Provocative title, I know, but I had to catch your eye some how! This is a short thought experiment in response to some readers questions about forecasting Net Worth. Plus, as always I have some useful spreadsheets that you can download the can help you 🙂
Magic Number 40
This is the holy grail (was for me anyway). It’s a good 25 years earlier than normal retirement and you are still at the peak of your life, albeit a little more mature.
Some people aim for earlier either because they have a higher income and savings rate OR because they are happier with lower expenses.
Start Early Start Now
Either start early, or start now. The trick to accumulation of wealth is to dive in and start saving and investing as early as possible. This then allows interest, dividends or growth to compound through reinvestment. The longer it grows the bigger the number. We started earlier than we realised but our FatFIRE Retirement Age is a little off 40 (we are tracking closer to 46).
Want to know what your actual number is? Have a look at How much do I need to FatFIRE in the UK for a guide + free tools to help you!
In our experiment we start at the age of 25 with a high earning individual on around £79,000 total cash compensation (Base + Cash Bonus excluding stock and company pension contributions and other allowances). This may sound absurdly high for a 25 year old but a high performer, 2-3 years out of University, in Big Tech, Investment Banking or Consultancy could be taking this home fairly easily. Investment Banking salaries in particular are extremely competitive and in a lot of cases can dwarf the numbers that we are playing with in this post. This is why I am gutted as I was offered technology placements in IB but took Management Consultancy as I didn’t like the working culture.
With a £79k total cash comp you are looking at around £54.5k after tax income or £4500 a month, in hand. (Ignoring the fact that bonuses are paid in December or March for ease of computation) lets assume that the individual is frugal with their money and are able to hit a 60% savings rate…
- Income : £4500 pm
- Spend : £1800 pm (40%)
- Saving : £2700 pm (60%)
- Current S&S ISA Account Balance: £10,000
This results in a saving for investment of £2700 a month. Let’s also assume that you have £10k already in your investment account and that you are going to be very diligent and increase your contribution every year by inflation (~2%).
And voila, at the age of 40 you will hit £1M and 50 you’ll hit £2.5M! Don’t agree? See the proof:
Please download this spreadsheet (FatFIRE Tools) and play with the numbers yourself. If you have already downloaded this as part of another article, please do take a fresh copy as I have updated it with a few extra bells.
Found any errors or inconsistencies in the spreadsheet? Don’t agree with the calculation? Please please let me know. I do a lot of modelling in Excel (part of my job + personal life) but I’m also human so let me know and I will correct!!
Early investments are worth more than later investments (even though you are putting more money in later on)
This is always the thing that really gets my juices flowing: The amount of money invested during the first 5 years of investing equates to 25% of your net worth by the age of 50. Even accounting for increases in monthly savings (using inflation as a guide), your investments made in the first year (lets say 25th year) are worth 2x or 3x the value of the investments made in your last year (lets say 49th). You can see this in the last row on the table – “% contribution to overall wealth at 50”.
OK OK… the difference isn’t super-huge. That’s because we are increasing the monthly investments by inflation each year. If you set the value of inflation to 0% in the spreadsheet (simulating a fixed monthly investment of £2700), you will see a marked difference in % investment contribution: the first year of investing will be worth 4x more than the last year of investing.
But this example is absurd, incomes aren’t this high. You’ll never be able to hit that net worth. Be more realistic!
As I said, this is assuming higher income individuals. But what if you are a couple and both of you are working in higher income jobs? Your individual incomes don’t need to be that high. To hit the £79k total comp figure each one of you needs to earn at least £39.5k (assuming you will save and spend equally). That is achievable for someone 2-3 years into their careers in Tech, Finance, Law, Medicine (although you will be a little older), Engineering etc. So you don’t really need to be in Investment Banking or Top Tier Management Consulting. You could just be two people in well earning professions saving together.
And… we are not counting other parts of your compensation such as:
- Pensions (that will help you later on in your retirement)
- Stock Units (very common in Startups and Big Tech)
- Promotions (that allow you to bump up your monthly investments more than inflation)
- Other allowances such as company car, medical, dental, gyms etc. (which mean that you can reduce your spend and increase your savings rate because your company is paying)
But this is a thought experiment and not an exact science. Key thing is that it illustrates what can be possible. Download the spreadsheet and play with your own numbers. Not enough income to hit your number by 40 or 50? Earn more, get a promotion, move jobs, train up, ask for a rise, start a side hustle… anything.
I’m struggling to work out my net worth to retire?
So you have read through the post and don’t know whether £1M or £2M is enough for you to retire comfortably in the UK? I put a nice guide to calculating your FatFIRE retirement number that helps you work out where to start + free tools and downloads to help you along the way.
But how do you even save 60% of your Income into investments?
This is a hard problem to solve. Not everyone can put that number away. I’m now in that “not everyone” category (I never used to be). It’s about managing your expenses and not letting lifestyle inflation carry you away. Or being comfortable with your spending patterns and expecting to push your retirement date out a little further into the future. I struggle with this a lot but have managed to summarise my strategy for balancing luxuries and family necessities with savings rate. Have a read, it might inspire you to think of luxury/unnecessary spend in a different way.
Also remember to download Emma – super handy app – to help visualise and analyse your finances across all of your apps and ultimately help you cut down on your spending and increase that Savings rate up! Click here for a £10 cashback when you install and subscribe to Emma Pro!
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