7 Circles

The Plan

The plan

The Plan is an action plan bringing together the lessons from each of the 7 Circles.

  • It also incorporates the lessons from the MoneyDeck series, a pack of 52 playing cards that describe the “golden rules” for Private Investors in the UK.
  • And it links to our Elements series, which forms a Periodic Table of Investing

As well as things you must do, some of these rules describe things you should avoid doing.

Circle 1 – The Problem
  1. What’s your vision of the future?
  2. What retirement income do you need to make it happen?
  3. Work out how much money you will need in your pension pot to produce it
    • Do The Math
    • Use a Safe Withdrawal Rate (SWR) of 3.25% pa as a starting point.
    • This means that you will need 31 times your target retirement income as savings.
  4. How many years do you have to get there?
    • What’s your investing time horizon?
  5. Start saving today – the best time to start is now.
  6. Find out about your risk tolerance.
  7. Make your financial plan:
    • Calculate by what age you can reach the pension fund you  need to support your retirement income.
    • This includes annual savings and investment growth.
    • What goes into a Plan?
  8. Work out a mix of assets that fits your risk tolerance, and will get you where you want to be in the time you have available.
Circle 2 – Cash, Debt, Budgeting
  1. Learn about Cash and Debt
    • Avoid debt – apart from mortgages and perhaps student debt (which is a tax, really).
    • Don’t have too much cash.
  2. Work out a monthly budget.
  3. Live within your means.
    • Monitor your spending for a month to make sure that you stick to it.
    • If not, reduce your outgoings to less than your incomings.
    • Don’t Keep Up with the Joneses – people buy stuff they don’t need to impress people they don’t like.
  4. Avoid lifestyle inflation and smooth your consumption.
    • Your annual budget should ideally be no higher than the retirement income you decided on in Circle 1.
  5. Once a year, draw up your personal financial statements.
    • You need to be saving whatever annual amount you calculated in your Plan.
    • Pay Yourself First
  6. Pay off your debt, highest interest rate first.
    • Mortgage and Student Loan debt can be retained, depending on your circumstances.
  7. Save an emergency fund of 6 x your monthly budget.
  8. Start saving towards a house deposit if you currently rent.
  9. Self-insure when you can.
Circle 3 – FIRE and Frugal
  1. Many of the principles of this circle overlap with others, but FIRE followers want to get to retirement (or rather, financial independence) at an earlier age than normal.
    • Learn to budget and save.
    • Save an emergency fund.
    • Pay down your debts.
    • Find a place to live, and start to pay down the mortgage.
    • Save your money into assets that will grow faster than inflation.
    • Develop some form of income for retirement.
  2. Learn about FIRE (early retirement)
  3. Learn how to be frugal.
  4. Understand the maths behind your savings rate.
Circle 4 – Costs and Taxes
  1. Costs matter.
    • Saving 1% pa to 2% pa makes an enormous difference in the end, because of compounding.
    • Think of the marginal gains made by the UK Cycling Team on their way to gold medals.
  2. Don’t use a financial advisor.
  3. Select your SIPP and ISA (see below) from the low-cost brokers we suggest.
  4. Select assets (Circle 5) from the low-cost ETFs, investment trusts and funds we suggest.
  5. Consider holding direct shares in the UK and possibly the US.
  6. Taxes Matter.
    • You can’t spend pre-tax money.
  7. If your employer has a pension with matched funding, make use of it.
  8. Make up your NIC contributions so that you qualify for a full State Pension.
  9. Open a SIPP (or two), and open an ISA (two).
    • Put your annual savings from Circle 2 into the SIPP (or your employer’s plan) and the ISA, mostly into the SIPP.
  10. Don’t pay any 40% tax – put all your higher tax earnings into your SIPP  for 40% relief.
    • If you earn more than £82K pa, consider VCTs and EIS.
  11. Look into spending some time abroad to save tax.
    • For example, Portugal offers a 10-year exemption from tax on your pension.
  12. Own your own home
    • It’s free of capital gains tax (CGT).
Circle 5 – Asset Allocation and Passive Investing
  1. Start investing.
  2. Understand the characteristics of the various asset classes and assets within them, and how they match the problems and risks of long-term investment.
  3. There are some things that you don’t need:
  4. Look at the model asset allocation, and come up with an allocation of your own.
  5. The Big Questions are:
    • Equity allocation vs. everything else.
    • Which diversifiers?
    • Which geographies are distinct enough?
    • How much Home Bias?
  6. Decide whether you want to be passive or active by looking at the most popular investment products:
  7. Consider using a diversified portfolio of UK stocks instead of your UK passive assets (ETFs) or indeed actively-managed funds (ITs or OEICs).
  8. Implementation issues:
    • How many accounts?
    • How many lines per account?
    • Maximum and minimum buying size?
  9. Buy Low and Sell High – Rebalance Your Portfolio.
    • What is your rebalancing strategy?
Circle 6 – Active investing, Risk and Trading
  1. This circle is less prescriptive and more subjective than the previous five.
  2. Here are some more suggestions:
  3. And a few Don’ts:
Circle 7 – How to Spend it / Decumulation
  1. You can’t have a stable, high retirement income forever – pick any two from three.
  2. Work out a safe withdrawal rate, and don’t use the 4% rule.
    • It’s US-based, old and based on a 30-year retirement.
    • 3.25% pa is better – it really should be the 3.25% Rule.
  3. Spend your bonds (and cash) first in retirement – give your equities time to grow
    • You need a rising equity glidepath.
    • “Bonds For Old Men” (Lifestyling) doesn’t work when you aren’t buying an annuity (see below).
    • You need to get to 75% equities in retirement.
    • Capitalise your DB and State Pensions – that will make you feel better about a high equity allocation.
  4. Sequencing Risk (SoRR) is more important than investment returns.
    • SoRR is worst when your retire into a High CAPE stock market (just before a crash).
    • Halfway through a recession is also bad – you take an accumulation and decumulation hit.
    • Couples should stagger their retirements to minimise impact.
  5. Dynamic Spending can help with SoRR.
    • Fixed guard rails don’t work (they lead to dramatic spending cuts).
    • CAPE-based spending rules [eg. 1.5% + 0.5%*(100/CAPE)] do work.
  6. Dynamic asset allocation can help.
    • A cash buffer is a drag on returns, but is a psychological help.
    • You might need as much as 6% to 13% in cash, depending on your actual withdrawal rate.
    • 60% equities rising to 100% equities is the best glide path, especially when starting at a high CAPE.
  7. Guard against inheritance tax.
    • Give your money away, or look into using AIM stocks to avoid IHT.
  8. Think about moving abroad.
    • Portugal offers a 10-year exemption from tax on your pension.
  9. Think about cashing in your DB pensions if you have a good offer (CETV).
    • Anything close to 40 x annual income won’t be around when interest rates eventually rise.
  10. Don’t buy an annuity before the age of 75 – use flexible drawdown instead
    • Here’s some more detail on Drawdown.
    • This also means that Lifestyling doesn’t work – it depresses your pot size.
  11. Don’t use Equity Release.
    • Debt in retirement increases your Sequencing Risk.
    • It increases spending (on the interest) and front-loads withdrawals
    • It works well only when you don’t need it (even if returns > debt costs).
  12. Instead, own your home in retirement
    • This is effectively the tax-efficient pre-payment of your costs of shelter.
    • It therefore reduces sequencing risk.

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