Is Financial Independence by 40 on 40K Possible? – REALITY CHECK9 min read

FI by 40 Reality Check - Cashflow Cop Police Financial Independence
(no. 048) – Image Credit: Kenny Luo (balloons), Sharefaith (US flag) and James Giddins (UK flag)

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.

CountryLast Previous
Euro Area12.60Mar/19
South Africa-0.10Mar/19
South Korea8.80Dec/17
United Kingdom4.40Mar/19
United States8.10Jun/19

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: The median gross income of full-time employees was £29,588 in the UK and $31,099 in the US.

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.

Fact: Global advertising expenditure is over $560 billion US dollars.  In the UK, advertisement spending is over £20 billion compared to an education budget for 5-16 year olds of £39 billion

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: Excluding mortgages, average debt per UK household reached a new peak of £15,385 in 2018.  The average American on the other hand had about $38,000 in debt, excluding home mortgages.

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

So when I went through the calculations to reach FI by 40, one out of the two things had to give.  The two main variables in the formula are: Income and Expenses.

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 ExpenseAmy (US $)Adam (UK £)
Rent / Mortgage700700
Home Repairs5050
Household Goods5050
Eating Out5050
Student Loans425180
Monthly Total2,4901,795
Annual Total29,88021,540


Age Starting FI Journey2525
Annual After Tax Starting Household Income40,00025,000
Annual Income Increase5.0%2.0%
Age Start Earning Side Hustle Income3030
Percentage Value of Side Hustle Income Compared to Base Income20%20%
Investment Growth Rate8.0%7.0%
Withdrawal Rate3.5%3.5%

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.

According to 2018 US data, around 30% of young adults did not go to university compared to 60% in the UK.

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

LocationScenarioFI AgeNetworth
Amy, US25k Income, 40k Student Loan84$2.83M
Adam, UK25k Income, 40k Student Loan54£1.02M
Amy, US25k Income, NO Student Loan71$1.86M
Adam, UK25k Income, NO Student Loan52£950K
Amy, US40k DUAL Income, 40k Student Loan40$1M
Adam, UK40k DUAL Income, 40k Student Loan38£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.  

You can let your self-limiting beliefs hold you back and accept your current reality, or you can work towards being an outlier and start making your own plan towards financial freedom


More from the Blog

Financial freedom by making decisions like a Police Commander

What if the world retired early? (Tragedy of the Commons)

Do you have the Financial Grit to Retire Early?

Humans of FI

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6 thoughts on “Is Financial Independence by 40 on 40K Possible? – REALITY CHECK

  1. Pingback: The Full English Accompaniment – Crowdfunding maturing – The FIRE Shrink

  2. fatbritabroad Reply

    The bit I’m currently struggling with is how to split my savings between my pension and my isa.

    Relatively new to isa investing (last 7 or 8 years) but thanks to a mid 5 figure inheritance have 100k saved now. My pension I have always put a relatively high amount in and now contribute 19% Inc ni credit and 6% employer contributions. I’ll have about 230k as of Jan as I’m getting a retention bonus then which will all go in. I’m 39 In November

    For me at the moment i feel the need to increase liquidity. I plan to up the isa savings to about 200k and then use the yield to clear my mortgage down but it’s really difficult for me to decide what to prioritise
    . My pension is best tax wise but with a kid and wanting to retire early or at least be financially independent I feel like I need a bit more in my isas. The mortgage is really not worth paying off. It’s a relatively comfortable figure at 277k. I also keep debating on property but with my income being just under the 100k I feel like I’m better prioritising more tax efficient investments.

    Any pointers?

    • Cashflow Cop Post author

      I’m in the same boat actually. Our financial planner recently told us that we were too focused on the long term and lack short-term liquidity. I completely agreed with him.

      Our forecast by our financial planner estimate that we will have too much money in our 60s+ and because we are not big spenders, would struggle to use it. This is mainly because of our large monthly overpayments into our defined benefit pensions (35% contributions) in addition to SIPP investments. This means for the short term, especially once we are FI in a few years time, cashflow would be tighter so he suggested shifting our focus.

      The struggle I face is I just find the tax relief on the pension far too good an offer to miss, especially because we are currently higher rate tax payers.

      What we’re doing to ween ourselves off the pension investment addiction is gradually shifting a greater proportion of monthly investments from pension to ISA. The gradual process will take about 2 years according to my current plan. This way, it just feels better psychologically for me.

      We also overpay a lot on our mortgages – but this is a personal choice; not necessarily a financially optimum one.

      I wish there was an algorithm which can calculate the best split between pension and ISA. However, there are just so many factors involved and not all of them would be maths related.

      Unfortunately, I have no specific pointers, but the above is what we intend to do. I hope that helps with your own decision making.

  3. fatbritabroad Reply

    Yes for me I’ve just left the % on my pension the same and started chucking money in isas now out of any spare capital. I can’t bring myself to reduce it lol feels like I’m still miles from my target even though the 200k even with modest growth could break the lifetime allowance quite comfortably with additional contributions. My plan is to wait till it hits 500k then stop completely and take the tax hit

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