Hi everybody – sorry it’s been a while, life gets in the way! Nothing bad, just been busy with family and work and nothing has really drawn me in for a full post. So I thought I’d post a few thoughts on two topics today, and some thoughts on upcoming posts.
Inflation & Investing
Most of the talk on the various finance communities I frequent seems to be some variation on “what to do with such high inflation?!?” Lots of variations on a theme: how to protect my investment from inflation, should I buy bonds with such high inflation and low yields, what should I do about an emergency fund so I don’t lose money to inflation, and so on. My thoughts:
- First, calm down, inflation isn’t that high, when you compare to history or to other economies. 4.2% in the UK, 6.2% in the US – yes, these are big numbers when we’re used to 2% or so, but it’s a long, long way from hyperinflation. Nobody is trucking around dollars or sterling in wheelbarrows!
- But, interest rates are also extremely low, when usually you can get a risk-free return that matches or beats inflation. The last time inflation was above 5%, in 1990, 10 year treasuries were above 8% yield – today, they’re at 1.375%. Quick graph of 10 year treasuries vs annual US inflation – the UK data I have isn’t as clean, but it’s a similar trend:
- So, what to do about it? Realistically, is there anything you can and should do, now that inflation is actually here? A few of the more commonly recommend approaches include:
- Inflation-indexed bonds/gilts are designed for to mitigate against inflation, but their yields, aside from the inflation adjustment, are practically (sometimes literally) 0%. And any bonds traded openly are subject to interest rate risk if rates rise from their current very low levels. I don’t have a crystal ball to say when or how much rates will rise, but rising inflation feels like it increases the risk of rises in the near future, and we’re seeing the market price that in with mortgage rates coming off their record lows. Plus, inflation is already here, so the higher inflation linked adjustments are priced in – I don’t see these as especially attractive, except maybe as a portion of your overall bond allocation.
- US I bonds take away the interest rate risk, since they aren’t openly traded, only bought and sold to the US government. And the current rates of 7%+ (all of that being inflation adjustment) are clearly attractive, although that’s only guaranteed for 6 months before the inflation adjustment changes, and you’re stuck with the 0% coupon rate. The 1 year lockup, 5 year penalty on interest, and $10k annual limit don’t help, either, and as UK spenders we take on currency risk with USD investments. I think there’s a place for these, but given the limits they’re hardly a panacea for an inflationary environment.
- Some people are recommending crypto as a store of value in an inflationary environment. Not sure I buy that crypto won’t be impacted by inflation (no historical data), but I do know the day to day fluctuations in crypto prices make me hesitant to use crypto as a safe store of value even if those fluctuations aren’t linked to inflation. I don’t want my “safe” money bouncing around that much! Crypto as a long-term investment is a topic for a different day…
- For me, this is the time to stay the course. If you trust your overall asset allocation and investment policy statement, it’s designed to handle anything life can throw at it, within the foreseeable possibilities. I’m still at my 79% equities, 21% bonds+cash allocation with no intention of changing, except bumping to 78/22 next year as planned. Changing your plans just because people and the media are making a lot of noise is a good way to chase performance and lose out overall.
- Within the bonds+cash allocation, it always makes sense to move money to the best combination of yield, access, and risk – leaving all your cash in a 0.01% high street bank account isn’t a good idea in any environment! Same if you have a dedicated emergency fund, at least get the best rate you can (probably the 1% prize rate on Premium Bonds, as of today, unless you can lock some of it up for a fix). If you wanted some of your emergency fund in I bonds, that seems reasonable, too.
S&S ISA Experiment Update
I haven’t done a proper update in a few months, mostly because the experiment is going well. I’m within a percent or so of the FTSE 100 – sometimes ahead, sometimes behind, but close. Individual investments are all over the place, with the best (M&S) up 61% and the worst (IAG, owner of British Airways) down 23%. Not through any investing acumen on my part, just my almost-random approach to a DIY index.
I’ll do a bigger update, probably at the end of the year, but so far I call the experiment a success and plan to continue my ISA contributions next UK tax year.
Upcoming Topics – Suggestions?
I keep a running list of topics I’d like to explore – some of the ones that I expect to come up in the next few months are listed below. But I’m eager to hear from you – what would you like to read? More diving into the details of IRS and HMRC publications, tax treaties, and the like? Modeling and projection? My own financial story and approach?
Some topics I might tackle in the next few months include:
- Expanded US Child Tax Credit and what it means for Americans in the UK – they’ve made it a bit complicated this year…
- Comparison of US tax filing tools – I’ve used TurboTax previously, just started playing around with TaxAct and I’m impressed so far. Any others you think I should try?
- Breakdown of my 2021 taxes – I expect 2021 to be a reasonably typical year, might be a good example of what a US tax return looks like for an American in the UK
- 2021 year in review – it’s been a good year from a personal finance perspective, at least!
- Tools for tracking investments and FIRE in two countries, two currencies – at least the approach that works for me
- Impact of Biden’s Build Back Better Bill on Americans in the UK, once/if it’s actually passed…
What else should I take a look at? Thanks for reading!
FIRE Across the Pond 
Thanks for the post about inflation. I remain fairly stoic about inflation. It’s not something we can really escape, but it’s essential that we try to account for some level of inflation when FIRE planning. My father retired age 55 with a flat-rate company pension and an “ok” social security check drawn as soon as he was entitled. At the time, the SS would have been far less than his company pension. 24 years later, his inflation-adjusted SS now exceeds his company pension check. But did he make the wrong decision to not choose an inflation-adjusted pension? Probably not – he’s now too unhealthy to benefit from any extra cash he could be getting. However, at the same time, I feel a lot of people (mostly gung-ho US podcasts) have tended to ignore the potential impact of inflation (and taxes, and the likely lower stock market returns going forward) because we’ve been in such a “benign” period. The biggest unknown in my FIRE plans is the potential impact of inflation on Long Term Care costs, given that these have been increasing faster than inflation for a while.
Thanks for your suggestions for Upcoming Topics. I would happily respond with “all of the above please”! However, for me probably the most interesting topics would be your take on TaxAct/TT/OLT and a breakdown of an example tax return. I used to use TT until I struggled to pay for it without a US credit card, which pushed me to OLT. OLT has been okay, but you already need to know what you are doing. I’d be happy to pay for a little more hand-holding if I knew it could handle FTCs/NRAs/exclusion of SS for UK residents/etc *and* it could be paid for via payment method with a non-US address. I love how OLT creates the actual forms before you press the “pay now” button because TT leaves you in the dark as to how they came up with the figures.
You also mentioned “modelling and projection”. I’ve recently added a more detailed future cashflow model to my spreadsheet based on Wade Pfau’s recent book “Retirement Planning Guidebook” (like a combination of his Present Value cashflow and Funded Ratio tables, p74-75). I’ve tried a few online calculators (including the UK retireeasy.co.uk) but none of them allowed me to model a FIRE plan that included the transfer of assets between SIPPs & ISAs that I needed and transparent control of growth/inflation assumptions. So I definitely prefer my own (no doubt error-riddled) DIY model than a 3rd-party tool that I don’t fully understand.
Regards,
Jeff.
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Thanks Jeff, appreciate your thoughts as always.
On inflation, I completely agree. It, and taxes, and current valuations, should all not be ignored. When I see people projecting 10% real returns on equities forever with no impact on taxes, I get worried. My 5% real returns I use for projections is probably conservative, but I’d rather be pleasantly surprised than bitterly disappointed. Taxes are inevitable – I spend a lot of time thinking about how to manage them and reduce them as much as possible within the law and my own sanity, but they’re going to happen. Hopefully my retirement taxes will be less than the 30% effective rate I paid the UK last year (plus NI and now the new care levy), since it’s much more tax efficient to live off investments in tax-sheltered accounts, but I’m expecting something in the 10-20% sort of range. For inflation, I can only hope and expect that, in the long run, equity returns will adjust for inflation, as the underlying companies raise their prices and their revenues, but there may well be some short term shocks.
I want to do the tax software comparison for my own purposes, too. I’m honestly tired of fighting TurboTax – it would be simpler to just fill in the forms myself IF the software would check the math and do the cross-references for me. I tried the free fillable forms last year, but I want a little more help on the math and consistency side, too easy to make a mistake just carrying numbers from a worksheet to a form to a schedule to the 1040. From my bit of playing around with TaxAct, it feels much more like they’re guiding you through the form, instead of a questionnaire with loose links to the form and unclear logic around how they get the results. On the forms before payment, they seem to split the difference, showing you the 1040 and associated schedules, but not all the other forms. Helpful, at least.
On the modeling and projection, I do think the best/only real solution for people in our situation is a DIY model. I’ve built several crude ones in Excel, this might give me an opportunity to further beef up my Excel/Sheets skills. Do some modeling with historical data (the hard being finding good data…) and/or Monte Carlo simulations. A project for after tax time, probably! If you haven’t played with it, I do find the Early Retirement Now toolbox pretty interesting – I haven’t made it a core part of my own tracking/projection processes, but play with it from time to time: https://docs.google.com/spreadsheets/d/1QGrMm6XSGWBVLI8I_DOAeJV5whoCnSdmaR8toQB2Jz8/edit#gid=0 His whole SWR series is worth a (LONG) read, although necessarily US centric: https://earlyretirementnow.com/safe-withdrawal-rate-series/ My modeling probably won’t be up to that level, but want to see what I can do.
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Yes, I have had a cursory look at the Big ERNs blog and one of his spreadsheets. Unfortunately, it doesn’t take long before my head explodes with the level of detail he goes into!
I’ve also looked at a (much simpler) spreadsheet that comes with Michael H. McClung’s book “Living off your Money”.
I find Wade Pfau to be the most cautious/pragmatic/conservative and easiest to implement method. McClung has analysed different withdrawn strategies in extreme detail (for drawdown-type assets) but I think a simple Vanguard-style “floor and ceiling” withdrawal strategy would get you 90% of the way there with a much simpler process. (i.e. start with say a 4% withdraw in year 1, then thereafter withdraw 4% of the current portfolio value, but no more than 5% or less than -2.5% of last years nominal withdrawal).
Alternatively, keep a good sized emergency buffer fund, then use the Excel PMT() to calculate how much you can withdraw each year (using a conservative inflation-adjusted growth rate) in order to withdraw everything (or leave a legacy) before a conservative date of death (e.g. age 95). This does not allow for Long Term Care costs, so this may need to be separately budgeted for (or use the FV value to cover it).
Jeff.
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Regarding upcoming topics, any notes/reflections on UK State Pension vs US Social Security and how they interact would be welcome. Any posts on the complexities of UK pensions (not just SIPP but also Defined Benefit, Defined Contribution, and how contributions to the latter work from a US/UK taxation perspective) very welcome too.
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Thanks Rebecca – on the State Pension/Social Security aspect, I think I’ve covered most of the interactions in this post: http://fireacrossthepond.com/2021/06/17/estimating-social-security-for-americans-in-the-uk/ The short answer is that State Pension doesn’t care about Social Security, and State Pension is a really simple calculation (maximum payout * (years worked in the UK/35). Social Security is far more complicated, and does care about State Pension via the Windfall Elimination Provision. If there’s anything you think I should add to that post or a new one, certainly interested in any suggestions 🙂
I haven’t really touched on Defined Benefit pensions because I don’t have one, I just know enough to know they can get different in terms of lifetime allowances and the like. But from a US perspective, they’ll be taxable income when you receive them. Beyond that, a lot of the details will get plan specific, I think.
Defined Contribution, on the other hand, I’ve covered a lot more, since that’s what I have!
Basics of a workplace pension: https://fireacrossthepond.com/2021/03/21/uk-employer-pension-account-options/
And a SIPP: https://fireacrossthepond.com/2021/03/21/uk-self-invested-personal-pension-account-options/
Withdrawal options: https://fireacrossthepond.com/2021/04/20/uk-pension-withdrawal-options/
And taxes in withdrawal: https://fireacrossthepond.com/2021/05/26/tax-on-uk-pension-withdrawals/
Pensions are quite a complicated topic with a lot of facets, so if there’s anything you think I haven’t covered, I’d happily look into it more!
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Hello, did my comment go through here? It made me log into my WordPress account. I’ll summarize it here. We’ve exchanged comments in the past and I really enjoy your comment. Wasn’t sure where to put this but was curious to hear your thoughts on two things:
1. Any tips on exchanging GBP to USD and finding a favorable rate / site? I’ve used Wise but have heard good things on Revolut and think they may have no fees?
2. I have a PCRA within my 401K which allows me to buy/sell stock within that tax-free. Since I transferred to the UK 5 months ago, I have a pension through Aviva and was hoping to set up the same thing. Do you know if something similar to a PCRA or self-selecting brokerage account within a pension is an option here in the UK?
Cheers and thanks!
Ross
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Hi Ross,
1. Wise definitely works and is a solid rate, I used it for my UK house deposit. I’ve heard good things about Revolut, but haven’t used it myself – I think they probably bury the fees in the exchange rate if they don’t charge an explicit fee, nobody does it for free! The absolute lowest fee is via Interactive Brokers. Bit more of a faff than Wise, but very, very cheap, especially for larger amounts – it’s the open market rate plus a tiny fractional fee (Wise is sometimes cheaper for small amounts, under a few hundred or thousand).
2. Had to look up PCRA, but basically sounds like you can trade whatever you like within a 401k, right? Workplace pensions in the UK tend to be more locked down; mine is also through Aviva and they have a decent selection of funds, but certainly nothing too exotic or any individual shares, and I can’t find any option like a PCRA in my Aviva pension. You can buy almost anything you want within a SIPP though. You can have a SIPP in addition to a workplace pension, as long as you stay under the total £40k allowance, which includes employer contributions. You get the same tax relief (except for National Insurance, if your pension is salary sacrifice), but more flexibility. There is some debate over the US treatment of a SIPP – it is very probably a pension, so the US recognizes the tax treatment, but less certainty over whether it’s also a foreign grantor trust and thus requires filing of form 3520/3520A with your US taxes. I don’t have a strong opinion on that one, worth deciding for yourself (or seeing paid advice).
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I also like using Wise. I’ve heard people have used it to receive IRS refunds. I’ve used it to receive a US pension and make transfers between US banks, UK banks and US brokerages. I’ve also used it to top up with Euros before travelling to a few European countries. Excellent for Euro purchases. Euro cash from ATMs is good, but the monthly limit was small before you had to pay fees.
I second the advice on SIPPs. There are only a handful of providers that will allow US citizens, but Hargreaves Lansdown and AJ Bell will be okay (at least for now). However, charges are high for holding OEIC/mutual funds (hold Irish/Luxembourg domiciled ETFs instead) and typically high trading/FX fees for non-UK shares. Personally I would use a SIPP for buying and holding low-cost tracker funds for the long term, not for active individual share-dealing. I personally don’t file 3520/3520A forms, even though strictly speaking I probably should. I suspect I’ll get away with it, not least because the IRS don’t have the bandwidth to chase up obscure informational forms that will yield no tax revenue.
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Thanks for the quick response guys, really appreciate it! Why is IBKR a bit of a faff? Is it worth the faff or no?
Re: PCRA, yes that’s right I can trade most equities within a 401K. What is the process for setting up a SIPP? Can my Aviva pension funds be transferred/converted into a SIPP? And the max of the account is £40k? Or that’s the max contributions per year? Good to know about Hargreaves Lansdown / AJ Bell for setting up a SIPP. Will look into Irish/Luxembourg ETFs too. Is there a list of those somewhere? Sounds like the SIPP isn’t a great option for trading though – right? Or could you trade the Irish/Luxembourg ETFs without much of an issue?
Re: Wise, for use in Europe, were there any fees for withdrawing Euros? Got dinged with a big fee while on holiday in Greece a few months ago cuz I didn’t have a Euro-friendly ATM card. Have a Revolut card now and some money I’ve converted to Euros sitting in there so I think I’d be alright now. Cheers!
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Wise is really well designed to do a couple of things well, one of them being international money transfers/conversions. IBKR is designed to do many, many things – effectively, cheaply, and compliantly, but not always the most intuitively or with the best user interface. Here’s a good writeup on how to do money exchanges on IBKR: https://www.expatfinance.us/general/ibkr-money-transfers IBKR is generally great for US citizens abroad, one of the very few brokerages that will happily take a US citizen with a non-US residential address.
I will use IBKR for all future conversions, now that I’m all set up it’s not much more of a faff and worth the cost savings. I used it not too long ago to move money from GBP to USD for my upcoming 2022 IRA contribution and all went smoothly.
Setting up a SIPP is no more complicated than setting up any other account in the UK: https://www.hl.co.uk/pensions/sipp/apply-now or https://www.youinvest.co.uk/apply/sipp (I have one with H-L and that was simple, no experience with AJ Bell). And yes, you can convert from a workplace pension to a SIPP – some workplace pensions will allow in-service transfers (I know some people transfer a couple times a year, especially if they have a high-cost workplace pension), some don’t, so you can only transfer when you leave that employment. I haven’t tried to transfer from Aviva, since my employer has negotiated pretty low costs at 0.29% for a good selection of funds. Not US index fund low, but competitive with a H-L at 0.45% capped at £200 a year (for stocks/ETFs – funds are a sliding scale starting at 0.45% up to £250k). AJ Bell looks slightly less, 0.25% up to £120 a year for stocks/ETFs.
Max annual contribution to all pensions/SIPPs in a year is £40k, including your and employer contributions. There is a Lifetime Allowance of a bit more than £1M – you can go above that but there’s a 25% extra tax penalty on amounts above the LTA, so usually best to try not to.
https://justetf.com/en/ is my go-to for researching UCITS (European) ETFs. You probably want Irish, especially for any underlying US investments, because the US/Ireland tax treaty has only 15% dividend withholding, compared to 30% for Luxembourg.
I don’t think there are any options in the UK that are open to US citizens that are actually good for active trading. SIPP would be fine except the fees will eat you alive – £11.95 for H-L (goes down with frequent trading, to a minimum of £5.95), AJ Bell at £9.95 going down to £4.95 after 10 trades in the previous month. Nothing close to US fee-free trades that will accept US citizens, at least that I know of. But if you’re doing buy-and-hold with ETFs, those fees aren’t too bad, and both brokerages offer much lower fees (£1.50 a trade) for monthly purchases. IBKR is probably your best bet, their commission is very cheap for active trades, but they don’t offer a SIPP except through a third party, who will charge you fees: https://www.interactivebrokers.co.uk/en/index.php?f=38149 , nor do they offer an ISA. So you’re limited to a US IRA or a taxable account.
Looks like first two Wise ATM withdrawals a month are free, 50p after that – not bad: https://wise.com/gb/multi-currency-account/pricing I’ve also got a Monzo account I’ve used in Europe which is free for up to £250 a month. Not for currency exchange (you can only hold GBP in the account), but it’s cheap/free for spending/withdrawing in Europe. Not sure there’s any advantage/disadvantage compared to Revolut, though (haven’t tried Revolut myself).
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Thanks so much for your insight here, always appreciated. A lot of good info to follow up with and explore more deeply – very excited! By the way, what is your name or what do I call you?
Curious if you have any insight in technical analysis or timing the GBP-USD ForEx rate when it is favorable (either way) to make a transfer as needed, but perhaps that’s a convo for another day 🙂
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For the moment I’ve kept the blog semi-anonymous (wouldn’t be that hard to trace it from other places online, I’m sure!), but I should probably think of a pseudonym or something 🙂
Timing FOREX seems like a zero sum game. I move money when I need to, and hope that it will all average out in the end! But at this point, I don’t actually move between currencies much, because my existing USD investments just sit there and do their thing, and practically all spending and new investment is in GBP. Key exception is my Roth IRA contributions, but I don’t try to time that – wound up in emerging markets equities this year to rebalance anyway, so didn’t sit in USD long.
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