What’s piqued my interest this week?
The above question appears to be a recurring theme in our little niche of the financial blogging community. High-profile, mainstream public-facing blogs like MMM and the Frugalwoods argue that anyone and everyone can potentially be financially independent and retire early, if they take the right steps (1). It’s great for selling the story and motivating potential readers, but to me it’s selling an impossible dream.
To explain let’s draw up some basic sums. The amount most people can save towards an early retirement can be defined as:
Amount saved = (Defined pension + take-home Earnings) – (Basic living + lifestyle Costs)
A = (D+E) – (B+C)
For the sake of simplicity we’ll ignore tax rebates, dividend payments, inheritance etc. I’m not even going to bother running this on a minimum wage. Instead we’ll start at the UK Living Wage, currently £9.00/hr (2). This is built on the Minimum Income Standard, which calculates the cost of the average basket of goods required for a household to afford an acceptable standard of living (3).
A 23 year old working a 37.5hr week on £9/hr that will see a yearly salary of £17,550. Plug that into a salary calculator, incorporating 8% pension contribution with an 8% employer match. That’s D and E. The Living Wage is based upon a minimum acceptable standard of lifestyle, so we’ll use that figure again for B, with £0 lifestyle inflation cost and we get (4):
A = ((£76.79 X 2)+£1214.81) – (£1214.81+£0)
How does that lifestyle cost compare? Well the average UK 1 bed flat costs £600, but that’s skewed by London’s ridiculous prices (5). Say instead you’re sharing or living in an area with cheaper housing, it’s more likely to be £400/month, this represents ~30% of your earnings and so if a fairly accurate representation given the UK average is 25% of earnings spent on accommodation (6). If you get can by on another £600/month for all other expenses then well done, you can save £215. Add in your generous pension contributions and you’re up to £365/month put aside for the future, or £4,380 annually. Run that number through a rough early retirement calculator and we get that you can retire in 33 years. So that’s early retirement at 56 for a lifetime spent in a one bed flat and minimum acceptable standard of living.
Not realistic? Lets work another example. Example 2:
30 year old earning median UK disposable household income (2017) of £27,300 (7). Same sums, same aggressive pension match, £1715.31 take home. This time our 30 year old has got bored of living in digs, and is instead renting a two bed new build in a LCOL area. £750/month for rent gets you access to homes in 67% of the UK, so compared to Example 1 you’ll pay £350 more/month (8). Your lifestyle has inflated a bit, but not much, just a few beers now and then, a better phone, a decent tv and slightly better food. Say £100/month? So, let’s punch that into our equations and calculators:
A = ((£141.79 X 2)+£1715.31) – (£1214.81+£450)
A = £334
Retire in 44 years
Ouch. That lifestyle inflation has hit hard. Your early retirement age is now 74. So what do you do? Cut back on the house size or go back to shared accommodation? Stop drinking and eat 7p basics noodles? We know that actually, due to the benefits from our taxation system and social support services, a moderate increase in income in the lower quartiles makes little difference to disposable income (available for savings). Lifestyle inflation at this end quickly gobbles up the extra earnings as you are now comfortable, not just-about-managing. Do you make yourself uncomfortable to retire early? That requires a special type of motivation (9, 10, 11).
You have to be a high earner to achieve the % savings rates required for early retirement without living uncomfortably in some way. Ignoring this fact is dreaming. Most people will not achieve early retirement without either lifestyle discomfort or a serious increase in their earning power. That’s FIREs dirty little secret (11). To say otherwise is to sell a dream.
I don’t think this is a bad thing.
Because the world is driven by soundbites and nicely packaged information, easily digestible and understandable. The majority of the FI blogs pitched to the mainstream do just that, make it easily digestible, understandable and relate-able. A cynic would argue it funds their early retirement through a customer-facing monetised website (12). But I’m not that cynic, this is a good thing, more people should be thinking about their money matters. The UK household savings ratio is currently stuck around 4%, and has been for several years (13):
The financial choices required for early retirement are for everyone.
The’ye just a good idea. Just by thinking about your finances you’re ahead of those ignoring their accounts. To crib my fellow medical colleague, the female money doc (14):
- Know your numbers
- Build assets
- Get out of debt
- Buffer it
- Consider extra income streams
Anyone could achieve financial independence, but not everyone can. The effort can only be a good thing. No shame in trying!
Have a great week,
- John Bogle passes away (15)
- House sales drop according to RICS, while prices drop in London and remain stable (dropping relative to inflation) elsewhere (16)
- With Government data from the land registry supporting the above (17)
- Bulb is the next energy company to make a loss, though theirs’ is reportedly due to expansion costs (sounds like guff to me) (18)
- Hitachi suspends their Wylfa plant plans (19)
- Highlighting the growing discrepancy between cabinet policy and the actual energy market direction (20)
- The number of high-risk corporate loans about is climbing back to 2008 levels (21)
- Metro Bank share price dives after profit warning (22)
- Idealistic scientists reckon if we stop using fossil fuels now we can ‘limit’ global warming to 1.5 degrees (23)
- And there’s been lots in the news about reducing meat consumption to reduce carbon footprint (24)
- And M&S are ditching plastic for their fruit and veg (25)
- The BBC had this odd piece on side-hustles (26)
- And this on ‘hacking your year’. I bloody hate the misappropriation of the work hacking (27)
- The largest ever breach of email addresses and password was quietly announced (28) – Check if you’ve been pwned here: https://haveibeenpwned.com/
- UK unemployment rises ever so slightly, prompting sensationalist headlines (29)
- Tenancy Fees Bill will come into effect in June this year (30)
- For the first time an electric car wins Car of the Year; the Kia e-Niro (31)
- And in a surprise to absolutely nobody in the NHS, Junior Docs are found to be working well-past their allocated hours for free (32) – If I’d been paid for every extra hour I’ve done to ensure patients are safe I would already be FI.
- Monevator summarises better than I ever can the legacy of Jack Bogle (33)
- The Investor looks at Venture Capital (34)
- Ridiculous snow stories from the Frugalwoods (35)
- And for December, a further update (36)
- Some motivation as American bloggers Our Next Life recap a year of early retirement (37)
- And our very own RIT discusses decompression post-early retirement (38)
- YFG explains the Pension Protection Fund on Monevator (39)
- Takes a long hard look at Pat Val (40)
- MrsYFG discusses why she stays in a grindy job (41)
- And MrYFG is doing the podcast rounds (42)
- A cracking piece from Firevlondon featuring worked examples of tax ‘minimisation’ strategies (43)
- MsZiYou reviews her 2018 (44)
- And looks at some goals for 2019 (45)
- The Caveman chats prioritisation (46)
- And marginal gains towards a less-stressed life (47)
- John at UKVI gives his reason for selling GSK (48)
- Looks at why companies with thin profit margins make bad investments (49)
- And completes his series on investing metrics, looking at capital employed (50)
- TFS runs the rule over his December (51)
- And 2018 in general, with a look to 2019 (52)
- TEA reflects on the costs and challenges of parenthood (53)
- The saving ninja gives ideas for how to work in London on a budget (54)
- Weenie is going through some major domestic changes (55)
- DIY Investor hits one million page views (56)
- And takes a look at Aberforth Smaller Companies Trust, one on my watchlist (57)
- GFF on how to live in London on the cheap (58)
- LMF has been busy on their new site covering their side hustles (59)
- Mortgage paydown (60)
- and the benefits of a wood burner (61)
- Dan at Pursue Fire on the benefits of compounding (62)
- And Decembers monthly net worth report (63)
- The Finance Zombie reminds us to start and think small (64)
- Indeedably ventures into politics… (65)
The kitchen garden:
- Annabelle at no 27 provides a mid-winter allotment update (66)
- Two Thirsty Gardeners show how to make a home-made non-alcoholic cocktail/ squash/ shrub (67)
What I’m reading (now affiliate links):
Tombland – C.J. Sansom – I love the Shardlake series, detective novels set in the Tudor period with a crippled lead character. Beautifully written.
Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanity’s’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.
Enchiridion by Epictetus – Bedside reading for a bad day