I saw an article on BBC news the other day that was provocatively titled “Could you retire in your 40’s”. Now with a title like that you simply have to click, but the report didn’t really live up to the hype.
For starters, despite the video being called could YOU retire in your 40’s it didn’t really do much to explain how someone new to the FIRE community (FIRE = Financial Independence, Retire Early) could get started on their own early retirement journey.
The video did give some very basic tips, but I think more can be done.
I believe that anyone can ‘retire’ in their forties – and I will explain how below.
Now, the first thing to define here is what we actually mean by ‘retirement’.
I think the word retirement has almost lost its meaning in this increasingly flexible world of second careers, career breaks and with the rise of the so called ‘gig-economy’.
Nowadays, you can stop working for a couple of years (do we call that retirement?) to go travelling and then return to your career or start a business when you get back.
Many of the clients I deal with in our financial planning business, will choose to ‘retire’ from their traditional 9-5 job and might go onto start a consultancy business, do some coaching work or write a book. This is rarely how people picture ‘retirement’ however.
When you think of retirement, I imagine you conjure up images of someone sitting in an armchair watching daytime TV. That’s bad enough when you are in your seventies, but if you are in your forties – forget it!
Given all the uncertainty about what it actually means, I’m not sure the word ‘retirement is that helpful anymore’.
The traditional notion of retirement also assumes that you hate what you do for a living and want to stop as soon as possible and I know for a lot of people that is simply not the case.
Perhaps instead we should focus on Financial Independence and Financial Freedom.
I define Financial Independence as the point where you can cover your current level of expenses with income from your investments or other ‘passive income’ sources such as income from a blog or digital product. This means that if you fall out of love with your job, you could simply hand in your notice and continue living your current lifestyle with no changes.
Financial Freedom on the other hand is where you have enough passive income to live the life you actually want to live. The two could be very different things.
With more time often comes more expense and so you have to consider if you were not working in your 9-5 what would you do to fill your time?
If the answer is start a new business or write a book, then you probably only need to focus on Financial Independence. You can continue to live the same lifestyle while you work on your new project in the time where you used to be working.
If on the other hand, you dream of quitting the 9-5 and travelling 1st class to all sorts of exotic locations – then your new lifestyle might be a bit more expensive than your current one – you are focusing on Financial Freedom.
Whichever term you use, it doesn’t really matter. Being financially self-sufficient is an alluring goal and rightly so – who wouldn’t want to be totally free?
So, regardless of whether you are aiming for Financial Independence or Financial Freedom, the basic rules are the same. Here are 5 pieces of actionable advice you can implement today to help you on your way:
Your savings rate is the amount of your income you save each month. If you earn $1000 and put aside $100 into investments or savings accounts, then your savings rate is 10%.
How quickly you achieve Financial Independence is almost entirely dependent on your savings rate. If you can save 10% of your income, you will reach Financial Independence in roughly 76 years. That’s a long time!
If you can achieve a savings rate of 25%, that comes down to 38 years.
If your savings rate is 50%, you can achieve Financial Independence in 17 years.
If you get your savings rate up to the heady heights of 75% of your income – you can call yourself Financially Independent in just 7 years.
So the answer to the question “can anyone retire in their forties” is ‘yes’ – so long as they can save 50% or more from their income. Easier said than done right!
If you are currently struggling to make ends meet, saving money could be the last thing on your mind, but you have to start somewhere.
You don’t go from a zero (or even, dare I say it, negative) savings rate to 50% overnight. It is a slow and gradual process and this is where a lot of people get pulled off track.
In our quick fix society we want instant gratification and so saving loads of money for 17 years doesn’t fill us with as much excitement as, say, that new iPhone we could buy with the money right away.
The thing is, almost everything worthwhile in life takes some time, effort and sacrifice to achieve. There is no such thing as the quick fix or the miracle cure.
The important thing is to get started and start building good habits. To start with, I suggest you aim to save just 1% of your income and then build things up from there.
Now 1% might not sound like a lot, and it isn’t, but what you are doing here will have a far greater impact than 1%. You are building a habit that can be built on over time.
What begins as 1% this month could be 5% next year and 20% a few years from now. It took me 4 years to go from a savings rate of near zero, to around 50% each and every month.
Progress was really slow at first and at times it can be tempting to give up, but you have to keep at it if you want to reach your goals.
When we talk about increasing your savings rate, most people assume that they have to reduce their expenses to achieve this. Of course minimising expenses will help you build towards a higher savings rate, but that is not the full story.
Your ability to reduce your expenses is limited. All of us have some sort of basic expenditure needs that really are a necessity – food, heating, property tax, mortgage payment – the list goes on.
Even if you could cut your expenses down to the bare bone, that’s not a lot of fun!
Although there is some value in reducing your expenses as far as you can (without ruining your lifestyle too much), I believe that there is far more mileage in increasing your income.
By all means, try to cut out expenses that are excessive or unnecessary (that gym membership you don’t use, the $100 cable TV package – you get the idea), but I believe that life is for living and you can only cut expenses so far.
Your income on the other hand is truly unlimited and that brings us nicely to…
If you are working a job that you like and you don’t dread the 9-5, then the first step is to try and improve your income position. If you get a 5% pay rise for example, that is 5% that can go right into your savings pot.
If you can find a new role that pays substantially more, then even better. Anything you can do to improve your income is a massive win for your savings rate as this can go right to the bottom line.
I strongly recommend you check out the article below for a full guide on how to optimise your 9-5.
The key is to save and invest the excess income and not get caught out by the biggest threat to your freedom – lifestyle inflation…
Lifestyle inflation describes the phenomenon whereby your expenses seem to increase as fast as (or faster than) your income.
We have all been there before. You get awarded a long-awaited pay rise which will make everything better and before long you are back in the same position at the end of the month trying to make ends meet.
Where did all that extra money go?
The answer is usually that you started spending more on your lifestyle on account of your new higher income AKA lifestyle inflation. In fact, many people admit to increasing their expenses even before they have been awarded a pay increase – just because they think they will get one in the future.
The key is to immediately start saving a significant portion of any earnings increase. Notice I said ‘significant portion’ and not ‘all’.
I believe that life is for living and so why shouldn’t you enjoy some of your hard earned pay rise. I am a big fan of the save-half spend-half method, which sees half of any earnings increase immediately applied to savings and the remaining half spent on … whatever makes you happy.
That to me is the best of both worlds!
Once you have optimised your employment as far as possible, you could then consider starting a side hustle.
I believe that a side hustle is simply one of the best ways to improve your savings rate.
If you are able to earn some additional income from a side hustle, you can then apply most of this new-found income straight into savings and investments, instantly improving your savings rate.
There are loads of different options for a side hustle both in the online and offline worlds. Imagine you earn $20 a day extra working your side hustle and you do this 5 days a week. That’s a whole $100 extra income per week or around $450 per month!
Imagine the difference that could make to your savings rate.
Although everyone should have an emergency fund in easy-access cash, the rest of your savings should really be kept in investment accounts earning a higher return.
Although investing can be a little intimidating to start with, the returns on offer are simply too good to ignore – especially in a world where cash based savings are only just outpacing inflation.
Earning a good return on your investments is simply a must if you are focused on Financial Independence.
Remember if you have a savings rate of 50% you can retire in 17 years, but this assumes a return on your investments of 5% per year. If you leave all this money in cash and earn say 2% instead, it will take you 21 years to reach your goal – a whole 4 years longer.
Now you see why your investment returns are so important!
Because it can be a little nerve racking making your first investment, I put together this post to explain it all for you step by step.
If you take action on these 5 points, you can reach Financial Independence sooner than you might imagine. Progress will probably be slow at first, but don’t let that hold you back. Keep at it and I promise you will get there.
If you would like to jump-start your progress towards Financial Freedom, I highly recommend you sign up for my free 7 day Fast Track Financial Freedom e-mail course. Just fill in your email in the box below!