awareness – the table skates past all of this.

Most importantly, it doesn’t show the silver lining. That the same rate rise which massacred bonds in 2022 simultaneously reset yields to the point where expected returns from bonds are considerably higher now than before.

It was all going so well

Let’s look at the same table as it appeared at the end of 2020:

Bonds were crushing cash! Once again the conclusion is obvious. Only this time it pointed in the opposite direction.

The table flattered bonds in 2020 – pumped up as they were by falling interest rates in the wake of the Global Financial Crisis and the pandemic.

As Covid-19 vaccines were rolled out, many investors fretted that a similar shot in the arm of the economy could spell trouble for bonds as rates rose again.

But neither they, nor the table, could predict the scale and speed of the interest rate snapback. They couldn’t predict how fast the global economy would reopen, or the size of President Biden’s economic stimulus, or Vladimir Putin cutting gas supplies, or central bank dithering, or fire-starter Liz Truss as prime minister.

In retrospect the bond massacre looks inevitable. In reality, it was contingent.

So the table didn’t just fail to warn you. It actively pointed in the wrong direction relative to the risks, twice.

And these issues aren’t just a problem with bonds.

Hold my beer!

US equities and gold look amazing right now in similar tables due to their multi-year hot streaks.

• Does their run-up in value signal a tottering Jenga tower of risk piled upon risk?
• Or has the playing field fundamentally tilted in favour of these markets?
• Or are these cycles perfectly normal (if three-body problem unpredictable) when you examine the behaviour of risky assets?

Bet now!

A better picture

The next chart compares UK government bonds against the money markets over multiple periods from one to 50 years.

Orange means gilts won over a particular time-frame. Green means money market won:

• The numbers in the boxes show the winning asset’s lead in percentage points.
• The rows enable you to see which asset class led at the end of each year.

For example, money markets beat All Stock gilts by 1.8 percentage points annualised over the ten years up to 2025. Whereas, gilts beat money markets by 3% per year (on average) over the 10 years 2011 to 2021.

All numbers are inflation-adjusted.

As you can see, while the money markets score some wins, especially over shorter timeframes, gilts dominate overall.

And gilts maintain their edge over the very long term, too.

Real annualised returns to year-end 2025

It’s so over for money market funds – they earn half the long-run average of gilts!

Actually, it’s so not over…

When money markets win

The mosaic chart above shows that 1981 was the last time money markets scored a 10-year victory over gilts before 2022.

That’s because interest rates and inflation were stratospheric in the 1970s.

These are the known failure conditions for nominal bonds: inflationary environments where spiralling prices wreck fixed income returns and central banks push rates higher to limit the damage.

To be fair, both asset classes are typically hit hard in these circumstances. But it’s better to be caught in a shorter duration interest-bearing asset like cash when inflation stalks the land.

So what happened when Britain last experienced a long period of rising rates?

Real annualised returns by decade: rising rate environment

Good grief! The money markets did beat gilts for three decades (and change). Even though cash-like funds were clearly no picnic at the time either.

From my perspective, this reminds me that even a 126-year long-run return, shorn of context, doesn’t tell me everything I need to know about the relative merits of two asset classes.

During that particular period in history, successive British Governments stamped on the interest rate brakes to contain episodic inflationary surges – but they eased off again too soon as unemployment rose, setting the conditions for the next CPI pressure wave.

It was a terrible time for bonds but cash made a huge loss too.

Gonna need a bigger framework

I’ve come to the conclusion that return tables alone are a seductive but misleading tool. They compress a complex, time-dependent story into a single number that skips the ifs and buts.

I don’t believe that you, me, or anyone that we could hire can predict the future.

If it was so damn easy then why was anyone holding bonds in 2022?

And if bonds are doomed now, why is anyone still holding them?

It’s because bonds aren’t doomed. Their expected returns are better now than they were in 2020, as I’ve already mentioned.

Nominal government bonds also have a specific strategic role to play in portfolios as an:

• Equity diversifier
• Deflation / disinflation hedge
• Volatility dampener
• Refuge in a demand-led recession

So much for bonds. But people will dump gold and equities too next time they run into serious trouble. Mostly when it’s too late already.

We clearly need a better framework for deciding which assets to hold.

The minimum viable alternative to a quick returns comparison

I think a strategic investor should ask:

• What role does this asset play in my portfolio?
• Under what conditions does it work? When does it not?
• Why might it continue to work in the future?
• What’s my back-up if the asset fails for a protracted period?

There are various tools at our disposal to answer these interconnected questions.

Financial theory

This helps explain what assets are for, their sources of return, and so whether we have reasonable grounds to expect the investment to work in the future.

Expected returns

Enable you to take a view on the prospects for an asset class in the years ahead.

The advantage of expected returns is that they’re informed by current market conditions. Hence they can be a useful corrective for the very human tendency to project out recent trends.

The disadvantage is that market conditions can change quickly.

It’s important therefore not to take expected returns too seriously. They’re not forecasts. They’re formulas that are easily defeated by the unforeseen.

Long-term asset class history

The long term view reveals how each asset class performed during different economic regimes.

This enables you to understand:

• When it works
• When it doesn’t work
• How regularly an asset class experiences conditions that cause it to thrive or dive.
• How often does an asset class experience negative returns? How long and deep can those drawdowns be? Can you live with that?

If you hold an asset class as a diversifier, for example, then does it actually work? That is, does it have a track record of diversifying the appropriate risk?

For instance, if you hold an asset that’s reputed to rise when equities fall, how often does it do that? Once or twice in spectacular fashion? Or on a recurring basis?

Under what circumstances does the diversifier fail to respond? Does it actively flourish when equities drop, or just limit the damage by falling less far?

Ask whether an asset can behave the way you need it to, when you need it to. What are the chances?

Bear in mind that if an asset class wilts in unfavourable circumstances for such an investment, that’s evidence it’s behaving as expected, not that it’s useless.

Every asset can win big, drift sideways for years, dive underwater for a decade, behave unexpectedly… If you think you have found something that doesn’t, think again.

Ask how much of this asset should I hold given I know it can fail badly for extended periods?

Ten years worth of returns tells you next to nothing. A quarter of a century doesn’t really cut it.

Fifty years is okay and 100 years is good. Starting from 1900 is ideal.

Don’t rule out sepia-tinged events just because they happened a long time ago. I’m specifically thinking of the Great Depression or major wars.

Granted, the economy has changed. But the nature of risk has changed less so. Recall the dictum: history doesn’t repeat but it rhymes.

Predict the unpredictable

Most of all, stay lively to recency bias and resist plausible but simplistic theories. The world is rarely so neat. Bolts from the blue can upend current trends without warning.

The world wasn’t preparing for a pandemic in 2019. People weren’t talking about AI before Chat GPT3 launched in 2022. (Zuckerberg was betting on the metaverse at the time, for goodness sake).

Remember that everything you know is already priced in. For example, demographic decline and the size of government debt.

Embrace uncertainty and risk. That’s the source of your excess returns over those who go nowhere in cash.

Take it steady,

The Accumulator

Bonus appendix – even more gilts vs money market tables

I wrote up these tables then cut them from the main article. I’ll leave them here in case anyone finds them useful.

Nominal annualised returns to year-end 2025

Real annualised returns to year-end 2025

Gilts only achieve a real positive return on a 22-year view. Money market on a 28-year view.

Nominal annualised returns to year-end 2020

Real annualised returns to year-end 2020

Long-term real annualised returns

All Stocks gilts

• 1.2% (1900-2020)
• 0.8% (1900-2025)

Money market

• 0.49% (1900-2020)
• 0.4% (1900-2025)

1. Jordà O, Knoll K, Kuvshinov D, Schularick M, Taylor AM. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
2. Cairns A, Wilkie D, ESCoE Historical Data Repository. “Heriot-Watt / Institute and Faculty of Actuaries / ESCoE British Government Securities Database.” ESCoE.
3. Most UK government bond funds follow the All Stocks gilts index.

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What caught my eye this week.

The post Weekend reading: The write stuff appeared first on Monevator.

Your 100-year-old spinster Great-Aunt Maggie dies. The family solicitor calls you in. You are expecting a small bungalow, several boxes of yellowing paperwork, and perhaps a lecture about probate.

Maggie had always seemed almost aggressively frugal. She wore old clothes. She walked to the library. She grew vegetables. She did not own a car. As a child, you vaguely wondered if she might be poor.

Apparently not.

Because Maggie’s estate turns out to be worth about $1bn.

How?

You’d always had a vague idea that Aunt Maggie had once been American. It turns out Maggie’s father was a notable American financier. In 1926, when Maggie was still in her cot, he put $53,300 into the JPMorgan S&P 500 Zero-Fee Magically Accumulating No-Tax Miracle Fund.

Then Maggie did the hard bit.

Nothing.

Maggie did not sell. She did not switch platforms. She did not rotate into Japan in 1989. She did not decide Cisco looked cheap in 2000. She did not panic in 2008. During COVID, she didn’t go on TV and cry. She just went to get her vaccine.

She did not pay an adviser 1% a year to ask her whether she had an attitude to risk.

Maggie just lived to 100 and let America do its thing.

Neat.

Magical thinking

Now to be clear, no such fund existed. Or could have existed.

The S&P 500 did not take its modern 500-stock form until 1957. Retail index funds did not exist. Accumulation share classes did not exist. Zero fees did not exist – and taxes certainly did.

But let’s leave those implementation details aside for a moment.

Maggie has compounded her way to billionaire status.

Unfortunately, you have not.

Heirs and graces

We’ll assume Maggie was UK-domiciled in the end and her estate subject to UK inheritance tax.

Ignore allowances because this is billionaire maths – the estate pays 40% inheritance tax (IHT).

So you inherit $600m.

Still an excellent result. But no longer billionaire status.

The first thing that happens after a century of perfect compounding is that HMRC turns up and removes 40% of the mountain.

$1 billion to one in the stock market

Here is the Maggie checklist for getting to one billion:

• Start early
• Start with a large sum
• Own one of the best-performing major stock markets of the next century
• Pay no fees
• Pay no taxes
• Do not spend any of it
• Do not sell, gift, switch, merge, rebalance, or otherwise crystallise a tax event
• Finally: do not die

Simple.

Time

Compound interest is often called the eighth wonder of the world:

Many people understand the compound interest formula. Hardly anyone behaves as if they believe it.

At a 10.34% nominal CAGR for US equities, Maggie needed only $53,300 to get to $1bn over 100 years. But give her 50 years and she needs $7.3m. With 30 years she only needs… $52m.

This is why compounding is exceedingly dull. It takes decades for anything to happen:

The 10.34% column is the Aunt Maggie thought experiment scenario: nominal US equities, no tax, no costs, no product failure, no bad behaviour, and a century of hindsight.

For the grown-up model, I am going to use 5.2% real as a long-run global-equity return assumption. That is the long-term real equity return (in the past!) per Dimson and Marsh.

At 5.2% real, the starting sum needed to reach $1bn in today’s money after 100 years is:

Call it $6.3m.

That is the clean answer. Your ancestor did not merely need to be sensible. They needed to be rich already.

But let’s face it, plenty of Monevator readers are.

Maggie owned the winner

The S&P 500 is pretty much the best-performing stock market over the last century.

If Maggie had been born German, for example, it would have been a different story. But we’ll assume we’re all investing in 100% global equities nowadays, because we don’t believe in picking markets any more than we believe in picking stocks.

The leaks

Let’s take the clean $6.3m starting pile that becomes $1bn after 100 years at 5.2% real.

Then we’ll let the British state, fund managers, and biology have a go at it.

The model I’ll use is deliberately simple:

• 5.2% real gross equity return
• 0.20% annual implementation cost
• 2.0% dividend yield
• 39.35% additional-rate dividend tax
• 0.5% FX spread on foreign-currency distributions, equal to a 1bp annual drag on a 2% yield
• 40% IHT events at years 30, 60, and 90 (assume each generation just leaves assets to the next)
• Allowances, bands, reliefs, and clever planning ignored

Again we’ll assume that not a penny is ever spent from the pot.

A 0.20% annual fee turns the clean $1bn into $827m.

Taxing a 2% dividend yield at 39.35% creates a 0.787% annual drag. With the fee included, the family ends with $390m.

Add a 0.5% FX spread on those same distributions and you shave off another $4m.

The family is now at $386m.

Then three IHT events take the $386m to $83m:

The line chart below is the same argument in picture form.

The top dark blue line is the spreadsheet. The chopped blood-red line is reality.

Yes, Britain has a wealth tax

Whether or not Charlie Munger ever actually said it, the aphorism is correct: the first rule of compounding is never to interrupt it unnecessarily.

Dying is quite the interruption. Especially in the UK, where Maggie’s estate pays 40% IHT.

Of course, you can give your fortune away at least seven years before you die, assuming you know when that will be. But if you gift chargeable assets then the gift is normally a disposal for capital gains tax (CGT).

People occasionally suggest that Britain should have a wealth tax. Is that as well as this one? Or instead of?

Will your fund make it to 2126?

The spreadsheet says: buy global equities and wait.

Fine. Which fund?

We are asking a product to survive for 100 years. It must keep its mandate, stay cheap, avoid forced mergers, avoid weird domicile changes, avoid legislation, and remain available on future platforms.

There are, to my knowledge, no global equity index funds that have done this.

But some investment trusts have! The AIC has a list of investment companies launched before King Charles III was born. Several are more than 100 years old.

The AIC’s 30-year return table includes:

I could not find a clean, comparable 100-year total-return table that I would trust enough to print.

That absence is itself the point. But the table does show that collective investment vehicles can live for more than a century.

Are tax wrappers any help here?

If you’ve managed to get $6m – about £4.5m, our required starting capital to get to a billion – into an ISA, then well done.

But I bet you’re over 60.

And there lies the problem: the ISA tax shelter is only effectively inheritable by a spouse, so the wrapper dies with the younger spouse, unless you keep remarrying younger people ad infinitum. [Who knew tax planning could be so rock and roll?! – The Investor]

Still, ISAs can take a lot of the sting out of dividend tax and, of course, you can rebalance without worrying about CGT.

It also emphasises the tax-minimising principle: fill your ISA, your spouse’s ISA, and, if you can afford to, your kids’ and grandkids’ ISAs. Consider going into debt if you have to in order to make sure you use the annual allowance. [Like everything here this is not personal advice! Potentially very risky. Read the linked article, seek advice if needed – The Investor]

Pensions were a potential perpetual tax shelter for a while, enabling you to compound wealth down the generations with no dividend tax, CGT, or IHT. Unfortunately, that wheeze has been rugged by Reeves. (Yes, beneficiaries pay income tax on withdrawals, but the original pension got income tax relief on the way in, so call that a wash.)

Reeves’ actions also exemplify the tax risk. The rules keep changing, rarely to your advantage.

Once you’ve got a few hundred million in your ISA, will they come along with an ISA lifetime allowance?

The one weird trick that completely avoids IHT

Do not die.

The government has not found a way to close this loophole yet: your estate only pays IHT when you die.

So… don’t.

Unfortunately, living a long life is mostly down to luck. But there are a few things that you can do to improve your chances.

Just as we don’t give financial advice here, we don’t give health advice. But here’s a shortlist of things you can do in order to reduce your potential IHT liability:

• Don’t be overweight. This is now much easier to fix with money via drugs.
• Exercise: cardio, strength, balance, and enough mobility to get off the floor.
• Get vaccinated.
• Do not do obviously risky stuff.
• Proactively manage your health. The NHS is not going to do it for you.

So what would actually help?

Maggie already had all the answers:

• Start early
• Start with a lot
• Avoid putting all your eggs in one basket
• Minimise fees
• Mitigate whatever taxes you can
• Don’t spend any of the pot
• Try not to die

This time next century, you’ll be a billionaire. (Maybe.)

What is the point?

There is an obvious objection to all this.

What is the point of becoming a billionaire in 100 years if you don’t get to enjoy spending the money? You don’t want to never treat yourself because coffee will cost $1m in a century.

That pushback is totally fair.

But for some of us, the money itself has long since ceased to matter. It’s for the love of the game!

Be sure to follow Finumus on Bluesky or X and read his other articles for Monevator.

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God, has it really been 20 years since I first dropped a few plucky pounds into my workplace pension? 

The post Three things I’ve changed my mind about during 20 years of investing [Members] appeared first on Monevator.

What caught my eye this week.

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The Rule of 300 is a shortcut that enables you to estimate how much money you’ll need for retirement or to achieve financial independence.

Even more excitingly, it enables you to estimate what any particular line item in your budget will require in terms of capital funding.

That’s right! The rule of 300 turns amorphous future you into a flesh and blood person with their own wants, needs, and bank statements.

And if future you wants – or needs – a monthly subscription to a luxury hot chocolate delivery service, then the Rule of 300 will tell you how much you’ll need to have saved up to pay for it.

Most of us find it hard to imagine paying for stuff several decades hence. But the Rule of 300 bends the space-time continuum to make it easier.

Basically right but specifically wrong

Let’s get one thing straight upfront. The Rule of 300 is not a scientific law that can’t be broken. It will probably always be off a bit. It’s just a rule of thumb.

Some of the assumptions behind the Rule of 300 are open to debate.

Moreover, thinking we can predict exactly what we’ll be paying for in 30 years’ time – from robot insurance to our annual getaway to the moon – is delusional.

But as always with investing: what’s the alternative?

All forecasting methods have downsides. Few compensate by being as simple as the Rule of 300.

We’ll return to the caveats later. Once you know what assumptions you disagree with, you can replace them with your own guesswork.

Let’s first outline the rule as it stands.

What is the Rule of 300?

The Rule of 300 is dead simple. To use it you need only two numbers – and one of them is always 300.

Take your monthly spending. Multiply it by 300. The result is how much you’ll need to have saved up to keep living like you do today after you quit your job.

Let’s say you currently spend £3,000 a month.

£3,000 x 300 = £900,000

The Rule of 300 says you’ll need £900,000 to quit work and still pay your bills.

(Or to tell The Man to go hang. Or to safely smirk in meetings. To swap your job to do something less boring for money instead. Or to keep loving your job with a safety buffer. You decide!)

Be sure to multiply 300 by your monthly expenditure today. Not by your monthly salary, or a guess at what things will cost in 20 years, or by two-thirds of your income, or anything else.

Simply enter your expenditure as it stands. The Rule of 300 tells you what you’ll need to have saved to keep spending this amount from your capital. (Probably!)

Do not include any regular ISA or pension contributions in your budget. For the purposes of this calculation we’re assuming you stop saving and start spending.

A spartan guide to using the Rule of 300

The Rule of 300 is the easiest maths you’ll ever do in personal finance. But to save you even more bother, here’s a table that shows how much you’ll need saved according to the Rule of 300, based on various monthly expenditures:

Source: Author’s calculations

Depending on your lifestyle and your penchant for caviar and avocado on toast, those numbers may seem dauntingly high or very achievable.

But are you in the “HOW MUCH?” camp? Then the Rule of 300 is extra useful. It helps you see what your monthly spending habits will cost you in capital terms.

Let’s say you spend £12 a month on Amazon’s music streaming service. Multiply that by £300, and voila! You can see you need £3,600 saved today to keep the music playing indefinitely.

Not so bad, perhaps. However you may have other more onerous commitments:

Source: Author’s research (and bills)

I’m not judging. If your idea of retirement bliss is playing golf every day, then something has gone badly wrong if you’re not planning on paying for golf club membership.

However by looking through the lens of the Rule of 300, you might be motivated to cut back those things you don’t care about so much. This way you can reduce how much you need to save for financial freedom.

Maybe you were happy paying £10 a month for a Disney+ subscription when your kids were young. But now they prefer YouTube and you’re done with the Star Wars spin-offs.

Cancel the Disney subscription and that’s £3,000 less you’ll need saved up before you can declare financial freedom.

(Obviously you should be doubling down on your Monevator membership, though. We’ll keep you on the straight and narrow…)

The safe withdrawal rate (and the caveats)

The maths behind the Rule of 300 is based on a safe withdrawal rate (SWR) of 4% a year.

As you probably know, the SWR is said to be the money you can spend every year from your portfolio without (too much) risk of it running out before you die.

Here’s how the Rule of 300 works. Let’s say your monthly expenditure is £2,000. Over a year that’s 12 x £2,000 = £24,000. To find the capital required to fund that with a SWR of 4% we must solve (4% of Capital = £24,000) which is equivalent to (Capital = £24,000/(4/100)) which works out at £600,000. Alternatively, the Rule of 300 says multiply £2,000 x 30 0= £600,000. Ta-dah! Same!

Now, to say the safe withdrawal rate is controversial is an understatement. It’s the personal finance equivalent of the Kennedy assassination. People take it to mean different things, some of which may be contrary to the original research.

Some people are sceptical because it’s based on US investment returns for starters, which have been strong versus the global average. They say 4% is too high.

Others believe that the strong equity returns we’ve enjoyed for over a decade may mean future return expectations (and hence the SWR) should be lower.

And yet others believe 4% is too pessimistic. Bond yields have risen a lot. And anyway, the 4% rule was always too stingy in most scenarios, they argue.

Newer thinking – and our own Accumulator – even claims the SWR strategy can be improved by holding extra assets and using a variable withdrawal strategy.

Finally, some investing Luddites like me presume we’ll never touch our capital, but rather live off our income. We often coincidentally target an income yield of around 4%, even though the SWR research was based on spending everything.

Roll your own Rule of Whatever

I’m not proposing to win the SWR debate today. Just know that you can tweak the Rule of 300 to suit your own beliefs by reworking the maths to suit.

• Want to target 5% a year as your withdrawal rate? Then you can use a ‘Rule of 240’ to estimate how big your pot must be.

• Think 3% is more like it? For you it’s the ‘Rule of 400’.

Personally though, I’m sticking to the Rule of 300.

You’ll read all kinds of authoritative-sounding comments about what is the best number to use for either the SWR or as a rule of 300 multiplier.

Reflect on them, certainly. But understand that nobody knows, because we can’t be sure how our investments will pan out, how long we’ll live, nor how much money will really be required in the future for a decent standard of living.

Anyway, it’s only a rule of thumb. Keep it simple, Sherlock.

Not one rule to rule them all

Despite my rather analytical education, I’m not one for precise modelling in anything other than the underwear department.

Personally I don’t track my expenses or stick to a budget. I prefer to keep a rough idea of cash flows in my head.

I’m also not one for working out the exact amount of capital a person needs to target for some potential retirement in 23 years and three months’ time.

Back when I was still on my path to FIRE, I did sometimes look at what was needed to replace my income, but only as a ready reckoner. (This method targets pre-tax salary, unlike the Rule of 300’s after-tax spending. Both have their uses.)

I’ve nothing against precision, if that’s your bag. There are pros and cons to most approaches, and we can all learn from each other.

However even if you’re more particular than Dr Spock, note that the Rule of 300 demands zero effort in your everyday thinking.

You may have a 30,000-cell spreadsheet at home in the lab, but the Rule of 300 can still be a useful shortcut.

Much better than nothing

Most people don’t even have a financial plan written on the back of a napkin. They haven’t the foggiest what they’ll need to have stashed away for when they no longer receive a regular pay cheque.

Even high-net-worth individuals can seem deluded, while many of the less wealthy appear to think they’ll enjoy round-the-world cruises on the back of saving £50 a month.

At the other end of the spectrum, some people assume they’ll need so much money put away that ever stopping working is unrealistic.

Does any of that sound like you, or someone you know? Then the Rule of 300 can be a good start in getting a grip on things.

I repeat, it’s not a scientific law.

But in terms of changing how you think about your own financial needs, the Rule of 300 might be as significant for you as that falling apple was for Sir Isaac Newton!

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