fire

When we are in employment, our living expenses can be met using the money paid into our bank account each month by our employers. This is money which is given to us in exchange for time spent working for them - hence the phrase, 'time is money.' In order to stop working, you must have enough money coming in to be able to meet your financial needs without relying on employment, or in other words, without having to exchange your time for money on which to live. This is whats known as Financial Independence. 

Really it's just a fancy phrase for retired and the reality is that it's where we're all headed, it's the endgame. Trouble is, we've been told that retirement comes only with age. We are told that we should work all our lives in exchange for a small period of time when we'll finally be free to do what we want. It's madness, yet it's become the cultural norm somehow. 

At the moment, the state pension age in the UK is 66 - but by the time I reach the state-approved retirement age, it will have increased to 68 years old. And I already have days when I feel like I'm so done with this shit! 

The average life expectancy for men in Scotland is 77 years old. For sure, it is true that better healthcare, plus a shift in people's attitudes toward things like smoking and meat consumption, is helping drive up the life expectancy figures over time. According to the Office for National Statistics website, based on my current age and sex, I'll live till around 86 years old. But even factoring in the probability of a longer lifespan than is currently expected, my total number of years in retirement still isn't brilliant.

With a retirement age of 68 and a projected life expectancy of 86, I will have worked all my days, from age 17 to 68, in exchange for just 18 twilight years left to enjoy. Or in other words, I'll have just under 21% of my life left to spend however I want, provided I'm still in relatively good health; or in other words, if I'm lucky. Where's the justice in that? Why should I work every day of my life, driving myself into the ground, just because that's what the state expects? How did we get to a point in our society where we are literally living (and dying) for our work, as opposed to, as Jay Austin puts it, "living our lives with a bit of work here and there[?]...There's more to life than bills and money and work."

It grinds my gears in a big way. But we're told by our parents and our grandparents that it's simply how the world works and so we believe it. And since retirement is deemed so far away, many treat saving for it as optional. We treat it as something that our future selves can worry about. Unfortunately, that's the absolute worst thing you can do. The longer you put it off, the harder you must work to get there.

For instance, if an 18-year-old were to deposit £25,000 into an investment account and leave it there for 48 years, they would be able to retire aged 66 with around £712,000 without having added another penny to the pot. Provided this pot is then re-invested at retirement into a low-risk fund, this would enable our John Doe to draw down just over £28,000 per year for the rest of his life and be able to leave behind a substantial inheritance to his kids - all thanks to a big early-investment in his financial future.

That, my lovelies, is the power of compound interest. To put it into perspective, I'm 23 years old right now, just 5 years older than the John Doe in our example. Yet in order for me to reach the same figure in my retirement pot by age 66, I'd need to invest £35,500 compared to £25,000. In other words, every day that you don't invest, you are costing your future self money. Now obviously this is a best-case scenario. Very few 18-year-olds will have that kind of money lying around to throw into the market and forget about, but the point of this example is simple. Investing as early as possible is they key to a sustainable financial future. Yesterday was the best day to start investing, but today is next-best.

What I'm describing here is something called Coasting Financial Independence, which is stage four of my Financial Independence Retire Early journey, or FIRE for short. The FIRE concept isn't a new thing, in fact it's been around since 1992 after the publishing of a book called Your Money or Your Life by Vicki Robin and Joe Dominguez. But I only just discovered the movement this year and it's given me a new sense of direction in my life, an idea of what I should be doing with my money. I say 'my' FIRE journey very deliberately, as I've modified a generic FIRE plan to suit my life and my priorities. A generic plan will look slightly different to what I'm about to show you. So if you like the idea of certain parts but not others, there's no harm in adapting it to suit your life.

Stage Zero: Financial Dependency. This is when debt payments and other living expenses are fully covered by someone else, usually your parents. This is the stage every single one of us start at, so there is no shame in being here!

Stage One: Financial Solvency. When you are current on all your debt payments and you can meet all of your financial commitments and living expenses without outside help. In other words, you have gotten a job, moved out and are financially self-sufficient.

Stage Two: Financial Stability. When you are current on all debt payments and can meet all your financial commitments and living expenses without outside help - plus you have an Emergency Fund saved. Personally, I had my emergency fund saved before I became financially self-sufficient.

Stage Three: Debt Freedom (Part One). This is where things on my plan start to deviate from generic plans. For me, Stage Three is mainly about clearing high-interest debt. That meant my credit card and car loan. But I then took things a step further, planned ahead 5 or so years and predicted any potential debt I could end up with. Then I set a savings goal for a pot of money I'll set aside with the sole purpose of preventing this debt. That means I'll have a pot of money to use on bits and pieces that will need done around the flat and in the garden before I move, just to make it that bit more presentable to future buyers. At the time of writing, this is what I'm working toward. My current predictions suggest I'll hit this goal by December 2020 and will be ready to start working toward Stage Four in January!

Stage Four: Coasting Financial Independence. We touched on this at the start of this post. This is when you have enough invested in the market that you are able to coast your way into retirement without ever having to add to the fund again. At the moment, my plan is to start this in January 2021 with the intent of reaching £40,000 by age 27. To reach this goal, my monthly deposits to this investment account will need to average out at £850 for 3 years and six months, with an average return of 7% per year. This will be a huge undertaking, my biggest financial goal post so far, but one which I think is achievable. For me, this is a critical stage of FIRE. It gives me the confidence that whatever I choose to do with my life after this point, my comfort in retirement is already relatively secure, even if average ROI turns out lower than expected. But please remember that investing in this way is a long-term strategy. Don't dwell on every peak and trough in the market! Check your retirement investments once per year (at most) to make sure you are on track, set yourself a reminder and then forget about it for another 12 months. Your portfolio will build with time!

Stage Five: Debt Freedom (Part Two). This is where I clear my lower interest debts, namely the mortgage. Many FIRE plans will have you clearing all your debt before you start investing, but that doesn't suit me for a few reasons. Firstly, I want to reach Coasting FI as quickly as possible. I want to give myself that security net to basically guarantee my financial security in retirement. Secondly, whilst I currently have a mortgage, I do also plan to up-size at some point in the foreseeable future - likely in 5 or 6 years time. I personally don't see the point in clearing one mortgage just to take out another. So instead, I intend to focus on reaching Coasting FI first. Then, once my roots are set in a "forever home" I'll start aggressively paying down that mortgage.

Stage Six: Financial Flexibility. This is defined as having enough money invested that, should circumstances change which causes a loss of income, or inability to work at all, you have enough cash flow to meet your needs in the short term. In theory, this means you could take a few years out of work (if you wanted or needed to) without ruining your financial future to do so. Generally, those in Financial Flexibility are defined as having 12.5-times their annual living expenses invested. For me, this figure is £300,000. I'll already be on the way to this figure slowly thanks to my investments made in Stage Four. So now that the mortgage is paid off, my sole focus is on investing as aggressively as I can. The quicker I save, the sooner I can retire!

Stage Seven: Financial Independence. This is defined as having enough money invested in the market that the cash flow from your investments is sufficient enough to cover your expenses and allow you to retire. This is usually defined as 25-times your annual expenses. For me, that means £600,000 total, resulting in a £24,000 per annum drawdown in retirement.

Stage Eight: Financial Freedom. This is defined as having enough money invested to be considered financially independent, plus you have enough extra income to allow you to do extra things you have always wanted to do, such as travel frequently or even live abroad. This typically is defined as 1.5-times your FI number, or £900,000 for me, resulting in a £36,000 per annum drawdown.

Stage Nine: Financial Abundance. This is defined as having more money invested than you will ever need. You could spend the lot if you really wanted to, but you'd actually need to try. This is usually defined as 3-times your Financial Freedom number, or £2,700,000 for me, allowing an annual drawdown of £108,000. This is an optional step in my eyes and one that I won't likely pursue, but I figured I should include it just to let you know it exists.

I'm under no illusion. This will be a long journey! As I've said, there are those out there who discovered this movement in their childhood and were in Stage Four by their 18th birthday! That ain't me! So it's going to take me longer than it potentially could have to reach Financial Independence, but even still my current calculations suggest I'll reach Stage Seven in my early 40s and allowing me to retire nearly 30 years early! But there are of course many variables to this, so it could be earlier or it could be later. Time will tell! 

I've went on a bit, well a lot, but I can't help myself. I find the topic exhilarating. After travelling Europe doing what ever the hell I wanted for a month in 2019, I came to seriously appreciate the value and importance of having freedom of time. I hope that I've opened your eyes to the possibilities and the options you have; to the notion that you don't need to work all your young years away. You have more utility over your life than you perhaps once thought you did. If you live frugally and align your priorities with retiring early in mind, I'm of the belief that anyone can do it - and not just to retire early either!

It's my belief that a person has more than one calling in life. But all too often people follow their wallets instead of their hearts - often because they need to. So having the financial freedom to pursue a job you love regardless of the pay seems like the dream to me. So even if I need to make a few sacrifices in the short term, in my books it's worth the long-term satisfaction. When I think about the why of it all, the what becomes very easy to put into perspective. 

Though I must stress, it's not for everyone. The journey towards FIRE goes hand-in-hand with frugal living - something which many are not willing to do. So maybe you are quite happy working away, enjoying your work, living your life and retiring when your time comes. And that's just fine! It's a perfectly valid path to walk, provided you know that other paths are available to you. But should you only take one thing away from this, please let it be this - save for your retirement! You'll thank yourself later!

For a generic FIRE plan, head over to Next Level Life on YouTube.

~ Aedan.