Since starting this blog, I worked out my approach to financial freedom. It’s an exciting time, but I admit that the way I’m aiming for FI makes me feel a bit of a fraud in the FI world. I use what I’ll call here the conventional early retirement (ER) strategy, which put simply, is accumulating enough assets to cover my costs until conventional retirement age . But was I a bit too quick to dismiss the ‘classic’ FI strategy? In this post, I ask: how long will I need to stick in my current job to reach a x 25 FI stash to be able to use the withdrawal rate method?
The FI movement lauds the idea of funding early retirement mostly if not solely through passive fund growth/income by building up a stash that’s x 25 (or more*) the income needed in retirement. MMM and others have written a lot about this, including FI bloggers this side of the pond. But the stash I needed (roughly worked out) seemed almost unattainable to me (given I want to leave my career), which is why I went for the conventional strategy… which to my surprise, suddenly saw me reaching financial independence in 6-7 years!
Sound too good to be true? If you have (or are working toward) assets that will be ‘locked in’ and not accessible until later life (i.e. pension, home) plus you’re already a bit older meaning you have less of your early retirement to fund already and you are used to low-cost living, then my conventional ER strategy may be surprisingly attainable!
But besides feeling like an “FI fraud”, maybe a greater thing that’s at the back of my mind is that the conventional strategy I’m now following means watching my hard-earned savings whittle/hurtle down inevitably to zero over time. I shudder at the horror of it! Would I be able focus on other things (i.e. feel financially free!) once out of paid work or would I just feel more than mildly depressed and useless not generating an income?** Even worse, what if there are unforeseen costs, such as health costs, which will eat away at my funds and by then I may not be able to return to paid work?
Okay, so I’m not trying to catastrophise as I realise that’s the quickest way to never retire! But at the same time, these are reasonable considerations to mull over…right? To not consider them would in my mind be short-sighted.
If there’s one thing I’ve learned so far from writing this blog, it’s that when the ideas don’t suit, I do not tend to calculate the numbers in any real way – the brain is lazy and quite quick to dismiss. But maybe the FI strategy isn’t so out of reach especially if later on, I play around with the figures a little? After all, it would be perfect to have early retirement while creating substantial passive income, knowing my portfolio was working hard for me! In theory, keeping me going for 30 years based on the 4% withdrawal rate (though I truly wonder if that’d be the case).
The big reveal: How long to get to my x25 FI stash
So, this is the first time I’ve done the calculations properly – I’ve created a table below for comparison. I’m basing calculations on an annual spending (thus income needed) of £15.5k*** and saving of £18k, based on a projected saving (current saving + childcare savings starting next month).
It’s worth reminding ourselves that there are lots of ‘moving parts’ to both strategies, like:
- Inflation – not taken into account at all in the calculations above
- The market and economy – not taken into account at all in the conventional strategy, and totally reliant in the FI strategy which is high risk if your FI date is under 10 years away
- Future house prices – if house prices between desirable and less desirable areas increase in disparity, this may become a larger fund than I’m estimating, but who knows?
- Future costs especially having a growing child
- Post-FI spending, which often decreases but some will increase theirs e.g. if travelling
But if you want to plan for FI, you do need a plan, a starting point, so this is mine. Did you try the exercise? How do your figures look? Also, let me know if I’ve made any glaring errors.
So how am I doing with each strategy?
These calculations confirmed my initial ‘back of the envelope’ thoughts – that the ‘classic’ FI strategy is quite an awkward fit for my financial situation. With my estimated current savings rate (£18k pa), it’d take over 15 years for me to reach FIRE enabling me to live on my withdrawal rate! And even then, there are the caveats.* If I manage to increase my savings to 20k or 22k per year, it’d still take an estimated 14.6 years and 13.3 years respectively (not taking into account any capital growth meanwhile). These alternatives sound more attractive but there are a lot of uncertainties as to whether we could maintain saving so much with a young family and not compromising too much on quality of life.
While the gains made gain momentum in the FI strategy, I’ve got my pension and house equity for that ‘later on’ which I can’t feature in the current calculations. I don’t really want to downsize from our average 3-bed semi while Little Firelite is still growing up. The FIRE fund assumes you need to keep withdrawing at a consistent rate once at FI, but I don’t need that. The other big assumption is that you have a large run-up to your FIRE date so that you can ride out any economic downturns. I don’t have or want that.
By contrast, the conventional ER strategy has the attraction of knowing that This Time Next Year I’ll have a nest egg enough live on in about 6 years! I’m still uneasy about drawing down on principle investment continuously for years. However, in reality, maybe my strategy is something ‘in between’, except that I’ve not made any financial growth assumptions as part of my strategy to live on in future. It’s going to look something like this:
- At 50: Life 2 starts! I’ll have slightly over 100k to live on (+anything I accumulate in Life 2), which in reality will have had some capital growth (I hope!) and I’ll probably adjust my spending, if I’m honest in response to knowing my new situation.
- At 57: New sources of income released: a pension lump sum of 21k, work pension of 7k pa, and sometime between 57 and 67, we can sell up from the city to a town releasing house equity of an estimated 44k to me. Most of these are not stock market dependent (which is a good balance against the former) and all of these have some kind of inflation proofing baked in.
- At 67, my state pension starts and supplements my work pension. Will hopefully have a contingency fund still too.
Why I can’t use the ‘classic FI’ strategy and action points
This exercise has reassured me that FI concepts include some good principles but that need to be considered critically next to your own current financial situation, priorities and stage of life. It literally doesn’t make sense for me to go all-in the index fund investments strategy even if, looking at my investments, I’m a little (or a lot!) on the cautious side! I’m hopefully under 10 years to FI so there’s a pretty good chance I’d be leaning on my savings and investments right in the midst of an economic wobbly (given we’ve not had anything like that for over 10 years now)…so it seems like there would be higher than average chance of operating at a substantial loss if I throw all my assets into the market. Not contributing to my work pension seems foolish given my employer’s contribution rate (that will soon reach 23%).
I can’t estimate how long I’ll live, hopefully to a ripe old age with my faculties relatively intact, so it doesn’t feel right to cash out my final salary pension as some have suggested, and put all the proceeds to work on index funds. And then there’s just the minor issue of being able to access my work pension before I even reach my FI figure!
Also, there’s the not-so-small inconvenience of wanting to leave my job soon – that’s a priority for me but would set me back quite a lot as I need to be creating my 293k additional FI pot. Taking all into account, the only way I could do the classic FI strategy is to stay in a job I want to leave and aim for a promotion that may not happen (eating into precious family/me time). Unfortunately, I feel already pretty burnt out…
On the other hand, this has also got me thinking of the ‘bells and whistles’ I need to add onto my current ‘bare bones’ strategy to ensure my second life is optimal and not a time of background financial worry:
- Consider how to build in a bit of paid work or sources of income into Life 2 (especially aged 50-60, say).
- More actively consider work that allow some continued financial saving in Life 1.3.
- Consider further diversification into property especially while I’m still in a respectable job!
A shift in my thinking
Yes, I’m moving away from thinking about my gap year as a year to do all the things I’ve always wanted to do, to thinking about what time investment can I make for Life 1.3 and into the future. I guess writing this out makes you well aware of all the various assumptions being made and that my personality tends to want to consider preventative measures in order to protect what financial freedom I can get/feel.
Maybe working a day a week isn’t as bad as it initially sounds if, after the honeymoon period of quitting the rat race, it enables you to feel productive, a bit connected in a good way (to the capitalist machine on your own terms), contributing to something meaningful, and attenuating the rate at which my assets being slowly stripped away. It’s something to consider anyway rather than an obligation. To take a crude example: Would you like to work an hour a week so you can take your family for a meal out (not factored into the FI budget already)? Would you mind working 2 weeks a year to have enjoy an additional family holiday?
So, that’s where I’m at in my journey. Illustrated by pictures I took last weekend while pondering about bits of this. 🙂 And spending family time, of course!
And just to spoil the ending, I’m now reading a new UK-based book that’s again leading to some possible upheaval in my FI thinking – something that is unsettling yet chimes with me – and I expect it might lead to some further lifestyle redesign. Watch this space! Meanwhile, I really welcome any comments. What is your FI strategy? Are there other considerations I’ve overlooked?
*That is, 28.5% is the figure of the “UK version” followed by some, like Reset writer, David Sawyer, the major reason being that our markets are less efficient than US ones and to tap into the major markets will add in additional risk and cost (e.g. currency risk). The withdrawal rate you can read about elsewhere but assumes you withdraw 4% of your funds to live on per year; the framework of this post shows you what’s possible, but the reality is that in the UK we may need to assume a lower withdrawal rate. To keep it simple, I’m going to follow the x 25 as a ‘lower limit’ (and thus a 4% withdrawal rate assumption) but it’s important to recognise that the FI figures may be (slightly) underestimated for the UK situation and especially once index investment fees and post-FI income tax are taken into account.
**There’s almost no time in my adult life when I wasn’t generating income even through the 9 years of my university studies via part-time jobs that I pretty much started from when I was about 12 or 13 years of age. The closest feeling I have to not generating income for a period was during maternity leave once I was no longer on full maternity pay via my work’s generous package. Even though I do believe that being at home during your child’s first year of life is possibly the most singular impactful thing I can do to support another life ever, I did feel somewhat useless, incredibly unproductive, and did not enjoy seeing the lack of income landing in my bank account at the end of each month.
***The £15.5k pa needed is based on my average spend these last 5 months and adding £500 a year as a contingency given that we’ll have the unknown costs of a teenager (e.g. for more food and clothes). Of course, this is all a guestimate as some costs will disappear once out of work (though not many) and there likely will be some unforeseen costs in future.