One of the most underrated aspects of blogging is the ability to connect with interesting people you never would have met otherwise.
And so, over the past few weeks, I have been exchanging emails with a number of long-time readers here at Banker On FIRE.
Unsurprisingly, the intertwined topics of money, work, and financial independence loomed large in these conversations. They always do when people make plans for the year ahead.
But what I found particularly interesting is that a lot of these people (myself included) fit a pretty common description.
They are in their late 30s or early 40s. Most of them have been intentional about their careers and savings from a relatively early age.
As a result, they find themselves in a good place – at least financially speaking.
No, they are not yet well off enough to retire. Not by their standards anyway.
At the same time, they are in a place where “financial independence” becomes less of a fuzzy, aspirational term and more of a fact that will transpire over the next decade or so.
The big question is, what is the best way to get there?
To put some concrete numbers around it, let’s say you find yourself at the prime age of 40, with a $2m net worth.
Sure, it’s nice to be a millionaire.
But with house prices where they are, uncertainty about future stock market returns, and a family to support, it’s nowhere near enough to pull the trigger on early retirement.
So let’s say your “number” is $5m and you are currently contributing about $100k a year to your portfolio. When will you be able to pull the trigger?
Well, some very simple math gives a clear answer:
Assuming an 8% investment return, you are looking at eight more years. Two presidential terms.
Make no mistake, being able to retire at 48 with five million in the bag is a high-quality problem indeed.
But what if you don’t want to spend the next decade at your current pace?
We all know how it goes. Long weeks, with work often spilling into Saturday mornings and Sunday nights.
Holidays that sometimes end up being more stressful than being in the office (nothing like taking that “urgent” client call at 6 am!)
Kids that seem to be growing up in a blink of an eye and will be nearly out of the house by the time you turn 50.
And, frankly speaking, you wouldn’t mind spending a bit more time in the gym, being able to fully disconnect on weekends, and perhaps even picking up a hobby or two.
So what if you were to take your foot off the pedal just a little bit? Even if that meant cutting your contributions in half?
Well, here’s what the math looks like in that scenario:
To say the answer is surprising would be an understatement:
The difference is ONLY one year. Instead of retiring at 48, you get to pull the plug at 49.
Intrigued, you make another tweak to the spreadsheet.
This time around, you cut your annual savings target to just $25k. Once again, the answer is mighty counterintuitive:
You’ve just cut your contributions by 75% – but you get to retire just two years later.
At this point, I’d be remiss if I didn’t add another scenario here.
This one assumes ZERO incremental savings going forward. Absolute zilch:
Yep, you read that right.
If you were to stop all contributions, you would still be able to retire at 51.
Just three years later.
Hips Numbers Don’t Lie
It’s a surprising conclusion. I certainly did a double-take when I ran the numbers.
But when you think about it, it’s entirely logical – and nothing short of fantastic news for many people.
At the very beginning of the financial independence journey, your net worth grows in direct lockstep with your contributions.
Transfer some money to your brokerage account, watch the balance go up.
Hence, it’s only natural to establish a strong mental link between “another year of work” and “an uptick in the number”.
We know that thanks to compounding, that relationship will break down eventually – but when it does, it often goes unnoticed.
Your portfolio is now doing most of the heavy lifting. No, you can’t touch it (yet). Yes, you still need to give it plenty of time to compound.
But at the same time, the contributions you make now have nowhere near the impact of the contributions you were making in your 20s and early 30s.
Which leaves you with a multitude of options.
It may be taking a slower-paced, much less demanding job – because you are now able to spend 100% of your (reduced) salary.
Alternatively, it may be one of you or your spouse leaving employment altogether to spend more time with the kids – and make sure you actually enjoy your weekends and evenings as opposed to taking care of life admin.
It could be a sabbatical – because you no longer have to reinsert yourself into the pyramid when you are back.
Or simply taking your foot off the gas at work – because you no longer have to knock it out of the park at bonus time.
The list goes on and on.
But whatever it is you choose to do, you get to enjoy the mental freedom of knowing that while you are not financially independent YET, you are certainly financially independent ENOUGH to design a much better life for yourself – while still accomplishing your personal finance goals.
The strategy above isn’t new and is known as Coast FIRE in the personal finance circles.
However, what is striking is that at some point, Coast FIRE becomes more than just an option – it is THE utility-maximizing option.
And you may have arrived at that point already – without realizing it.
Of course, not everyone will find themselves in this position – not yet anyway.
The math clearly doesn’t work for people who are just starting out.
It also doesn’t stack up for the ones who have a bigger gap between their net worth today and their “number”.
If you are in that boat, the analysis above should inspire you to build up your nest egg ASAP. Remember – every extra dollar/pound/euro in your portfolio is a step towards a life filled with optionality.
For everyone else, it may be time to take a step back and consider your next steps.
No, you can’t retire yet. But thanks to all your hard work, that dream life of yours may be much closer than you thought.
As always, thank you for reading – and happy investing.
About Banker On Fire
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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
Find out more about me and this blog here.
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