The method favoured by ERE, hammer those expenses down brutally and absolutely tank it towards Financial Independence. It is possible in a scarily short time if you are committed to increasing your income and really trim back the fat on your expenses, and we are talking towards the 2% body fat range here.
Walking towards Financial Independence or plain old retirement is the approach most of the population take. Early retirement could become an option through luck or just being good with money naturally.
If it was a nice relaxing walk it wouldn’t be so bad. I suspect it’s not though, what with getting the biggest house possible, running a super sweet car, smashing your way through the 4 daily hazelnut flavoured grande cappuccinos and buying a new t-shirt to go out on Friday night there’s not much left for retirement savings.
It’s more likely to be jittery stressful walk, stopping in the bushes every now and then to defecate out any savings that have accumulated, all the while feeling a little paranoid, knowing that there is something in the distant future you should be saving for. It’s whirlwind at the end, pulling together what ever resources are available and blaming everyone else for not letting you know that this day would come.
Alternatively, a plan might be in place, you are happy to work until whenever as you really do love your job, it really is a relaxing walk towards financial independence. Especially with all the paranoid people defecating in the bushes to keep you amused.
Those of us actively saving for Financial Independence with an eye on early retirement are somewhere between a casual jog and the flat out sprint of ERE.
Some of us are cruising along at a good old pace, happy that our stoic craniums can resist the build up of too much work induced lactic acid before crossing the finishing line. Others a little slower, perhaps away that our minds would crumple under such strain, but still steaming along faster than 99% of the populace.
Slowing the jog down – part time early freedom
One thing that I have pondered recently is a move to part time.
The first question is;
And immediately after that;
The first question can be looked at with cold numbers. As a higher rate tax payer in the UK you are paying 40% income tax. Any reduction in income from reducing your hours would only impact you after the effects of tax. For example, let’s say you are earning £50k a year, lucky you. That’s about £36,300 after tax and NI contributions. If you were to drop your hours by 10%, so one day off every two weeks, you would see your gross salary drop to £45k. This would leave around £33,400 after tax for you to get your grubby mitts on. A reduction in income of 8% for a 10% reduction in your time. A 2% premium.
How about the impact on the big idea of Financial Independence? Well, this depends on a whole range of factors. How much you are saving, driven by how much you spend, how much you have in savings already, assumed growth rates, blah blah blah etc blah.
As an example;
Savings rate: 60% (implied living costs of about £14,500 after tax)
Target financial independence pot: £581k as suggested by a SSWR (Super Safe Withdrawal Rate) of 2.5%
Real growth rate: 5% (then we can ignore inflation)
Starting pot: £0
Under these constant conditions it would take 17 years and 2 months to reach the targeted stash. It would be much quicker if we trusted the 4% rule, but it’s good to be pessimistic every now and then.
If after 5 years you dropped to 9 days in every 10, a day off every fortnight, the savings rate would drop to 56.5%, assuming the purse streams couldn’t be tightened any further. This would make the time taken to reach the targeted stash would increase to 18 years and 2 months. An extra year to accumulate the necessary pot of investments in exchange for 1 day in every 10 days off for 13 years.
A 5.8% increase in time until the stash cracks through the mark suggested by the SSWR. But you have spent 2% less time in the office overall, despite working for another chronological year. Is it worth it?
We can play around with the reduction in hours and the time that part time work starts and see how much it would delay aspirations of Financial Independence. More free time now for a delay in the ultimate free time that FI offers.
Looking at starting to go part time (part time sounds so negative, how about part time FIRE’d) at 5 years in, 10 years in and 15 years in for both 1 day off a fortnight and 1 day a week;
Delaying the onset of going part time obviously has less of an impact on the trek towards FI. But you always get more free time back than either the increase in total chronological time or the reduction in income (both are due to the effects of tax).
Looking at it from where I am sat;
– 1 day off a fortnight looks like a pretty good deal, even from only 5 years in.
– switching to 1 day off a week early on, around 5 years in, has quite a big penalty. But becomes more attractive later on. Perhaps the transition to FI should be eased into, like easing into a hot bath you need to do it slowly lest you burn your dangly pieces.
It obviously different for everyone (their perceptions of going part time, not getting into a hot bath) but it has some clear positivies and negatives.
More free time. The main advantage, but it is an absolute beauty. A free day to cycle, surf, catch up on various shitty tasks that you resent doing at the weekend, play computer games in your pants, read, write, go to cafes or do whatever suits your needs on that day.
A drop in income being potentially the hardest to stomach. It’s hard to put a value on your free time, but I suspect that it increases as you get older so making this less attractive early on.
Got to accept that you will be making it far harder to get promoted. Your colleagues that are grinding their faces off at the grindstone are going to get promoted ahead of you in all likelihood, unless you really can cast spells at work.
Might not even be possible, working in finance you are needed at certain times, certain working days of the month. You would need a pretty flexible employer to make it work.
Incidentally, my manager works 4 days a week and kids are all at school next year. He’s not going back full time as enjoys the free time too much, despite admitting promotions are probably out of reach due to this. Can’t be all bad.
An FI test run
In my crusty eyes there is another option; a sabbatical. It would be tempting to travel round the world on your sabbatical and come back with a shocking tattoo on your arse, a tale you’ll tell no one about involving a rowing boat in South America and a few maxed out credit cards. No doubt fun, but it kind of hampers any idea of Financial Independence.
But taking it as a chance to recharge the batteries, test run your withdrawal strategies and generally see what it’s like to live off your investments for a few months might be a good idea.
Take it too early, you risk burning through whatever small savings you have and missing out on the years of later growth. Take it too late, and what’s the point?
So, what impact would a 6 month sabbatical have on things?
Perhaps surprisingly not that much impact. As before, it would take 17 years and 2 months to reach £581k with no rest. Or with a 6 month sabbatical, taken 10 years in, it would take 17 years 8 months, an extra 6 months to build up the required savings for a 6 month sabbatical, seems fair.
I have run it with a 6 month sabbatical taken 2, 4, 6, 8, 10, 12, 14 and 16 years in;
No surprises there really, the earlier you take a sabbatical the bigger the delay it causes.
Taking it early (somewhere up to 6 years after starting) causes a delay of longer than the sabbatical itself. And conversely taking it later (after around 12 years) causes a delay less than the sabbatical.
That’s because at some point the growth of our fund starts to overtake the size of the withdrawal. In our example of earnings of £50k and a 60% savings rate, it assumes around £14.5k spending (after tax) or about £1.2k a month, it happens 10 years and 6 months in in this example. This is a function of our savings rate, the withdrawal rate and the assumed 5% growth rate, i.e. it is based on some pretty sketchy constant assumptions and can’t be relied upon in reality.
Still… as an estimate of when it might be a good time to have a practice run at the whole FI thing, it looks like a good proxy to me. Take it after your portfolio starts to churn out more than you spend, so it isn’t expected to shrink while conducting your experiment.
Looking at the growth of the fund for each scenario shows how similar they all are;
I admit its not the greatest graph ever produced, but it shows something. It shows how similar all of these scenarios are.
Keeping things simple, ignoring volatility and sequence of returns risk, it shows that it’s easy to get wrapped up in the pursuit of FI. Once in the groove and with your eyes firmly fixated on the finish line it’s easy to forget that a rest might not be a bad idea. It ultimately shows that a break isn’t going to destroy everything, it will slow you down slightly, but it doesn’t have to completely derail you.
Personally I wouldn’t want to take it too early. Getting into the habit of saving much more than you earn, embracing the slightly tougher approach to life that frugality entails, ignoring what the majority are up to and telling unconscious consumerism to fuck off can take a while. A break too early on could render it near impossible to get back into things after tasting the the good life…and ultimately causes more delay to your quest than you get in return.
Aiming for something like this well after the halfway point might not be a bad idea. A taster of what’s to come. Something to aim for that’s closer that the finish line and could provide some motivation to keep the fire stoked.
A counter culture within a counter culture
Taking a break isn’t generally done within the small community of the population seeking FI. It does seem like a single mindedness begins to take hold once we start on the yellow brick road towards Financial Independence.
But this relentless staunch approach might not work for everyone, you have to be focused, stoic and motivated for a long time. And this is partly the point, gaining true Financial Independence isn’t supposed to be easy, otherwise everyone would be at it. The difficulty and the size of the task is a large part of the appeal. There’s not that many blogs of people that have made the journey intact, and that’s why they make such interesting reading. There’s a lot of people trying though. Burn out looks like a very real danger and I want to keep my odds of making it as high as possible.
Time for a poor anecdote. Settle in while Grandpa Z gets into a ‘monologue-ial’ stride. Last year I put in nearly 5,000 miles on my bike, it was a glorious year. Through the winter I spent more time in the gym lifting weights in an attempt to get stronger legs and back, and then started building up bike endurance through horrible static bike intervals in the gym or on the turbo. Thing is, I injured my back in January by pushing some squats too far. I never properly rested it, because I didn’t want to lost the gains I made through the hard winter training. When you are enthralled in training it can be hard to see the bigger long term picture. And I’m still paying for it now. There’s a reason that every 4th week in a tough exercise program is a rest week, our bodies need rest. And that’s as much to avoid physical injury as it is to avoid burning out.
I’m only just over a year into saving hard for FI, am I backing out already? Not a chance. But I like to keep my options open. 6 months off in 5 years time might be just what I need to stay motivated. Working part time for the last few years, easing into things might be right for me. Got to find what works for you, not what has already worked for others.
Spend Less, Save More & Escape the Horde