I had a conversation a couple of weeks ago with one of my more frugal friends. We used to live together and she was my saving grace when I needed someone to help me manage my finances. Let’s call her Sasha. Sasha lived in the smallest room in our 3 bed house, paying less rent and owning the least amount of stuff. She shops at Lidl – she swears by their cheap organic produce – and cooks a lot of her meals at home. She spends only on what matters to her – food, relationships, craft beer and travel – and buys good quality clothes and shoes in order to get durability and long wear out of them. She shops for deals and has a decent source of passive income. In our conversation, she revealed me that for the last 2 and a half years, she’s been putting away 50% of her salary in her pension.
So what’s all this got to do with anything?
Well Sasha is worried. For the first time, she’s going to be unemployed for 6 months or so while she travels and figures out what she wants to do with the rest of her career. She’s worried because she won’t be contributing any money to her pension. She’s worried because her pension ‘app’ says that if she carries on contributing at the ludicrously high rate that she’s doing at the moment, she’d only be able to afford a £21 000 a year pension. Considering she’s got over £140 000 in her pension at the moment, I too began to worry that my FI plans are super unrealistic.
What are the assumptions that I’ve made about my “retirement” date?
I wrote a few months ago about my rough plan to retire by 2028 – a summary of the assumptions to enable these were:
- All debt paid off by December 2017
- Saving roughly £18 000 a year from 2018 – pension, stock market & bonds to take advantage of compound interest
- “Retire” to a country / city where I could get by on £12 000 a year while maintaining my current life style – from 2028 till my state pension kicked in (when I’m 68)
- Reducing my withdrawal rate to £3 500 a year post 68
After a few months I decided that perhaps if I were more aggressive on the saving front, upping savings to £24 000 a year, and ensured that I moved to a lifestyle that only required me to earn £12 000 a year, then I’d be able to leave the rat race earlier – just shy of my 40th birthday. The MASSIVE assumption here being that the amount I saved up over 6 years (£144 000) would be enough to keep growing without any further contribution as long as I didn’t withdraw any money from it before 2028, and then only the £12 000 after that.
What is the new (more carefully thought out) plan?
It turns out my previous assumptions are MASSIVELY WRONG! If someone with over £140 000 is worried (albeit because they want to spend more than £21 000 a year in retirement), I have no business being comfortable with my plan to retire at 40. Aside from the fact that I haven’t got that much money already saved up, I’m not even on the right path to saving £24 000 or spending £12 000 a year. If I did these two things though, then I should be able to meet my initial goals. The new assumptions for my new retirement date are:
- Pay off £12 000 of debt by the end of 2017 and everything (~£22 000) by the end of 2018
- Have a fully funded emergency fund (£9 000) by the end of 2018
- Save £5 000 for investment post tax & ~£5 200 in my pension in 2017
- Save £24 000 from 2018 (split between pensions and post tax investments) till 2028
- Grow my salary to £55 000 within the next year at least
- Ensure that my spending is £18 000 a year or less up until 2028 and £12 000 after
- My investments grow at an average of 4%, at least, over time.
- Start withdrawing at a more normal rate (£20 000 a year) from 55
There’s a lot of work to be done. My spending in February has been outrageous – but that’s a different post. I need to find the key to reining in my spending, in line with my goals. It’s clear now that I cannot afford to be complacent unless life, in its current state, is good enough. Which I know it isn’t . Not when I can’t get out of bed until 8 on a weekday morning, when I say I can’t exercise because I don’t have enough time, or when I can’t go away when I want to because I have to work or consider others at work want to go away at the same time.
I need a “fool-proof “plan to make some of those assumptions reality!