11 September 2019
What is your attitude to work and money? Are you prepared to save hard in order to retire early or to have long breaks from work, or would you prefer to enjoy your money as you earn it?
There has been much discussion recently about the ‘gig’ economy, people working when they want to, achieving a work/life balance, having time off to spend with the kids, and employers attracting staff by offering flexible working. Indeed, a recent personal experience of this was attending a welcome home party a colleague attended for a relative. He and his wife, for the third time in 20 years, had given up their jobs and taken nearly a year off work to go exploring the world by motorbike. In contrast, traditionalists see the norm as starting work after leaving full-time education, building a career or business, and retiring in one’s mid-sixties, hopefully with sufficient health and wealth to enjoy long holidays, the garden and day-trips with the grandchildren. Long career breaks or early retirement rarely feature in their plans.
In 1992 the publication of a book, ‘Your Money or Your Life’, gave rise to a lifestyle movement known as FIRE (Financial Independence, Retire Early). Early retirement is not its only aim; having sufficient funds to have a sabbatical, change career or adjust one’s way of life are all part of the same objective. Money, and in particular, financial independence is the key. Proponents of the theory claim that anyone with savings equivalent to 25 times annual spending can afford to retire.
To most people, this level of savings would seem to be an unattainable goal. According to the Resolution Foundation, a think-tank, only half of the population is saving enough to retire with the same standard of living as they enjoyed while working, (although the introduction of workplace pensions is starting to improve the situation). Another report by Royal London, an insurance company, concluded that a person reaching retirement age needed an investment pot worth in excess of £250,000, together with their own paid-for home and basic state pension in order to maintain their pre-retirement lifestyle. Those living in rented accommodation would need £455,000. An underlying assumption is that someone relying on their investments could withdraw about 4% per annum. Most investment advisers would agree that 4% is a modest average annual growth rate to expect on an equities-based ISA or investment bond, after accounting for management charges.
Tighten those purse-strings
Whereas financial planners would normally recommend investment in savings of 10-15% of income, proponents of the FIRE theory suggest a much more ambitious rate, especially for those who wish to take regular long unpaid breaks. If, for example, you can save 25% of your income you could take one year in four off work. If you can save 75% you could probably accumulate a sum equivalent to 25 years’ annual spending within 10 years. This would require considerable thrift and self-discipline, quite the opposite of the tendency of most to increase their standard of living in step with their income. The personal financial planning efforts needed to achieve this would necessarily entail living in frugal accommodation, foregoing meals out, holidays, new clothes, cars and other luxuries – a Spartan existence which would surely make the drudgery of a normal full-time career rather more appealing.
The power of compound interest
Surely this isn’t the best answer to the work/life balance question. Far better to plan early in your career for that well-earned retirement, and use the power of compound interest. Time is then your friend. Consider this: if we assume a growth rate of 4% p.a. (i.e. a growth rate that exceeds inflation by 4%) and a monthly investment of £200, initiating this investment at the age of 24 would yield a fund of £250,000 by age 65. To achieve the same fund by staring your investment ten years later, at age 34, the monthly investment would have to be £340.
Investors or spenders
Those who like to plan ahead will feel comfortable with a personal finance plan which dictates an appropriate amount of investment in savings and pension whilst allowing some slack for life’s unforeseeable challenges. Those who are determined to retire early will no doubt derive pleasure from finding ever more innovative ways of tightening the purse strings. For the rest, follow the 10-15% investment rule and enjoy the rest of your money. The economy will not function without spenders.
If you would like help in planning for your retirement why not get in touch. We can assist with the overall financial and strategic plan and, if appropriate, recommend a qualified financial adviser to select the most suitable investments.