So I have been doing more research on the whole Financial Independence Retire Early thing and, for my brain at least, it has some nice rules built in which help you navigate the uncertainty of the future.
We cannot predict what will happen in the future, lets face it who in January 2019 could have predicted that the whole world would stand still thanks for Covid (WHO indeed 2014, 2019) , and that we would see another large scale land war in Europe a couple of years after that (errm, well.. 2014)?
Anyway, enough geopolitics and back to the FIRE stuff….
One of these lovely rules of thumb is the 4% rule, a guide to the amount of drawdown one may make on a lump of cash that should maintain it for around 30 years after such time you should be such a shrivelled up husk of a person to no longer need an income and will be wheeled into a sunny spot and fed soup by some kind soul on minimum wage and more tattoos than a bank robber … (heres hoping!).
This 4% drawdown should cover any chomping away by inflation and any pretty lacklustre interest gains.
So how does this 4% rule help us in our FIRE journey?
When in comes to working out just how much cash you will need squirrelled away in Pensions, ISA’s and under the mattress, you need to know how much you will be living on, that living expenses calculation usually comes before this as mentioned at the top of this post, but I like to play with numbers and bounce around a little just to give things a thorough test.
If we wanted to live on say, £12000, which is just below the current UK income tax allowance of £12570 (2023/24) for roughly 30 years after we hit retirement age we would need £300000 smackeroos saved (4% of 100 = 25, so £12,000 x 25 = £300000).
If you would like a little more luxury in your old age, say £30,000pa then you would need to have accumulated £750,000 before drawing down (£30,000 x 25 = £750,000).
Now these are scary numbers if you are starting with very little in savings and it is at this point when I feel the vast majority of people just shrug their shoulders, tell themselves “thats impossible” and go back to watching TikToks about dogs or something.
But wait… then the Winged Hussars arrived!
So before you flick back to doom scrolling your life away like 99% of the population, a glimmer of hope lies on the mountain top. Much like the sight of the legendary Polish cavalry lifted the hearts of the besieged Viennese, so to do these articles on gaining wealth.
This Motley Fool article explains how the struggle to the first $100,000 is the hardest because at $0 you have no money working for you, but at $100,000 that sweet tasty compound interest starts chugging away like the Flying Scotsman pulling out of the station.
This Yahoo Finance article explains the phycological aspect of hitting the 100K line as delayed gratification, having pudding after dinner as it was explained to me as a child, is something that seems to be a hard for a vast majority it seems.
So, to wrap this post up I think its important that we don’t just look at the scale of the amounts needed to become financially independent, but instead break it down into manageable goals. So perhaps as I we start our journey we should focus on our first £100,000 as that in itself is a massive accomplishment, then celebrate that success and move on to the next goal whatever that may be.
But we should never loose sight of our end game.