The post where I give the details of what sort of retirement fund I’m aiming for by reference to the 7 Stages of Financial Independence.
As you can imagine with a blog name of Fretful Finance, I’m constantly re-visiting my FIRE numbers. Like most people interested in personal finance I have a relatively detailed spreadsheet that I’m frequently tinkering with. This post may, therefore, be subject to a fair bit of editing.
7 Stages of Financial Independence
I’m a big fan of Joshua Sheats’ 7 Stages of Financial Independence after hearing him on Paula Pant’s Afford Anything podcast. This is what I’m currently using to monitor my goals. I will leave the detail of the stages to him at his Radical Personal Finance blog.
For current purposes I’m focusing on the following stages:
Stage 3 – Debt Freedom
It is debatable whether this should include mortgage debt. Some people just include consumer debt in this. I don’t have any consumer debt (other than a small amount on credit card that I pay off in full each month).
However, in my view this should include mortgage debt. My numbers at stages 4-6 below assume that my monthly expenses don’t include a mortgage. This doesn’t mean that I’ll try to pay off my mortgage before even starting on the other stages. I plan to try and concurrently overpay my mortgage whilst investing for stages 4-6 so that hopefully stages 3 and 4 are reached at about the same time.
Stage 4 – Financial Security (enough passive income to cover your essentials)
I am working on needing £11,000 per year (in 2018 terms) in expenses. I consider this means a pot of £335,000 plus a cash buffer of £15,000.
For me this is just a psychological milestone and I probably wouldn’t even part-retire unless I was truly miserable in my job.
Stage 5 – Financial Independence (enough passive income to cover your current lifestyle)
Using my current expenses and lifestyle as a guide (minus mortgage costs) I’ll need £23,000 per year pre-tax (£20,600 post-tax). My calculations suggest I’ll need a pot of £590,000 plus a cash buffer of £50,000.
I might choose part-retirement at this point.
Stage 6 – Financial Freedom (enough passive income to cover the lifestyle you want in retirement
There are some people that consider they will need less money in retirement as they won’t have the costs associated with work such as commuting and work clothes. I’m the opposite. I think that with all that extra leisure time I’ll need more money to do things. I quite like free activities like going for walks in the countryside but I also like think that cost money – such as fannying around vineyards. So my income aim here is £35,000 pre-tax (approximately £30,000 post-tax).
I call this my “luxury” retirement, even though it doesn’t sound that extravagant on the face of it. But it’s actually quite a lot of money when you don’t have a mortgage. This not only gives me the same level of monthly expenditure as my current norm, but also an extra £400 per month for additional routine leisure expenses, £7,000 per year for holidays and other “frivolities”, and £5,000 per year for home improvements and other unexpected housing expenses such as the washing machine breaking. Aiming for that level of income also gives me plenty of slack if there is a bad year or so in the market as I know I can afford to live on much less.
To reach this retirement income I’m aiming for a pot of £825,000 plus a cash buffer of £50,000.
I intend to fully retire at this point.
How did you calculate these numbers? Do you use the 25x rule?
For those that aren’t familiar with it, the 25x rule says that if you multiply your required annual income by 25 you get the fund you need to be able to live off of passive income indefinitely (on the assumption you withdraw 4% of your fund per year). This assumes that your fund grows by 4% per year (after factoring inflation) so that you can withdraw your required income every year and never eat into the capital.
I think that the 25x rule is a good guide, and if you look at my figures above you’ll see it’s fairly close, but it’s not what I used to get my final numbers for a few reasons:
I split my investing between ISAs and pension. As they have different tax treatments you need to use different figures for pre and post pension withdrawal. I work on the basis that my ISA will see me through until I can withdraw my pension and I will use my pension thereafter. I don’t factor in the state pension as I think there’s just too much uncertainty with it.
I don’t plan on having children so as things stand I’m not bothered about leaving a shitload of cash in my estate when I die. I’m fine with eating into my capital as I go through retirement.
My figures above are therefore based on plugging index-linked income requirements into a spreadsheet and making sure my fund lasts me until I’m very old.
I don’t want one post to be too long or granular, so I’ll continue with details of what I’m actually saving and the retirement age I’m aiming for, plus the subject of whether my cash buffer is over-the-top, in part 2.