This post was first published in February 2021 and updated in August 2022.
If you want to embark on a thankless affair, look no further than the pursuit of financial independence.
There are a million constantly moving pieces being debated in the personal finance community.
Persistent calls to “index and chill”.
Heated discussions about safe withdrawal rates.
Citizens of the “side hustle nation” denigrating the nine-to-five.
On and on and on it goes. And yet, take a step back and you will quickly realize that from the perspective of a rational decision-maker, pursuing FIRE is hardly the way to go.
Skeptical? Let’s start with some cold, hard numbers.
Here Comes The Taxman
Imagine for a moment that you are earning £50k a year, which puts you at the very top of the 20% tax bracket here in the UK.
You start working away in your early 20s, put in forty years of solid effort, and retire at some point in your 60s.
It might (gasp!) even be a few years ahead of the statutory pension age.
Your freedom-loving, FIRE-seeking alter ego wants no part of that. She decides to put the pedal to the metal, work twice as hard – but retire in 20 years instead of 40.
Bring on Freedom 45!
With that in mind, this alter ego of yours either gets a second job or gets one that pays twice as well – all with a view to making £100k a year.
It’s not easy. She ends up working 80 hours a week – or getting a high-paying job that requires working as many hours.
Heck, it might even require going back to school, with the associated risk and opportunity cost.
But as it turns out, her hours aren’t the only thing that doubled. So has her marginal tax rate – all the way to 40%.
Now, over the course of your respective careers, both you and your “FIRE twin” will earn the exact same amount of money.
40 years at £50k or 20 years at £100k. £2m all in. A life’s work – at least in monetary terms.
And while option 2 doesn’t leave you any further ahead financially, it still means you will end up paying twice as much in tax.
Adding Insult To Injury
Let’s imagine a different scenario here.
You and a good friend of yours graduate college and start working in similar jobs with similar pay.
Your friend has a penchant for living today and spending everything he earns. You, on the other hand, are very focused on saving and investing in order to build your wealth.
Two decades later, you’ve managed to build up a nice nest egg.
Perhaps it’s $500k.
Perhaps, through a combination of risk and effort, you’ve even crossed into millionaire territory.
Well done to you, right? Sure, you’ve had to make some sacrifices along the way, but it was all worth it.
Enter wealth taxes.
By virtue of delaying gratification and setting money aside, you’ve just nominated yourself for a wealth tax to the tune of 5% or even 10% of your net worth.
And for those who got there by earning more, that wealth tax will come on top of all the extra taxes they’ve ponied up to now.
Talk about a one-two punch.
Now, I am not about to use this post (or this blog) to debate the tax policy.
As a matter of fact, I’m quite content paying my fair share of taxes and have been cutting six-figure cheques to the HMRC for the bulk of my working career.
The free market (of which I’m a big fan) does a pretty crappy job producing optimal quantities of public goods.
The government has a unique (and frankly speaking, tough) job in righting that imbalance.
But it is also an undeniable fact that the pursuit of FIRE will leave you with a much higher tax bill versus the one you’d get on the “mainstream” path of working until you are 67.
Depending on where you live, there will be other monetary considerations as well.
For example, you are unlikely to qualify for any means-tested benefits. Your pension will likely be capped even though your total contributions might not be.
For what it’s worth, you might even get less of a helping hand from your family. Why aid someone who is managing pretty well on their own?
Feeling dispirited yet? And we haven’t even gotten around to the non-monetary part.
Given we all operate in our little internet echo chambers, it’s easy to overestimate the number of FIRE adherents out there.
You may think we are an army. In reality, we remain on the fringe of society.
Certainly not in concept (who doesn’t dream of retiring early?) but surely in number.
Many will struggle to get their significant others on board. Others will experience blank stares when trying to broach the subject with friends or extended family.
The online camaraderie notwithstanding, the pursuit of FIRE is still a solitary affair. And that presents a bigger challenge than many folks appreciate.
There’s the self-doubt. Will it ever work? What if this whole investing thing won’t live up to the promise?
The questions of balance. Should we really spend our best years (!) putting in all that extra effort – and delaying gratification to boot?
Sadly, there’s also the natural question of risk. What if we die young and all that effort was for naught?
What’s the damn point of all of this?
If by this point you feel like closing your browser, selling off all the investments, and buying that mid-life convertible, I can’t blame you.
As a matter of fact, I bet that the vast majority of people on this journey have felt that one at some point or another.
So how do you keep going?
Price of Admission
A big hurdle I’ve alluded to above is the (mistaken) belief that reaching financial independence somehow implies a life of deprivation.
If that’s how you’re feeling about your own journey, you may want to pause, rethink, and reset.
Sure, there will be periods when you need to tighten your belt for a few months or years. I did just that when I was paying off my six-figure student loan.
But over the long run, cutting your budget to the bone is unlikely to move the needle in a meaningful way.
It is, however, guaranteed to leave you dispirited, depressed, angry, and ready to give up.
Being intentional with your spending, however, is an entirely different story.
Ramit Sethi has a wonderful saying that tells you to spend frivolously on things you love and to cut back ruthlessly on things you don’t.
To me, that’s the best advice one could receive. Follow it and being financially responsible will never feel like a sacrifice.
Let society dictate your spending habits and even a seven-figure income won’t be enough. I’ve come across many highly paid bankers, decades into their careers with absolutely nothing to show for it.
But that’s just the first step.
For me, the most important factor by a stretch is the notion of control.
Sure, the math may be stacked against us. But what is the alternative?
Being whipsawed around by the vagaries of life?
Having someone else (i.e., your employer) tell you what to do, when to do it, and how to do it?
Relying on the kindness of others (including the government) should you fall on tough times?
To be clear, there’s absolutely no shame in any of the above.
Lots of people go through their entire lives doing just that. Anyone reading (and writing!) these words might need to rely on a helping hand at some point.
Still, the vast majority of us have the option to chart our own path. Not acting upon it is to miss on one of life’s greatest gifts. In addition, having autonomy over our lives is one of the biggest predictors of happiness.
It has now been a decade since Bronnie Ware published her book on the top regrets of the dying.
The most common deathbed refrain was the following:
I wish I’d had the courage to live a life true to myself, not the life others expected of me.
Financial independence, on your own terms, is the ultimate opportunity to design your own life instead of letting someone else do it.
Don’t waste it.
Thank you for reading!
About Banker On Fire
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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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