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?
Status Quo
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.
Easing Off
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.
Wild.
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.
En Route
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.
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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Great post – I’ve ran similar scenarios in the past and was equally surprised by the outcome. One thing I’d point out though is that regular contributions will get you there with much more certainty than market’s returns alone. Those 8% returns are not guaranteed and if you do not invest regularly, market volatility has a far greater impact on your expected outcome. I’d suggest having a look at the excellent post by Portfolio Charts on safe saving rates, which really drove the point home for me.
Yes, this was one of my concerns too – while contributing you can benefit from sequence of returns risk, and it is benefit forgone if you reduce contributions
Thanks Luke and agree, all valid points.
That being said, we are talking about an extended time horizon here. 8 years in this example, but possibly 10+ years for other people, which would smooth out any near-term volatility.
At the end, comes down to a certainty of hitting the number by a specific age or the certainty of living a much better quality life for the next 10-15 years while acknowledging reaching the number may take a bit longer!
This is precisely what I did this year. I’d been hanging on in a high paying but soulless job for years trying to hit ‘my number’ realised actually I have enough saved to get there with another couple of years contributions. So I left to join a start up. Same pay so I can continue those contributions for the next year or two. If it doesn’t work out I’ll almost certainly go backwards salary wise with any new job but that’s OK too. I did find I needed to reframe my brain that my self worth wasn’t wrapped up in what I earn and that going backwards wasn’t a failure
Sounds like a great move FBA, especially given that you aren’t taking a near-term pay cut
I’d also venture to say you are building up a new skill set that could further improve your earning potential if things don’t go to plan
Hi BoF
Interesting article as usual; no pressure, but I look forward to seeing what you have to say every Wednesday.
Although your assumptions were illustrative, I wonder whether some areas were unrealistic. In particular, 8% real return seems optimistic, given the long term averages and the run up we have had recently. CAPE is now is seriously elevated so high returns seem relatively unlikely. If the return is only 4%, it takes until 54 to reach the £5m, and reducing the contribution to £25k pa pushes retirement out to 60.
Perhaps the main issue is around confidence. While 8% real could easily happen over the next decade, I think there is a meaningful probability that it won’t, and I would rather build a retirement plan around conservative assumptions.
The other point for me is that I don’t know how long I will be able to work. I could easily have a long term illness, or become obsolete in some way, and find that my earning capacity falls dramatically. Hence my sense is that I should make hay while I can rather than take my foot of the gas and coast for a bit.
Happy to hear your counter-arguments!
Cheers Jo, love the points you are making as always up for a thought-provoking debate!
No real counter-arguments, other than to say:
Long-term returns are anyone’s guess. At the end of the day, one needs to have a view of what to plug into the spreadsheet. For those who think it’s 4%, the right answer is probably work a bit longer. Those who think it’s 8% or have a smaller gap to their “number” can probably ease off a bit earlier.
As far as the ability to work, also agree. That being said, slow and steady does with the race. If you are working 60-80 hour weeks in a stressful job, you probably have a higher risk of health issues (with associated earnings reduction) by the age of 50. On the other hand, someone who works 30 hours a week can enjoy a high quality of life and happily work for another 30 years.
As always, not a one size fits all answer. What’s right for some folks will be inappropriate for others.
@Jo
Here’s an article on CAPE you may find interesting.
https://www.tker.co/p/cape-ratio-not-mean-reverting-goldman-sachs
I guess it’s just like inflation – “could be” transitory and revert back to the long-term average, but could be a permanent shift!
I like the Coast FIRE approach – protects against awful market moves just after pulling the trigger. I’ve not started to “Coast” yet but it’s on the horizon… thinking about dropping down to part time.
I think there’s always a mental benefit in addition to the financial
Many people think they need to retire while in reality what they need is just a bit more free time and a bit more control over the time they spend working…
Hey BoF. So I’m curious……did the realisation cause you to reconsider your own approach?
Personally I found it difficult to do the whole COAST approach. I think when you have a ‘full on’ job, that’s just how it is. On or Off. There’s little middle ground without moving into a different role.
One thing I did find ( and enjoy immensely! ) was once I was reasonably sure I was going to make it I became way more confident in pushing back on the stupid asks, the useless meetings etc. Being happy to be the one asking the questions people didn’t want to hear…you know the ones? Actually made a ton of difference to enjoying those last couple years! Well worth trying…
Cheers.
So I think there’s a variety of flavours here, which is what you are kind of getting at – things like taking it easier at your current gig because the pressure to earn and save as much is no longer there.
As for me, I’ve been considering next steps for a while now. Being very candid with myself, I don’t see myself leaving work altogether, but I definitely see myself taking a “normal” job. The kind with 40-50 hour workweeks and mostly undisturbed weekends and holidays.
Partly for decompression, partly to try something different, and partly to see what working less feels like!
I love, love, love this post because this is the dilemma that so many of us are in. This is how I ended up Accidentally Retired. I left my job and sat around running numbers and it just didn’t make sense to go back. Now, I was much closer to my FI number, but so far the portfolio continues to do the heavy lifting while I simply sit back and try not to spend over my budget. That. Is. It.
Once you reach a certain point, you’ve already won the game, and it’s time to figure out a way to truly enjoy it. Cheers!
Thanks AR!
So this is a perfect case study for the situation I was trying to describe.
Out of curiosity, did you know or suspect you were at this point before you left your last gig? Or did you just realize it for the first time when you ran the numbers?
As always, loving your post here. The age in the post is quite funny (same as my age lol). In my case though even though I’ve hit prime earning age I am very much ground down (having two small kids) and wouldn’t mind stepping back if I can and pursuing Coast FIRE.
Biggest issue with the your $5M example though is inflation. $5M today will be very different from $5M in 10 years time I guess. Also lifestyle inflation, you try to avoid it, but it happens especially when you are a professional earning a decent wad.
One problem I see with a sabbatical or stepping away from your profession is that if you want to get back that can be very hard (if not impossible) as you will become less up to date the longer you are out.
Thank you
You are right, getting back into a professional career after a few years out is exceedingly hard. Near impossible I’d say, unless the job market is incredibly hot.
Then you’ve got the psychological barrier – are you REALLY going to be up for 60 hour weeks again once you’ve had a taste of a better life?
As far as the numbers go, you are right – it doesn’t work for everyone. Got to factor in inflation, returns, SWRs etc etc.
That being said, I suspect that many people are much closer to this point than they realize, even adjusted for their own personal outlook on the factors above.
Wow.. your example of a 42 year old with 2 million net worth, almost makes this blog post, a personalised letter you have written for me.. I must say, I was initially surprised to see how just one-more-year makes so much difference in the long term, and opens so many choices NOW. But its really comforting as I have dropped my role to part-time, eased on business growth – really buying time now, so I can do what I am, more sustainably and for much longer. Thanks for another great post.
Thanks AK.
I think there are quite a few people in the 35 – 50 y.o. demographic who are grappling with the same questions.
You seem to be quite advanced in setting your priorities – and designing a lifestyle that enables you to focus on the important things.
I am not quite there yet (though making progress) and hopefully this post causes others to do some productive soul-searching as well.
very clear, what working an extra year or so will do to your portfolio. I am not in the position of the millions but fit and healthy. I am late to the FIRE treadmill just turned 50 two weeks ago and becoming clear what needs to be done.
Thank you for your time to write this blog.
regards Cleophas
It’s not about where you start – it’s about where you finish!
Wow did this article speak to me! Our numbers are almost identical to yours (age, NW, planned yearly savings, etc). This caused my husband and I to have a big talk about not pushing as hard in his career bc we will be totally fine and fatFire by 50 or 52 regardless!
Cheers Allison, that’s great to hear.
I’m pretty honest with myself that I probably wouldn’t want to retire early – not yet anyway, and I think many people are in the same boat.
That being said, it can make a world of a difference when you are able to stop stressing out in your job and take it just a little bit easier.
Good luck!
Hey, love the blog. Don’t how you find the time but certainly appreciate the high quality content you continue to spin out every week. Noticed “Independence” is spelt incorrectly in the title of your tables. Know folks sometimes reference charts from other blogs so thought this important enough to let you know so you could correct it !
Hah, talk about attention to detail – clearly my years as a junior banker are long behind me!
Thanks for the heads up and the kind words. Titles now fixed 🙂
Relatively advanced??.. maybe yes… But I guess you can’t really stop thinking about / questioning it.. if you are making a choice to leave money on the table.
Interesting comparison. I think most people don’t know when to stop taking their foot off the gas.
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I just stumbled upon this post/blog as it was linked in another forum I follow. Love this! and I too am a Private Banker on the way to FIRE (in the US though). I’m 38, husband 44, and we just hit $5MM. He was asking me how much we need to save to hit X or Y by the time he’s 55, and I ran some similar numbers and was similarly shocked how little difference any ongoing contributions would make to our goals.
It’s why I’ve loosened up the purse strings and started spending more rather than worry about incrementally increasing our savings rate. Compounding returns really are powerful! I read a study in the Journal of Financial Planning a few years back that pointed out that most retirees die with MORE invested than they had at retirement age that really stuck with me. And these weren’t even super wealthy people on average. Lots of retirees finally retire and start spending more (reluctantly, as many of them have never exercised this muscle if they spent their working years in hyper frugal mode), and then find that their portfolios continue to grow regardless.
The takeaway is that most people could have retired a lot sooner or saved less during their working years. Of course the catch is that you can’t know for sure that will work out. So too many of us (especially the control freak overanalyzers that tend toward FIRE and FIRE blogs in the first place) over save and over work to make SURE that in all but the most catastrophic 3% of cases we will definitely be able to spend at our goals from retirement until the ripe old age of 115.
Amazing perspective, thanks Meg.
Early retirement types tend to be quite cautious when it comes to finance, so I suppose it’s not surprising people will err on the side of conservatism.
If you don’t mind sharing, what is the “number” you and your husband are solving for? As you say, once you’ve built up a $5m+ nest egg, it’s quite tough to move the needle with incremental savings.
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Great point about how blogging opens the door to connect with people you never would have met otherwise. I was stunned to see how much of the heavy lifting your portfolio does once your in the latter half of investing. Keep up the great work Banker On Fire!
Yeah, a real eye-opener, isn’t it?
Even though you know it to be true subconsciously, still a stunner once you run the numbers.
Interesting simulation, Banker On Fire! Just goes to reinforce the lesson that what really matters is time IN the market, not timing the market.
Thanks for sharing!
Glad you enjoyed it! Was quite opening for me to be honest.