Back in 1930, British economist John Maynard Keynes predicted that by 2030 technological advances would result in there being insufficient work to go around. Wed be forcibly confined to three-hour daily shifts, enough to give job satisfaction without causing overproduction. The centenary of his prediction is in sight, and yet politicians are talking about extending our working lives, compelling us to workuntil were 70 or olderuntil we can claim the state pension, with access to private schemes a decade earlier. What gives?
Keynes was mistaken!
The economist overlooked three factors:
- The more disposable income people have, the more products and services companies create to targetwants rather thanneeds. As time progresses, our expectations change and those items become perceived (wrongly) asmust-haves;
- One of the greatest gains from affluence has been longevity, driven by healthier lifestyles and diets and great healthcare. When the first state pension scheme was introduced, in 1908, only one person in four lived long enough to claim it. Now, theGovernmentpredicts that girls born in 2016 will live to 93.5, and boys to 90.6 and has commissioned a review into whether future generations may have to work into their seventies to avoid old-aged penury;
- Over the past 40 years, affluence has drivenup the prices of goods in short supply principally, residential property. Increasingly, younger people are forced to devote much of their incomes to buying or renting property boosting the wealth of the baby boomers, but impoverishing themselves
Howyou can profit
Every cloud has a silver lining, and you can turn each of these challenges to your advantage. Follow these three simple steps and you really can retire earlier than Dad:
1. Spend less, save more. Step off the consumerist cycle of constant upgrades of items you probably never needed. Buy what you need, and choose items that last. Turn down the heating; put on a jumper. Drink tap water, not bottled. If you dont own a home, think hard about whether you want to jump onto the property ladder and if so, where. With a little planning, you can live more comfortably than any previous generation, while putting aside more money than theycould ever have achieved;
2. Start early. Longevity is a blessing; additional years of life cant be bought. Turn them to your advantage by starting your journey to financial independence early. If youre aged between 18 and 40 when theLifetime ISAscheme opens in April, you can save 4000 a year, get a 25% Government top-up and access the whole lot tax-free aged 60. Or contribute up to 40,000 a year into a pension, if you have qualifying earnings, and get tax relief at your marginal rate. You can withdraw 25% tax-free 10 years before you qualify for the state pension and draw a taxed income from the rest, or forego the lump sum and the first quarter of regular income will be untaxed. Finally, the ISA limit rises to 20,000 in April; theres no tax break on the way in, but income and capital growth is tax-free;
3. Invest wisely. While assets such as property now look expensive, technology is driving down the capital intensity of many businesses. Stock-pickers such as Nick Train believe this will supercharge the returns available to investors over the next 20-30 years, as affluence and low interest rates boosted the returns on property for the previous generation. In the accumulation phase of your investment journey, pick stocks that generate high and ideally rising returns on capital employed and are great at converting statutory profits to cash or invest in collective schemes, such as TrainsFinsbury Growth & Income Trustand arch rival Terry SmithsFundsmith Equity Fund that will do the job for you.
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Mark Bishop holds bothstocks mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.