Category Archives: Retirement – Early

How the median income earner could retire at 52

If you’d like a fuller version of what’s below, please do buy my latest book

Early Retirement Strategies for the Average Income Earner, or A Critique of the Curiously Ordinary Life of the Everyday Worker-Consumer

Available on iTunes, Kobo, and Barnes and Noble – Only £0.63 ($0.99)

extreme early retirement

Also available on Amazon, but for $3.10 because I’d get a much lower cut if I charged less!

 

Over the summer I worked out that a 35 year old earning the median salary could potentially retire at 52, if they just stop buying crap they don’t need now. In contrast, the expenditure levels of the average worker-consumer effectively tie them into working until the current standard retirement age of 68.

This post is simultaneously a critique of the ordinary worker-consumer and of the Extreme-Early-Retirement model, which I don’t think can be applied in its fullest sense to an average person in the U.K. (Although if someone wants to modify my stats using different investment models to see if the retirement date could be brought forward, I’d be interested!).

In this blog post I compare two hypothetical 35 year old individuals (4) who both earn the median UK salary. One individual has average consumption and expenditure while the other has in mind the goal of retiring as early as possible and so is much more frugal, without completely having cut themselves off from society.

As testimony to my lack of Open Office Calculator and Inkscape skills, this is represented below:

Ret InfoTo make reading the above more meaningful, you should refer to this spread sheet throughout – Comparing 33 years of expenditure

For the sake of making an easy comparison, I’ve used expenditure figures based on one person living alone for the remainder of their life, and imagined that they have just bought their first property at the age of 35. The reason for selecting a 35 year old is because this is the age by which most people are settled into a stable career, and this is also the age by which most people are at least starting to think about retirement, if not yet looking forward to it in the near future. It also happens to be the age at which today’s typical graduate student can reasonably have expected to have paid off their student debts and have some kind of savings towards their first property. Although the figures in each expenditure category will vary considerably depending on variables such as age, or household make up, the levels of expenditure are generally not going to be that far away from how the majority of people spend their money for much of their lives, and thus most people should at least recognise something of their own and their friends’ expenditure habits in these figures.

However, to satisfy those who just can’t get over the problems of using averages when variables which will differ widely, I’ve included a link (4) to the spread sheet where I’ve done my calculations so you can add in your own expenditure and income levels in order to personalise these calculations for yourself, or you can even modify at a deeper level to add in things such as inflationary effects, investment returns and changes in circumstance over time.

The purpose of this exercise is to put in the starkest terms possible how many years and months (expressed in decimal terms) of one average human life one individual would have to spend working to buy certain things for the remainder of one’s normal working adult human life. In those stark terms – The expenditure levels of the average-consumer effectively lock them into working until the current standard retirement age of 67-8, while the frugal-consumer, assuming they maintain their frugal levels of consumption, will be able to retire when they are 51, or 14 years earlier, or in half as much time as the average consumer on the average wage.

Executive summary – A comparison of the 33 expenditure patterns of an average-consumer compared to a hypothetical frugal-consumer.

As far as I see it, there are three main factors which work together to keep the average 35 year old worker-consumer locked into the need to work for 33 years until they are 67-8. In terms of overall expenditure, the single most significant item is the 25 year mortgage with massive interest payments (costs 9 years). However, this lock in occurs primarily because the high cost of car ownership (costs 5 years), and what I can only characterise as fragmented expenditure on a range of unnecessary consumer frivolities (costs 4 years), which together means that a person earning the average median salary has no choice other than to drag the mortgage out over a 25 year period, and accept the attendant massive interest costs.

In contrast, what I call the frugal-consumer chooses to get rid of the car and buys a bike (saving 4 years), radically reduces consumption of frivolities (saving 2.3 years), and in addition makes some relatively marginal savings on necessities (saving 1.5 years) such as food and utilities. Taken together, these changes in lifestyle allow for an 11 year mortgage repayment term and much lower interest payments as a result (saving 2 years). All of this, factored with the lower cost of living, mean that this individual could potentially accrue enough savings over 16 to years to pay for 33 years worth of frugal consumption, allowing for an early retirement age of 52.

In future blog posts, I’ll compare expenditures across four categories – housing, transport (focusing on the car), consumer frivolities and things which may be reasonably regarded as necessities.

If you can’t wait, you can always buy my book – ‘Early Retirement Strategies for the Average Income Earner‘.

 

Boring but important – A few (selected) notes on data sources and expenditure categories and statistics

Categories of Expenditure In my analysis below I have four main expenditure categories, mainly drawn from The Office for National Statistics’ Family Expenditure Survey (5) -Mortgage repayments -Transport costs -Necessities – food, utilities, council tax, clothes, pensions contribution, communication, maintenance of dwelling, health -Consumer frivolities – recreation and culture, restaurants and hotels, ‘miscellaneous’, household goods and services, alcohol and tobacco and education.

To get my figures for individual expenditure based on one individual living along I’ve mainly used the data from the ONS’ family spending survey and divided by the average household size (2.4 people) where it makes sense to do this (dividing makes sense for clothes, but not for council tax). Because the figures are mostly weekly, I’ve multiplied by 52 to get the annual figures and then 33 to get the 33 year overall expenditure to the normal retirement age. I’ve calculated how many years working it would take the average consumer to pay for one category of expenditure earning the median net salary by  dividing the total cost of 33 years worth of expenditure by this figure (£21, 240). Where housing costs are concerned, I’ve used the figures for the cost of repaying the average mortgage which is £121 000 according to this is money (6).  Here, for the average-consumer repayment is over a 25 year term, while for the frugal-consumer, the repayment period is over an 11 year term.

Median Income

According to the UK Annual Survey of hours and earnings (7) median, full-time gross weekly earnings stands at £517.00 per week, which amounts to (*52) a median gross annual salary of £26884, which equates to a take home annual salary of £21, 240, or a monthly salary of £1770 after income tax and national insurance are taken out (£408/ week for those who like to work in weeks).

Potential problems with my modelling

Firstly, I don’t take into account inflation, I’ve just worked out everything at today’s prices, and neither do I take into account any returns you might make investing rather than paying down the mortgage, which is the main early-retirement strategy in my scenario. However, these two things being equal in both my average and frugal-consumer examples, you are still a lot better of spending as little as possible on anything other than the mortgage or savings. Another potential limitation of the model is that it is mainly based on someone having a stable job, and being single, although it is possible to ‘stick to the programme’ while moving around jobs and holding down a relationship, maybe even kids, just a lot more difficult. 

References (lots more in the book!)

(1)See the spread sheet above

(2)Office for National Statistics – Family Spending 2013

http://www.ons.gov.uk/ons/rel/family-spending/family-spending/2013-edition/index.html

(3)http://www.thisismoney.co.uk/money/mortgageshome/article-2553023/Two-thirds-time-buyers-turn-Bank-Mum-Dad-deposit-help.html

(4)ONS – Annual Survey of Hours and Earnings 2013 – http://www.ons.gov.uk/ons/rel/ashe/annual-survey-of-hours-and-earnings/2013-provisional-results/stb-ashe-statistical-bulletin-2013.html

Early Retirement Extreme – A Summary

EREI came to conclusion over summer that if I could make this 6 week holiday my life, my life would be a lot nicer. Hence why I’ve got the early retirement bug and hence this blog post summarising the following book –

Early Retirement Extreme offers a critical intellectual framework for rethinking your approach to retirement that would allow someone on the median salary to retire several years earlier, and the more you earn, the earlier you should be able to achieve this goal. (The book has helped me (on £40+K) to work out an 8-12 year early retirement plan, which I’ll post on later).

Early Retirement Extreme is not a step by step guide about how to achieve early retirement. It is a critique of the paucity of normative ways of thinking about work-consumption-retirement and an overview of an alternative way of thinking about this nexus which ultimately means working and consuming less and retiring a lot earlier than normal.

If I could pick one single stand-out idea which captures the ethos of the book it is this: If your current yearly income is £10 000 and you spend 75% and save 25%, it will take you 3 years to accumulate enough savings to take 1 year off. If you invert this ratio by spending 25% and saving 75% then after 3 years you can take 9 years off.

While this hypothetical example doesn’t factor in real-life variables such what you might actually be earning, or inflation or interest on savings, it does illustrate the central principle of the book – Whatever your income, if you get used to living on as little money as possible and save as much as possible, then you will be able to retire A LOT earlier than the norm. In this model, early retirement will also require you to invest sensibly (this is not an anti-capitalist manifesto!) and develop a range of skills (social, physical, practical and technical) which will make you a more resilient person who is able to meet their downward-adjusted needs and wants with much less money.

By saving 75% of his income Fisker managed to become financially independent in five years, and the blog recommends that you aim to save at least 40-60% of your income to make early retirement possible (I’ve managed 56%).

In Fisker’s model, the first step to early retirement is to get over the habitual way of thinking about work as something we do for 40 years, and to get over the idea that a high-level of consumption is what we do with those small chunks of time when we are not working. In his view, many of the consumer goods and services which are regarded as normal have little real value, and as examples he lists everything from kitchen gadgets to gym memberships but also cars and higher education.

Instead of working-consuming for 40 years, Fisker suggests that we stop consuming and start saving and we spend our non-working time developing ‘resilience skills’ which will make us less dependent on money. He suggests four types of skill – practical (e.g. building your own house rather than paying £100K interest on a mortgage), technical (a diverse range of professional skills), physical (being able to cycle rather than needing to drive), and social (sharing a house rather than living alone).

Each individual will approach early retirement in different ways depending on their own specific circumstances, and Fisker suggests that it is up to the individual to weigh up their own talents and find their own individual (or couple/ small network) path to retiring early – In this vision, thinking for yourself, and creativity are crucial.

The fact that the idea of saving 75% of your income will seem unrealistic to most and down-right impossible to many is, to Fisker, simply a sign of how colonised our minds have become by societal work-consumption-retirement norms and very early on in the book Fisker contrasts his own creative ‘renaissance’ approach to early retirement to the slavish mentality which keeps us chained to our sub-optimal 40 hour a week/ 40 year career working norm.

He uses Plato’s cave analogy to illustrate how we have become wage slaves, the wall in his modern rendering of this tale representing us being trapped by the multitude of things we mistakenly think we need. However, unlike physical walls, our chains are mental, because rather than using our imagination to creatively break free of this cycle, we develop excuses which keep us locked into this cycle of a long-career and short-retirement.

Fisker criticises what he casts as the ‘wage-credit-spend-consume-retire on a million-cycle’ – Into which we have been duped. He is especially critical of our wasteful consumption practices – we are taught to be materialists through toys from childhood and later on our mortgage-purchased houses become places in which we store stuff which goes largely unused.

As briefly outlined above, rather than spending, Fisker’s solution to breaking free of this cycle is simple – spend less and save like what appears to be crazy to build a relatively small retirement pot. His own version of retirement really is extreme – saving 75% of his income, it took him 5 years to retire on a third of the median income (something like $700 annually), reducing his expenditure to the very basics of life and finding creative ways to enable him to live on less.

Given that he lives on $7000/ year, it seems reasonable to assume that he had an income of $30 000 over these five years of saving, meaning that he has ‘retired’ on an income pot of $150 000, although it will almost certainly be more than that given that he appears knowledgeable about investing.

Obviously this is more than most people will be earning in their late 20s/ early 30s when he started out on his early retirement mission, but Fisker holds that it is the 75-25 ratio that is the crucial thing, and more crucially, the mindset to spend as little as you can by finding creative ways to avoid the con-of-consumption and save what remains.

If you haven’t already done so, I thoroughly recommend checking out the early retirement extreme blog which has details of many people on a mission to retire early, and in a future post I’ll put together a number of links to U.K. based early retirers…

If you like this sort of thing – then why not my book which is more focused on early retirement in the UK?

Early Retirement Strategies for the Average Income Earner, or A Critique of Curiously Ordinary Life of the Everyday Worker-Consumer

Available on iTunes, Kobo, and Barnes and Noble – Only £0.63 ($0.99)

extreme early retirement

Also available on Amazon, but for £1.99 because I’d get a much lower cut if I charged less!

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