As I mentioned in my April monthly update, I was a dollar millionaire in net worth. A few people asked me why I was not then FIRE’ing, and what my FIRE number was. Henceforth I lay out my bag lady fears, and why I feel I personally need more than $1m to FIRE while also attempting to acknowledge my privilege in getting here.
Money as a Tool
First of all, I’m fully subscribed to the belief that money in itself is not everything, and wealth should not be something you strive for on its own. I feel that happiness and contentment are far superior values to wealth, and like lots of things in life, these are very subjective and personal.
As I outline in my post on 10 things I don’t spend money on, items I don’t buy can be essential for other people. And this also works the other way; I spend money on things that others may feel are frivolous and unnecessary – such as my love for travel.
I feel strongly that money is a tool, that lets us pursue our dreams and achieve our own individual versions of happiness. And simply put $1m net worth does not buy me my level of happiness securely.
Security and Bag Lady Syndrome
Bag lady syndrome can be described as the fear of running out of money and having to take to the street with all your belongings in bags. Bag lady fears affect more females than males, hence the feminine naming convention.
In my case, if I retired today, my long-term security would not be great. Although my net worth is ~$1m, a substantial proportion of that is in a house. And a pension. In non-pension accounts, I only have ~£200k. With my ~£20k annual expenses, this would not last me from 37 to 58. Hence I would have to either (a) hope the market overperformed, (b) half my expenses for 20 years or (c) become a bag lady (joking!). Although this seems melodramatic, and a quite privileged middle-class view, running out of money is a real fear. Exposing myself to unnecessary risk is not something I am prepared to do when I am very happy to work for a few more years now.
I am single and rely solely on my income. I have no other financial support, therefore bag lady fears can arise. There is no supportive spouse with a second income to contribute, or family ready to bail me out if the worst happens. Having said that, if really bad things happened, I’m pretty sure my family would at least put me up as a last resort. But in reality, it really is all on me, and hence I take a more cautious approach.
So, how much do I need to FIRE?
I use the phrase FIRE fund to describe my savings and investments for FIRE, that will be used to fund my early retirement. This includes my pension (SIPP), ISA, taxable investments and cash savings. But excludes my home value and related mortgage. I’m working towards a FIRE fund target of £750k.
At this level, I feel that I would have enough to manage a long and comfortable retirement, without fears of running out. I’d be able to travel lots and not worry about market performance or the odds of becoming a bad lady. Using the 4% rule, this will give me a comfortable £30k a year to play with. While working full time I’ve been spending less than that, but I know my expenses may increase in the future.
Pension Bridge – UK pension rules
Here in the UK, there are strict rules detailing the age you can access any pension savings. This is currently 55 but is expected to rise to 10 years before state pension age, which will be 58 for me. Unlike in the US, there is no option to get this money out earlier.
So I will have to take a more conservative approach, and ensure I have enough money to cover me until I can access my pension, and enough in my pension for afterwards. And that in its self is a difficult balancing act. I don’t want to run out of money in my mid-fifties, as that would be the worst time to have to find a job again.
What about housing?
I have a house in outer London now. Moreover, I love living in London and am happy to work extra years now to ensure I can continue to do this in the future. Truth be told, I don’t want to live in this particular house forever, but I like being close to the city.
A lot of my net worth is in my house, hence is not available to fund an early retirement. I’m comfortable with this at the moment, as I need somewhere to live when I am working, and I love the facilities my house has. They have predicted low growth in the London property market, but as with all forecasts, this may or may not come to fruition.
Realistic FIRE plans?
As I’ve mentioned a few times before, I suffer from wanderlust. I love travelling and plan to FIRE before 40 and then slow travel for a few years. Exploring lots of far-flung places on a budget is the plan, and make use of geo-arbitrage and shoestring travel to keep my expenses low.
I have a draft route planned already and I need to stop myself planning the full journey years in advance. Truth be told, once I have the freedom to no longer have to work for income, I may change my mind. I’m a big believer in re-evaluating plans and adjusting them to your current situation. As we can never accurately predict how we will feel in the future.
Conservative or Risky?
There are many different types of early retirees on the risk spectrum. Clearly, you can have an uber-conservative approach, and save much more than needed by the 4% rule, to be extra confident you will never run out of money. Or the cowboy approach, retiring with less and hoping everything works out well.
My early retirement approach will be a more balanced watching brief. I think initially I will be monitoring my portfolio, and taking actions to reduce risk if needed. I’m planning to keep a good few years of expenses as a cash cushion for security. And as I’ve mentioned before, my biggest concern is sequence of returns risk. If I retire and then the market plummets, I may need to work again. But you know what? I’m happy to cross that bridge then, and I’m sure I’ll still be employable with a year or two gap on my CV. I’d much rather this happened in my early forties than later in life.
Are you really frugal if you can’t retire on $1m?
No, I’m not really that frugal. I may be guilty of using the word frugal as it’s the best way of describing middle-class thrift in reality. At the end of the day, I live in an expensive place and live a comfortable middle-class life which I really enjoy. I’m pursing FIRE for the freedom it gives me, as I’m lucky and privileged enough to be able to do so.
Over to you
- Would you be able to retire on $1m?
- What approach are you taking to work out your number?
Looking forward to your thoughts and ideas – all are welcome.