I’m 57 and I can choose to go to work or not – I’ve got enough and I keep on working because I love it, not because I have to. I got here through luck (being in a DB scheme for a time) and through hard saving from an early age (I started my first savings plan at 16).
Now I’m a later-life entrepreneur working with young people who are interested in planning ahead. I work with First Actuarial on courses that help people to save enough to stop work – when it suits them.
This is all about wanting something enough, I got a bad desire…
That’s why, I’m supporting FIRE, the ICAEW’s initiative to get people thinking ‘financial independence, retire early’.
This article’s by Nick Martindale and it was first published in the ICAEW’s house magazine.
FIRE today, jam tomorrow?
Barney Whiter’s interest in money started at a young age, which he attributes to early experiences of his family’s finances. “In 1981 my parents had moved house and taken out a big mortgage and then interest rates went to 17% so they had to tighten their belts,” he recalls.
“We had to cancel a holiday, my dad stopped buying beer and brewed his own and the newspaper got cancelled. What I took away from that was that being in debt was a bit scary and a bad idea, and I always wanted not to be in that situation myself.” Whiter trained as an accountant and worked for many years in corporate finance, but in 2014 he stopped working, having reached a level of financial security which he says means he no longer needs to earn a regular income.
For many years, Whiter had been following the principles of the FIRE movement, standing for ‘financial independence, retire early’, even before it fully existed as a concept. “In 2002/03 I was in a job that I didn’t like,” he says. “One of the ways I reacted to that was thinking I needed a fund that would support me if I was unemployed for a long period of time. At that point I had a child and another one on the way and my wife wasn’t earning. So we slashed our spending, built up an emergency reserve and I found a different job, which took the immediate pressure off. From that point on I thought I would just save 50% of my post-tax salary every month and any bonuses would be saved as well.”
In 2013, Whiter stumbled across US blog Mr Money Mustache, written by Pete Adeney, who had retired at the age of 30 by following similar principles: saving a significant amount of income each month and working on the basis that anyone with 25 times their annual spending saved up could afford to stop work. “My first reaction was that this must be some kind of scam, but he lays out all the maths and how he got his spending right down to that level through steps such as not using a car, living close to work and good old-fashioned frugality,” says Whiter.
“I went through it with a fine-tooth comb looking for the flaws, and I’m good at finding mistakes because I’m trained to pull apart spreadsheets, but it all stacked up. I tracked my spending for a few months and realised that I was in that situation. I handed my notice in and quit in 2014.” Since then, he’s focused on writing his blog, The Escape Artist (theescapeartist.me), with the idea of promoting the FIRE concept in the UK. It adheres to the so-called 4% rule, which claims that individuals should be able to withdraw 4% of their investments – made in a range of equities and fixed incomes – each year without affecting the real value of their portfolio. The exact level that is safe to withdraw has been the subject of much debate, with some analysts suggesting that 4% is too high. But Whiter believes this is actually conservative, pointing out that it doesn’t take into account factors such as the ability to return to paid work, any state benefits, inheritance, home downsizing or reduction in expenditure. In fact, many advocates of the FIRE model question the ‘retire early’ element, preferring to look on it as choosing what work they take on and not feeling stuck in a job they dislike.
“There’s a big difference between reaching financial independence and retiring,” says Paula Pant, founder of Afford Anything, who achieved financial independence through a mix of building up an online business and “living like a college student”. She says: “Within the FIRE movement, a lot of people use ‘retire’ as a synonym for making a very well-funded career change or building financial stability.” “For me, that’s what financial independence is: building a base of financial stability so you can take a sabbatical or switch into lower-paid work or try to start a business without the pressure of it being profitable in year one. I don’t know a single person in the FIRE movement who has stopped doing some kind of paid work.”
One thing that is very much a part of the FIRE movement, though, is extensive savings, and adapting lifestyle choices to achieve that, with many advocates putting away 50% or more of their income each month into savings. Ken Okoroafor is a first-generation immigrant from Nigeria who saw his father forced to continue commuting into London doing a job he didn’t enjoy until he had paid off the mortgage at the age of 65. “I didn’t want that life,” he says. “I wanted something completely different and not to be a prisoner to my mortgage for 25 years, which is why we set ourselves the goal of paying off our mortgage in 10 years.”
With his wife and young family, he moved out of London to Dartford and embraced a much simpler and lower-cost lifestyle. “When you look across your life there are all these areas of costs, such as gym memberships or takeaways, so if you’re really conscious about that you can save £500 to £1,000 a month,” he says. “We use Aldi for our shopping, we have a plant-based diet and don’t buy any alcohol whatsoever, and these have a huge impact on your shopping budget. You come out with a trolley full and you’ve barely spent £50.” Today, Okoroafor and his family are financially independent, although he still works as chief financial officer for an investment business in London, as well as writing his blog, The Humble Penny (thehumblepenny.com).
“I tell people to keep working but to do it on their own terms,” he says. “The goal is not to quit working and sit at home twiddling your thumbs doing nothing. It’s to have the option of early retirement or to be able to take five years off and go and do something that you’re really passionate about. It’s delayed gratification, but it’s better than getting to 55 or 65 and not being prepared.” While the FIRE concept itself may still be relatively low-profile – although upcoming documentary Playing With FIRE could change that – there is a growing interest in the concept of achieving financial stability to pursue alternative goals. Sarah Lord, partner and head of financial planning at Mazars, attributes this to a number of factors, including the impact of the credit crisis and the ‘always on’ nature of many people’s working lives. “Working life for many is far more intense than it used to be which, coupled with the fact that it is now very common for both parents to work, means many want to get out of the rat race earlier in life,” she says. “But it also depends on how important the goal is as to how life in the present day is lived. Too many that I see want to retire early at 50 yet also want to live for the moment and struggle to balance the finances for living today and saving for the future.”
Henry Tapper is director of First Actuarial and founder of AgeWage. He believes there is nothing wrong with the concept of aiming to be free of work at an early age. “Who should say that they can’t have that ambition?” he asks. “In principle I’m totally for it. What I’m not for is people starving in the hope that they will have a long and happy retirement, and the frugality thing is a really hard way of doing this. But I don’t like this slightly draconian view that we need your taxed pounds through to the age of 65 to 67 and you need to work until you drop. That was never the deal and people should have the option to opt out of that.” Whether it’s feasible for someone to save to the extent that is required to be able to stop having to work earlier than the traditional retirement age is less clear. Whiter points to a journalist earning around £30,000 a year and living in London who managed to save half his income in a one-month period, but concedes there are situations where it may not be an option.
“There are all sorts of circumstances that might mean it’s not possible for you, if you’re stuck on minimum wage or you can’t work,” he admits. Alice Douglass, a financial adviser at Bristolbased Grosvenor Consultancy, suggests that while being able to stop work may be possible for some with the right financial planning and life choices, it is not an easy route. “Many people who are looking to retire have built up pensions pots, and they often have the full state pension and other savings,” she says. “By retiring in their 30s or 40s, they will not have built up these substantial pensions, may have access to some state pension but not the full amount, and are unlikely to have had enough working life to make substantial savings. In addition, as people progress through their working lives, they usually earn more and therefore can afford to save more. By retiring early, these individuals may not have this option.”
Michael Basi, CEO of Onvestor, also has concerns, largely around the potential for people to misjudge what they need to retire and how long they will live. “This is a risk which is allayed by the oft-maligned annuity product set,” he says. “Flexible drawdown is all very well, but places the onus on the policyholder to maintain sufficient funds for an unknown number of future years. Most young people would be better placed having a properly considered and structured financial plan which accounts and provides for risks of unexpected events, including the possibility one could outlive a turtle in future.”
But while the FIRE concept may seem an extreme way of tackling the need to save enough for retirement, raising awareness of the issue among a generation that faces considerable financial pressures is certainly a positive, believes John Gaskell, head of personal financial planning at ICAEW. “Whatever can be sensibly done to engage younger generations to accept the reality of moving from the welfare state to the postwelfare state, which means they have to accept a greater degree of responsibility for self-provision, is welcome,” he says. “The inevitable consequence of that is that this generation is going to have to make greater self-provision, and to do that they need to understand the realities of the environment in which they’re going to be living.”
Ross Duncton, managing director, head of marketing and direct, at BMO Global Asset Management, also stresses the need for this generation to become more engaged in saving, if we are to avoid a split between those who are able to retire and those who can’t. “Most millennials are sensible spenders who want to take more control over their money, despite a lack of formal financial education and income,” he says.
“But some are painfully close to a different financial future – they only need to shift their money mindset to get their money working harder, and recognise funds’ potential return if they invest it rather than stick to cash. Money saved early in life can reap the benefit of compound interest and so have a bigger impact over the long term.” For Okoroafor, though, the route to financial stability is born of good old-fashioned thriftiness. “It will take time, hard work, lifestyle change, deferred gratification and a commitment to learning how money works,” he says. “But it is all worth the effort if it means that life in the future doesn’t have to be painful.”
Accountants have a role to play in helping to embed financial literacy in the national psyche, believes John Gaskell, head of personal financial planning at ICAEW. “Whatever can be done to encourage that is to be commended, provided it is responsible and realistic,” he says. “Surely as the numerate profession, accountants can engage in that agenda.” This could include talking to clients on how to use the tax system legitimately to their advantage, reducing fees on investments or making the most of the power of compound interest.
“Accountants will be dealing particularly with SME owners and entrepreneurs, so they need to think more along the lines of being a personal finance director,” he says. “They can help people to engage early, have a clear focus of what their goals are and give them sensible guidance as to what a financially healthy lifestyle looks like.” Many accountants, though, are reluctant to veer into this territory for fear of falling foul of regulations around mis-selling. This is something ICAEW has tried to address with the creation of its Personal Financial Planning Community (icaew.com/ pfp), which offers information to members both as individuals and as professionals, and which is now the biggest of all of ICAEW’s communities, with 9,000 members.
And in case you were hoping for that video – here’s Bruce