So some idiot started a blog and said in their first post that it was entirely possible for him to retire by 40 if he so wanted to. While he has detailed some of his story and financial history so far, he’s never really revisited that previous statement and tried to extrapolate out whether he’s actually likely or not to hit his targets. That original post was actually based on an old spreadsheet I’d devised a couple of years ago and have been adding monthly updates to – but I haven’t revisited the actual plan itself.
Having somewhat recently turned 31, I thought I should take a closer look of what my current position is, how things may continue (or not) and what obstacles or hurdles may stand in my way to the FIRE goal line.
The current situation
Having paid off my car loan now (woohoo!) my monthly essential expenses are down to around £1,200 a month or £14,400 a year. Essentials to me are defined as either “bad stuff will happen if I don’t pay them” (mortgage, council tax, utility bills, food) or “luxuries I am prepared to pay for in modern life” (broadband, mobile phone plan, Netflix, etc.). My wife and I split all household related bills 50/50 – so her monthly spend is actually less than mine as she’s not commuting right now, doesn’t own a car and doesn’t have expensive hobbies!
At this level of spending (£28,000-ish for the two of us per year), my wife and myself could live quite happily day to day and not worry about the basics. I wouldn’t say it would be a life filled with with exotic adventures abroad and 5-star dining experiences – but we’d be okay if we never had to go to work again if we had a passive income equal to this amount. And we could still see our friends and family and have fun (tick for level three of the pyramid)!
I’ve actually decided to aim for around £12,000 a year as my half of the “essentials covered” passive income floor. There’s a couple of reasons for this:
- Roughly £9,000 of that £14,400 is mortgage payments and that number will drop in 5 years (we’re on an aggressive repayment schedule)
- We’ve invested money into bringing some of our costs down already and will do more in the future (petrol, electricity usage, gas usage)
- My car insurance is very high at the moment (£1,000+) and this will drop as the car ages and electric cars become more mainstream (the cost of being on the cutting edge)
Based on much finger-in-the-air guessing and some reading at Monevator, I’ve settled (for now) on a 3.3% Safe Withdrawal Rate (SWR), meaning that for a passive income of about £12,000 a year I would need about £360,000 of capital invested. I think I will need more than that personally, but it’s a good starting point to try and calculate from.
So let’s dig a little deeper into the problems I’m going to face in the next 9 years.
Problem #1: I have an outstanding mortgage of about £150,000 (my half)
This isn’t as bad as it seems as just by making my mortgage payment every month, the capital amount owed drops by about £7,000 every year. Having also read the tale of the Ermine struggling to manage his money between silos, I also see the benefit in holding off paying a small amount, say £12,500, of my half of the mortgage in case we have liquidity problems in the future.
That does still mean I need to find an extra ((£150,000 – £12,500) – (£7,000 x 9 years)) = £74,500 to overpay the mortgage in the next 9 years. This is equal to an extra £8,300 a year or about £690 a month of additional payments I’ll have to fund. I could divert my ISA contributions for a few years and do this easily, but then I’m giving up a hell of a tax break with the growth the ISAs could have. I’m not sure both is possible for me right now so it’s the age old question of investing verses paying off your mortgage.
Problem #2: Are we going to have children? How many? And when?
Needless to say, this is a very personal decision and I won’t be delving into any details here beyond saying we don’t really know, but our house has room to spare for them if/when we decide. Also, kids are expensive I’m told.
Problem #3: I probably won’t be able to access my pension till I’m 60
It’s extremely hard to plan 30 years out as all the rules with tax, pensions and anything related to finance will probably have changed by then. So at a rough guess, if I continue my pension contributions as-is until I am 40 and then let it continue to compound until I am 60 with no further contributions (a stab in the dark guess of when I can access my private pensions) then I should have in the region of £1 million. This assumes a 4% after inflation yearly compounding. This would provide roughly £33,000 a year of pre-tax income which sounds like a lot of fun money to me!
My problem is bridging the gap between 40 and 60. With a wild assumption that my yearly costs will be in the £12,000 region and if I’m running down the ISA in those 20 years then I would need about £240,000 saved in my ISA when I turn 40. If the current ISA allowance stays the same, at £20,000 a year, then I can potentially still make this. All it requires is putting the £1,666 a month into my S&S ISA for the next 9 years and I’ve made it! I’ve managed to max it out the past 3 years – can I do this for another 9/10…?!
Putting this all together
Putting aside the children question, here’s what my monthly outgoings would have to look like to stand a chance of hitting all of the above:
|Money Silo||Amount to Contribute (Monthly)|
|Outgoings (inc. mortgage)||£1,200|
|Total:||£3,556 (exc. pension)*|
*The pension contributions will stay the same, that 40% tax break is too good to give up
I earn good money – but it’s not that good. I could contribute less to the pension but I’d find it very hard to give up the 40% tax break just to chuck the money at my low interest rate mortgage. If I stick with keeping the pension the same, keep my outgoings about the same and keep maxing the ISA I would probably owe about £80,000 on my half of the mortgage when I’m 40. Looking up how much a 2% mortgage for 20 years would cost on that amount gives me a monthly figure of £405 compared to my current £750 a month, so there’s some wiggle room in there!
Based on all of the above I would estimate that it’s still doable for me to hit my “essentials FIRE” level by the time I’m 40, but I can make it easier on myself by overpaying the mortgage whenever possible if I have some spare cash sitting around. The gap from 40 to 60 would be the hardest, but once I hit 60 then it would be an easy ride through the remainder of my life. There’s a heck of a lot of assumptions in that sentence and I could get hit by a bus tomorrow, I know, but it’s better to have a rough plan than none at all!
The happy unconsidered upsides
While those assumptions and figures up above are accurate for right now, there’s a few things that I haven’t taken into account that could swing things my way positively!
I’m still fairly young (so I tell myself) and am entering my prime earning years. If I’m still earning in 9 years time what I am right now, then something might have gone horribly wrong (or I cut my working days down to four or something, who knows). I have the technical certification to progress to the next level now and once I have some more experience I’ve already been told I’ll be put forward for promotion which is always nice to hear.
None of the above factors in any bonuses that I may (or may not) receive. The past few years I’ve been putting them straight into my pension but I may ease off and hit the mortgage more as it is by far my biggest monthly outgoing, dwarfing everything else. I never count on the bonuses though – they aren’t guaranteed.
And of course the big one is, I may not actually ever completely quit work. I like my job for the most part – the people are smart, funny and enjoyable to work with. The pay is pretty good and while there is a high amount of travel (less so at the moment), I do find it pretty nice to have a clear divide between “work time” and “home time”. Again though, the children question rears its head as I certainly wouldn’t want to miss them growing up by being away all the time. Then again, I could switch into a new job if I wanted to…!
So if I may give myself a small dose of optimism – I think I’ll be okay whatever happens when I hit the big 4-0. I hope that work becomes 100% optional, but I’m also okay if it’s merely 80% optional.
Any tips or suggestions from you, the reader?