I recently wrote a post about reaching financial independence by 40 with a starting salary of £40, whilst at the same time comparing the UK to the US.
I concluded that it was possible using my optimistic assumptions and that FIRE in the UK is much easier compared to the US.
Some people commented who were unconvinced about the assumptions. I expected many people would not like the assumptions used but they were needed for me to illustrate the ideas behind FIRE.
It is up to the individual to apply the principles to their own circumstances and adjust the assumptions to suit their reality.
I have always said not everyone can do this, but that doesn’t mean we should give up on the idea.
This post is going to provide a healthy dose of reality check before ending with what I hope to be a bit optimism.
Odds are against you
Fact: In the first quarter of 2019, the average savings rate in the UK fell to 4.4% compared to the US which was 8.1% in June 2019.
Historical data shows the savings rate range to be a high of 15.2%, a low of -0.9% for the UK, and high of 17.3%, a low of 2.2% for the US.
G20 Savings Rate, Source: Trading Economics
Despite the US having double the average savings rate to the UK, both numbers are far from high enough to reach FI by 40; even when using the highest rates recorded.
Side note: isn’t it interesting how Japan has an average savings rate of 55%!
Fact: There is little to no financial education in school. According to the OECD, only 27% of young adults can do simple interest rate calculations or know about inflations in the US. Whereas in the UK, 52% of teenagers have been in debt by the time they were 17.
What does that say? To me, it says we only invest twice the amount educating our future generation than is spent by the private sector to encourage us to buy things.
We are bombarded with advertisements every day. Constantly tempting us to spend money in an attempt to make us feel bad about our lives and successfully doing so based on the rate of consumer debt.
Fact: In the UK, the state pension in its current format is simply not affordable in the long-term with an ageing population. The International Monetary Fund has also suggested that the state pension needs to be means tested. Together with the recent report suggesting that the pension age should rise to 75 means that the future of the statement pension is very uncertain.
This is a sensitive topic for politicians and the public do not want to hear this truth. In the UK, the state pension age is already rising to 66 by 2020 and rising again to 67 between 2026-2028. What other changes will there be in the future? How about 30 year’s time? One thing I will bet on is that any changes will likely mean we will be worse-off rather than better-off.
For those planing to retire early and are still relatively young, I would definitely consider the points. Perhaps investing more and start investing younger. For me, I am not going to rely on the state pension; but I’m cautious.
Taking all the above into consideration, the reality is that the vast majority of people cannot reach financial independence by 40. This is even before considering whether or not someone has the will power, patience or know why they want it in the first place.
Something had to give
I had a choice.
Be generous with the income assumption.
Or be extremely tight on expenditure.
I went with the former believing that there is greater opportunity to grow your income but there is only so much you can trim your expenses by. As a result, I allowed Amy and Adam a budget which didn’t mean they had to eat beans and rice for the rest of their life, or live with the parents forever.
Amy and Adam Revisited – with Student Loans
So let’s give this another try using a much lower starting salary which might be applicable to more people.
|Student Loans Debt||$40,000||£40,000|
|After-tax Annual Income||$25,000||£25,000|
|After-tax Monthly Income||$2,083||£2,083|
It looks like this – same as before.
|Type of Expense||Amy (US $)||Adam (UK £)|
|Rent / Mortgage||700||700|
|Age Starting FI Journey||25||25|
|Annual After Tax Starting Household Income||40,000||25,000|
|Annual Income Increase||5.0%||2.0%|
|Age Start Earning Side Hustle Income||30||30|
|Percentage Value of Side Hustle Income Compared to Base Income||20%||20%|
|Investment Growth Rate||8.0%||7.0%|
Notice how the annual rate of income increase as well as investment growth have also been dropped.
Amy will reach FI by 84 with a net-worth of $2.38 million.
Adam will reach FI by 54 with a net-worth of £1.02 million.
Amy and Adam Revisited – NO Student Loans
Amy didn’t do well in the previous scenario did she? 84 years old is definitely not early by anyone’s standard.
Clearly, a significant proportion of people decide that university is not for them.
Let’s try it again without the university debt. All other assumptions remain the same.
Amy will reach FI by 71 with a net-worth of $1.86 million.
Simply by removing the $40k in student loans debt meant she could retire 13 years earlier!
Still not early though.
It’s the bloody healthcare insurance and medical costs which goes hand-in-hand with living in America!
Adam will reach FI by 52 with a net-worth of around £950K.
Removing the £40k in student loans debt meant he could reach financial independence two years earlier. The reduction is not as much as Amy due to the way students loans work in the UK.
Amy and Adam Revisited – DUAL Income
In the UK, over 60% of the population over 16 years old were living as a couple, this includes partners who are not married and cohabiting. In the US, the number of married people age 18 and older in 2016 was 55%.
Now let’s see what happens when Amy and Adam have partners who are also working. Their annual household after-tax income increases to 40k…all other assumptions remain the same, including 40k in student loans debt.
This means on average, each of them in the household earn 20k after tax at 25 years old.
Hold on a minute! This looks suspiciously like my original post…Financial Independence by 40 on 40k. The maths is the same, so there is no point me repeating it again. Suffice to say, they both make it to FI by 40.
I hear hear some of you grumbling already.
“WAIT! But their expenses would be higher as a couple!”
Yes, they would be; but if they are sensible, they won’t be double. Perhaps 25% higher maybe? Who knows. Everyone is different.
They might not reach FI by 40, but perhaps 45, 50, 55?
But what about children? I’ve done that already so let’s not go there again.
Just imagine what Amy and Adam could do if they received an inheritance, or if they earned more money? How many years could they knock off?!
I could be here all day working out different scenarios, but I think I’ve made my point.
To be absolutely clear, the point is this:
It doesn’t matter if your income is average, or median, the odds are stacked against you to reach financial independence by 40.
But it does’t mean you can’t improve your financial situation.
I’m sorry if I’ve burst anyone’s bubble.
That is the reality.
Summary of Findings
|Amy, US||25k Income, 40k Student Loan||84||$2.83M|
|Adam, UK||25k Income, 40k Student Loan||54||£1.02M|
|Amy, US||25k Income, NO Student Loan||71||$1.86M|
|Adam, UK||25k Income, NO Student Loan||52||£950K|
|Amy, US||40k DUAL Income, 40k Student Loan||40||$1M|
|Adam, UK||40k DUAL Income, 40k Student Loan||38||£900K|
How to beat the odds
I promised to end on a bit of positivity. If you’re a late starter or earning a moderate income, don’t give up.
Using the Building Blocks to FI can improve your odds drastically:
Earn: Maximise your earnings and develop multiple income streams.
Budget: Reduce your expenses, optimise your taxes and increase your savings rate.
Protect: Protect your path to financial independence with an emergency fund and insurance.
Invest: Invest wisely and with minimal fees.
Using Amy and Adam as an example; by not having student loans debt, controlling their expenses, having a partner who is also earning with similar financial goals and having a ‘side hustle’ income made FI a reality for them even with a modest income.
Don’t let anyone dictate to you what ‘early’ retirement means or what age you should reach financial independence by.
Everyone is different.
There are an infinite number of scenarios.
To me, early retirement is relative to what it could have been if you didn’t get your act together. NOT ‘early’ when compared to others. So if you’re heading for financial independence by 70, but took on board some of the tips I suggested in my original post to reach it a 60; that is early in my book.
There is nothing wrong with FI by 50 or by 60. It’s not a competition.
It is about having a flexible savings rate which you can adapt in a way to live happy now whilst preparing for the future.
Plus, if you enjoy work, there nothing wrong with working towards early semi-retirement instead. This way, your FI number can be reduced.
Starting now is better than than not starting at all.
Financial independence earlier is better than financial independence later.
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