There’s been a lot of kerfuffle in the press
lately about FIRE (Financial Independence and Retire Early). It seems that some
FIRE advocates have either been writing about or been sourced for comment about it and it's caused a big fuss. The newspapers, typically, have published
articles based on the far extreme of FIRE and suggested that it is possible for
us all to retire at 30/40 financially independent and never need money again if
only we practice extreme frugality (or something like that). This is just
click-bait ruse and to generate comments that keep the newspaper at the top of
Google. The comments are as expected, depending on which newspaper you read,
from the polite scepticism of Telegraph readers to the no-holds barred outrage
and insults from Daily Mail readers.
The trouble is, the newspapers do no-one any
favours but themselves by reporting in this way (perhaps reporting is too strong a word,
story-telling may be more apt).
The consensus is the average Joe couldn’t
possibly do this so why bother trying? To be honest, they’ve probably got the first bit right to a
certain extent but it annoys me that it is seen as a binary choice. Either
Financial Independence or bust! Suppose some of those people had a go, and the
most they managed to accomplish was paying down all their debt and building up some savings so they feel more secure. Surely that’s better than
throwing their hands up and not bothering?
A lot of the comments on the Daily Mail site
were very telling. One man commented that “I might as well enjoy it as I could
be dead tomorrow” because he earned £17,000 a year, his rent for a one-bed house
cost him 40% of his salary so financial independence for someone
in his position was ridiculous to aim for. No-one has said to him that if you earn £17,000 a year
and spend 40% of your take home pay on your housing you should not be renting a one-bed house. This guy is renting so he has flexibility that homeowners don't have. Rent/mortgage should not be more than 30% of a
take home salary. That’s what the banks work to when assessing mortgage
affordability and it’s a good starting point for personal finances. If rental on a one-bedroom property is
crucifying you, either downsize to a studio flat and save the difference or go
up to a two-bed and share with a friend. Either way, the percentage of your
take-home pay spent on housing comes down and you can breathe…and save.
I speak from experience. Years ago, before I
met DH, I rented a two bedroom house on my own and my housing costs were
43% of my salary. Ouch! If this guy got his
housing costs to 30% of his take home he could save 10%.
The attitude that “might as well enjoy the money, you could be dead tomorrow” is short-sighted and defeatist. Statistically you are NOT going to die tomorrow. I think averaged out across the entire population (taking into account age and health) it is something like 0.002% or 1 in 50,000 chance of dying tomorrow. If you spend everything you earn on consumer goods and services you will get to retirement age and have nothing but a state pension and a poorly performing private pension (if you didn’t opt out). If you’ve bought a house you might have that to fall back on and/or if you are very lucky you might have an inheritance from relatives. If you have neither and you opted out of a personal pension you’re going to endure a lot of financial pain at an age where it’s hard to ride that out.
Anyway, it's no secret that DH and I want to
retire early. I’ve explained my reasons why here. I have a few FIRE advocates in my blogroll
that I keep up with, HOWEVER, that does not mean I am going for Financial Independence. I realised some time ago that Financial
Independence is not possible for us.
Financial Independence is defined as the point
where the ‘income’ from savings and investments pay your monthly outgoings. You
are considered to have reached Financial Independence when you have accumulated
30 x your annual expenses, which you can then take 4-6% a year of as your income. DH and I will not accumulate enough money to achieve those kind of numbers, which for us is around £600,000 without
mortgage payments. Why?
- We started late – I didn’t even think about
retiring early until about 2009 at 36.
- We earn the UK average salary for a two-person
household. We’re unlikely to ever earn megabucks because we’re not keen on
the idea of the stress and responsibility that goes with it. We generate money
on the side here and there when opportunities arise but generally we do not have the drive or energy to
chase larger sums of money or climb ladders. That’s a conscious choice on our
part.
- We like the occasional meal out and want to have some interesting holidays
over the next few years. I consciously cut some things to the bone to enjoy others.
- We made the decision to take on another
mortgage two years ago. If we had stayed
at the last place we would have been mortgage free in 2021. And miserable. I
hated that house at the end. We moved to achieve a dream, albeit an expensive
one.
- We’ve benefited from rising property and
financial markets over the last 10 years, which won’t last and we may be in for
a bumpy ride during the next 10 years.
- I only started a proper pension in 2010 and,
due to probationary periods and redundancy, only have about 6-7 years
contributions.
Taking into account all of that, what we can
do is achieve financial comfort (and a nice chunk of FU money) earlier than 65,
so that is our aim. We’re going to use whatever tips and tricks we can glean from
every possible source, and combine that with solid budgeting, saving, tax and
investing principles to secure a better financial future for ourselves. That
better future is DH retiring at 62 and me at 55 and then carefully running down
our money (we may work after this but the crucial point is it will be because
we want to, not need to).
This is different to true Financial Independence, in
that we are not living off 4-6% of the total retirement pot every year. We’re
living off a lot more than that every year so it will deplete over time. At
some point we may have to do an equity release or downsize – we’re not living
in penury when we own a house outright. We’ll use it if we have to and enjoy a
comfortable retirement.
I don’t believe the average Joe can achieve Financial Independence, but I do believe they can achieve financial comfort
with no debt and a nest egg of FU money. That’s got to be worth going for.
