Advice for people with £160k/y and ~50 years remaining
I ran into an /r/ukpersonalfinance post by a 26 year old making £160k annually. I felt kinship to their position: I’ve worked at 6-figure jobs since I was their age and have asked myself similar questions. These days I’m in my late 30s, married with kids, earning a bit over £500k¹, and I’ve ended up with a long reply that went past Reddit’s 10K character limit. I figured I’d make a Medium post instead. You can call me /u/toifaornottoifa, my kinda-throwaway Reddit identity.
I’m sharing my advice hoping it would help /u/jaigos and others, though I don’t think I’m a particularly good personal finance-er. A lot of this is about life decisions because (surprise!) to make good financial decisions you first need to make life decisions. The advice may sound UK centric, but I think it applies globally. I don’t know if I’m a very good life decider, either. I do what I can — I’d love to hear your thoughts.
The rest of the text is written in second person, addressing /u/jaigos.
After some of my earlier posts, I was PMed by people offering private advice, often “exceptionally lucrative” yet “discreet” opportunities. Don’t forget you’re on the Internet: what better forum for scammers than where people advertise their wealth and seek financial advice. Be discreet (also post history/future!). Ignore any advice given in secret (fear: scam). Suspect any advice given publicly (fear: mistake).
Money is just a vehicle to achieve your goals. “Being happy” is one nearly universal yet amorphous goal. A quick Internet search should reveal the research behind something I consider an important truth — money does buy happiness (or, rather, defends from sadness) to a point, and yields diminishing returns beyond that point.
Different studies found different points for different populations, but I believe there’s a magic number around £60k/y. Based on that, my goal is to be financially independent at £5k/m assuming 3% SWR (in other words: have a lump sum expected to yield 3% net real returns over multi-decade time spans), which means I need to save £2m (this is simplified, see more on my plan here, slightly out of date).
I have life goals beyond £2m, but money isn’t my limiting factor: personal talent and expected remaining years of life likely are. I also have some financial goals running in parallel to accumulating wealth: for example, I want to provide for my family a high living standard, or I want to travel in the next couple of years. This makes me a pretty crappy FIRE practitioner; more like “Just FI” (see below).
As far as I can tell from your post and comments you don’t have clear goals yet. This makes you flexible but also aimless. Without goals, chasing money is strange: why not chase any other number instead.
- If you never heard of FIRE, strongly recommend to start reading up about it, maybe here or here. 26 year old making £160k and asking financial questions would likely be very interested in FIRE — I wish I heard of it when I was 26 instead of ~30, I wish the principles behind it were taught in schools.
- “oh, come on, you’re 26 making £160k! live a little! spend some money!”. Hrmf. I don’t know if I have many life regrets, but if I could return to being 26, I’d spend less money. Maybe I’d worry less, or work smarter not harder (see below re. increasing income), or whatever, but I don’t know if splurging an extra 500 quid a month will make you happier. If you think it will, go for it.
- Speaking of splurging, I traveled extensively in my late 20s, it was expensive and it was one of my best life decisions (doesn’t have to be expensive, other than opportunity cost). I’m about to travel again with the family for ~6 months, despite a higher opportunity cost. “Man plans and God laughs”: all the FI in the world ain’t worth shit if you get hit by a bus a day before retirement. If you decide you wanna spend, remember there’s more than one way to do it.
Altruism as a goal
Beyond financial independence, I think altruism is a great goal, really the only goal I can think of as an atheist. See, I’m not very impressed with your (or my) income-at-age achievements. I get the 1-in-a-1000 statistical implication of my income and wealth. So what. A lot of where I’m at is luck (lucky point #1: I reached adulthood with reasonable physical and mental health, safe economic basis and dual-citizenship in the Western block). I don’t deserve credit for any of that.
You know what’s impressive to my mind? Leaving humanity in a better place then it was when you were born. In what way and how much can you improve humanity’s situation I don’t know. I have my own plans on that; I’d rather not share them because I want to dream big and if I said aloud “I WANNA CURE CANCER” it’d sound so vain and crazy to me that I’d snap out of the dream. So I prefer to simply not say it and continue dreaming.
Some extra points:
- Dreams aside, I lead a consumerist Western life, eat meat far too often, travel on jets far too often, all that stuff. If I get hit by a bus tomorrow (more likely: die from stress related preventable disease), what good will I have done for the world? We live as though we‘d never die, then die as though we’ve never lived. Which is why I recommend interleaving your FIRE goal, if you chose to have one, with some altruism in the form of volunteering or plain old tithing. I consider this my early death insurance policy: if I die before CURING CANCER, at least I’ll have done some good.
- I have a formula to help me calculate how financially fortunate I was in a year and how hedonistic (expenses) I was in that year, I donate what the formula says every year and I try to choose the recipients well. It amounts to a stiff sum, but much less than £10K. My algorithm rewards frugality; if I spent as little as you do, the algorithm would ask me to donate probably less than £1K. Happy to share the formula, but the point is really that maybe you want to have this type of insurance, never mind the details I chose.
- Perhaps you’ll find interest in Effective Altruism.
- Lastly on altruism — I’m just a guy. Maybe altruism isn’t a great goal, so you should do something else. Your life, not mine. But have goals or it’s all in vain, almost literally.
If I had higher risk tolerance, I think I’d be much wealthier (I’d imagine 2x expected value, maybe less but maybe much more). There’s a difference between tolerance to risk and tolerance to volatility: I hope I’m tolerant to volatility (we’ll test that out sometime I’m afraid), but not risk tolerant. I make so much money out of gainful employment because I have little risk tolerance: I’d start a company otherwise. I think there’s a bi-modal decision between starting your own business or working for an established business. Being employee #1 doesn’t make sense to me (for reasons Patrick McKenzie, who I mention below, explained best).
Something to consider is that risk tolerance can change over the years: I only ever saw mine go down, maybe it can go up. Aging is really crappy, and one thing that you might discover is that stress levels you could totally handle suddenly turn into nausea or depression or rash or whatever. The point is, if you’re planning on multi-decade high risk, remember future-decade-you isn’t the same person as today-you.
tl;dr: it’s not so hard.
About ten years ago I thought personal finance was Really Hard. It’s really not much harder than this flowchart from /r/ukpersonalfinance. I’ve received lots of great advice there, especially from the venerable /u/pflurklurk and /u/q_pop, but hands down the best advice was “read Smarter Investing by Tim Hale”. Took me ages to finish reading it (I’m glacially slow; my work sucks up every ounce of mental energy I have), but it’s a terrific book and I recommend it. I wish it was a bit denser/to the point, but other than that, it’s great.
Answering your direct question, I don’t think there’s a lot you can do to minimise your tax bill other than moving to a different tax jurisdiction, which I’d totally consider at your age. Yes, you should invest in being tax efficient, but don’t expect to pay much less tax on gainful employment beyond the Additional Rate band. You’re just at the point where you can still harvest some breaks (notably, the £35K/y pension allowance you have left after tapering), but if your income grows even modestly (£210k+), even that dries up. I’d love to be wrong on this.
As far as I can tell, CGT has a lot more room for tax planning creativity than gainful employment, and I think you need >£2m in investment to make the schemes worthwhile (that’s when bankers start finding you and fly out from Jersey and Isle of Man to meet you; when you need to find them and travel to them, you probably don’t want what they offer). Maybe not £2m. Maybe more.
Finding a financial adviser is hard
Speaking of flying bankers, common advice in /r/ukpersonalfinance is “find a financial adviser”. I found that hard to execute on for the last 5 years, during which I met half a dozen financial advisers and didn’t like almost any of them (the only one I liked, the forum convinced me to avoid).
I don’t know what you do in the City, I imagine you’re an engineer or quant (probably former). Dealing with code that handles millions of pounds every day (or minute, or microsecond ;) doesn’t necessarily prepare you to handle your own money nor to even evaluate the credibility/relevance of a professional looking to give you advice. If it’s simple advice you can check them on, you don’t need them. If it’s complicated, you’re SOL.
A friend of mine once made ~£10m post-tax by selling a business. I asked them: “so, at what level of wealth do you work with bankers you can trust; you pay them an arm and a leg, but you can just relax and worry about other things? Sure Bill Gates doesn’t worry about his money…?” The friend said: “I don’t know, but it isn’t £10m”.
I do simple things alone, and for complex thing I still didn’t find the right adviser. If you know a great adviser, don’t bother telling me privately — see the “Safety First” section.
In my experience, you’re in a surprisingly easier position to increase your income than cut your tax. Have you read Patrick McKenzie’s Don’t call yourself a programmer? Memorise that shit. Read it until it flashes in front of your eyes every time you’re talking with your boss. Be keenly aware that at the City, £160k isn’t “OMG that’s insane”. Can you credibly explain why they should pay you £160k? I mean a proper explanation, including “why not replace you with a different Oxbridge wunderkind”? If you can explain that, can you explain £250k/y or £1m/y?
From what I hear, engineers can totally make £200k or £250k or substantially more in the City (or in London’s FANG and FANG-ish tech companies). From what I hear elsewhere, quant’s compensation works differently, but if you can demonstrably and repeatedly take £5m and return £50m, well, you can keep an eye wateringly large chunk of that money mate.
In corporate environments, as Patrick explains, you don’t really have to demonstrably and repeatedly do the “£X to £Y” trick; just take credit for it. I find the easiest way to take credit for a job is to do it.
Home != Investment
I can’t bring myself to think of principal residence as an investment. It’s a luxury item you own. You become emotionally and irrationally attached to it and start saying things like “Also I have bought a flat recently so am committed to living here for the near future” [subtext: and potentially miss out on huge tax breaks if I moved to another jurisdiction], which is exactly why I can’t bring myself to think of my home like an investment (I rent). An ETF will never make you say these things. That said, I concede that one has to live somewhere, that property is an interesting, diversified and oftentimes very tax efficient vehicle for wealth. If you own, beware the power of the ring.
Do good. Avoid doing evil. Keep focusing on what’s important.
¹ Some readers may raise an eyebrow at how I casually mention my income. It’s not to boast (anonymous boasting is silly). I think in a discussion forum about Karate it would make sense to advertise the colour of your belt, and in a forum about personal finance it makes sense to advertise your financial situation (household income is only ⅓ of the picture; our net worth is ~£1.6m and expenses ~£100k/y; if you followed my Reddit posts and wonder what why my net worth stagnated for ~12 months, it’s because I now realise I substantially overestimated the value of my property).