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How to work out your own financial independence plan

Hey, let’s have some fun with maths, right guys? Guys? GUYS?1  [Cue stampede for the exits].

Okay, so previously I laid out my plan for becoming financially independent (FI) in ten years. Literally ‘some’ people said it would be useful to fill in that sketch with numbers, so let’s do it.

Spin the FI wheel of fortune

It’s not hard to figure out your own plan for financial independence. You only need to know a few figures, and the only one that takes much time to fathom is your required annual income – a.k.a. how much will you need to live on?

Annual income required

1. How much do you live on now? The ideal way to laser this number is by tracking your current monthly expenses on a spreadsheet for a year or so. By that point you’ll have captured most of the annual expenses that parachute into our lives like enemy commandos behind the lines.

If that’s all too much of a fag – or a traumatising journey into your own heart of darkness – then try an online budget planner. You’ll rustle up a workable number in no time.

Now for the fun bit. Let’s imagine how that number might look once you no longer answer to The Man.

2. Subtract expenses that will no longer apply. For starters you can gleefully strike out all your work-related costs – commuting, work clothes, professional fees, expensive lunches, the lot.

Also eliminate expenses that won’t apply once you’re FI. Mortgage payments, sprog fees, saving to be FI and the like can all go.

3. Add new lifestyle expenses. Most people find they live on much less once FI but it’s worth considering a range of categories that begin with H: holidays, hobbies, heating, health, and helium (or is that just me?).

The number you’ll be left with is a rough gauge of the net income you’ll need. Obviously it’s not the real number – you’ll only know that once you arrive in the future – but it will do for now.

Also, don’t worry about inflation. Later we’ll use calculators that take inflation into account, so we can keep working in today’s figures. Praise be.

4. Don’t forget tax. As if you would. To turn net income into gross income, just dial up your favourite tax calculator. For sheer simplicity I like iknowtax.com.

Pop in your net income figure as your salary (into the calculator) and you’ll see what you’re left with once your tax bill is chopped off. Play around with the salary figure until you can take home the net income you need. Et voila! The salary figure is the gross income you need to work with.

Remember to cancel out the effect of National Insurance Contributions, as you won’t be paying any if you’re not employed.

Bear in mind that income drawn from an ISA is not subject to income tax, but you do pay tax on pension monies over and above your personal allowance.

5. Subtract other expected income. Expect to have income coming in from elsewhere? Then you won’t need to amass quite as big a mountain of assets to generate your income for you. Obviously these other income sources only count if they can be relied upon, and if they’re on stream by the time you achieve FI.

Common conduits of regular cash include:

  • State Pension
  • Defined Benefit pension
  • State benefits
  • Part-time work
  • Other passive income – trust payments, royalties, and so on.

Still with us? Having dashed through those five steps you’ll have a good enough idea of the gross income you will need to live on from your investments. Once your assets can support that income then you can declare yourself FI.

Cut a ribbon, run a flag up a pole, fire AK-47s into the air – whatever floats your boat.

Your target asset pile

To generate your desired income from your investments, you’ll need to accumulate a large heap of capital. How big should it be?

To find out, all you need do is divide your income by your withdrawal rate.

Your withdrawal rate is the set percentage that you cream off from your hoard as income.

  • If your required annual income = £20,000
  • And your withdrawal rate = 4%
  • Then your target to achieve FI = £20,000/0.04 = £500,000

You’ll need to accumulate £500,000 to earn an annual income of £20,000 at a 4% withdrawal rate in this scenario.

£500,000 = Financial independence in this scenario

I need to write a post or three on withdrawal rates. A few things to know:

  • The withdrawal rate is the amount you take in year one of your financial independence. You adjust your income in line with inflation every year after that.
  • If you withdraw too much then you’ll shrink your hoard faster than it can replenish itself with interest, dividends, and capital gains. Live like Tamara Ecclestone for a few years and you’ll be running on empty with bills to pay.
  • 4% is a financial industry standard for a safe withdrawal rate. According to widely accepted practice, you can set your withdrawal rate at 4% a year and have very little chance of ever running down your entire hoard to zero.
  • What’s less well known is that the 4% rule was derived from a specific set of assumptions that applied largely to the US, and to retirements lasting 30 years or less.
  • 3% is emerging as a far safer yet still achievable withdrawal rate, although research is ongoing. Rummage through Professor Wade Pfau’s blog for more.

Savings rate

Hitting your target comes down to how much you can save and the returns you earn on your investments.

Your savings rate is absolutely critical. This is the master string that makes the rest of your financial puppet dance.

It doesn’t matter how big your salary is or how much you live on, your savings rate dictates how long you will spend working. The following table – sampled from Mr Money Mustache’s excellent post that underlines this point in red pen – shows you how quickly you can go from zero to ‘cheerio’2:

Savings rate Years to FI
85% 4
75% 7
50% 17
20% 37
10% 51

It’s a beautiful relationship. If you can save more now, then you have proved you can live on less, which means your income target is smaller and you will reach it sooner.

So what’s your savings rate?

For the purposes of our calculation, we’re interested in the actual amount you can tuck away monthly.

You probably know this number already, but just to make sure you’re getting as full a figure as possible:

  • Take your annual net income
  • Subtract your annual expenses
  • Add all your other income streams including rentals and bank interest
  • Add pension contributions and employer matches if pensions are a factor in your plan. Gross them up to account for tax relief.
  • Don’t add investment income and gains. These are accounted for in the return assumptions that follow.

The number you’re left with is how much you should be saving a year. Now take your total savings and perform the following calculation as provided by UK early retirement blogger The Firestarter:

Total Savings3 / ( Total Savings + Expenses ) x 100 = Your savings rate

Once you know your savings rate you know how long it will be until you retire. Ratchet up the rate if you want out quicker.

Picking a return rate

This is the final piece of the puzzle – the return that swells your investments into your own financial life support system.

However you calculate it, this number will be wrong. If I (or anybody else) knew what the market is going to deliver over the next couple of decades then I wouldn’t be writing this blog post. I’d be flicking through What Tropical Island? magazine.

You could just use whatever rate is inserted by default into an online calculator, but be aware that these numbers are usually pretty generous. After all, companies know you’re more likely to use their products if they deliver good news.

A 4% real rate of return4 is a common gambit. That comes from a 5% historical real rate of return for UK equities and 2% for government bonds. It also assumes you’ll plump for a 60:40 equity-bonds portfolio.

Tim Hale – in his superb book Smarter Investing – suggested that you’ve got a 55% chance of doing better than 4% over 20 years in a 60:40 portfolio, and a 70% chance of beating 3%. That was before the credit crunch though. Post-2008, many commentators are predicting a long period of slow growth while low interest rates prevail.

Research commissioned by the FSA suggests a diversified portfolio is more likely to achieve a real return of 3.5% over the next 10 – 15 years5.

Again, even Brian Blessed couldn’t over emphasise what a shot in the dark these numbers are. You also need to dilute to taste. If your portfolio is more like 40:60 equities-bonds then your expected returns rate will be lower. But you can nudge the rate up to historical norms if your time horizon lengthens and your tilt towards equities becomes more daring.

Your best bet is to run a few different scenarios using nightmare and conservative assumptions, especially if your timescale is fewer than 20 years.

I personally wouldn’t run a dream scenario for fear that I’d anchor myself to an unrealistic number. If the future turns out to be a garden of roses then I’ll enjoy that when the time comes!

Don’t get your nominal and real returns mixed up. If your calculator includes an assumption for inflation, then feed in a nominal return that adds that inflation number to your expected real return.

It’s a numbers game

Right, let’s spin the wheel of fortune and see when you’re gonna be FI.

  • Strip out the inflation figure from the calculator if you’re feeding in a real expected return. If you want an inflation guesstimate then 3% p.a. is around the UK average. (That ‘slow growth report’ I mentioned assumes 2.5%.)
  • The lump sum figure is money you already have. It can include the value of any rental property (minus attached mortgage debt), pension assets (if you can access them), savings accounts, and current investments.
  • Don’t include your home, wine cellar, fleet of Vauxhall Corsas and so on.

The result is your answer, in years, to the question: When will I be financially independent?

Don’t like it? Then change something.

Take it steady,

The Accumulator

PS – Here’s the article again in fast forward:

  1. Annual income / Withdrawal rate = FI target
  2. Take FI target
  3. + monthly saving figure
  4. + real return rate assumption
  5. Feed numbers into calculator
  6. = Years until you are FI!
  1. Editor’s note: He means ‘guys’ in the uni-sexual post-Friends era sense. And I won’t let him write ‘gals’ anyway. []
  2. See Mr Money Mustache’s post for the assumptions. []
  3. Include all grossed up savings into pension funds along with employer matches []
  4. The real return is the return you’ll get after stripping out inflation. []
  5. That portfolio is somewhat more aggressive than 60:40 too []
  6. If you don’t know that number then you can safely plump for 0.5% if you’ve got a nicely diversified portfolio of index trackers. []
{ 53 comments… add one }
  • 1 Frugal Sage October 15, 2013, 9:52 am

    The one flaw I see with Mr. Money Moustache’s system, is that it is reliant on you spending the same in the future as you are now.

    I am willing to sacrifice a holiday today. In exchange for the expectation that I can take more when I’m retired. Hence my savings rate is higher today, while my spending in the future will be higher as a result. Thus throwing out the simplistic’ness of the numbers used.

    I don’t recall any mention of a safety net or is that meant to be built into the normal expenses?

    I guess it’s all easy enough to adjust the numbers to take this into account.

  • 2 Frugal Sage October 15, 2013, 10:00 am

    I apologize. It’s poor form to post twice in a thread like this.

    After re-reading my comment, it could easily be taken in a purely negative way. It’s not meant to be a rejection of the initial premise of obtaining FI quicker via a high savings rate. It’s just something else that needs to be taken into consideration when a person applies it to their individual circumstances.

    Any chance of adding ‘edit’ buttons?

  • 3 BeatTheSeasons October 15, 2013, 10:33 am

    Things get a lot more complicated if you still have a mortgage term remaining and/or pension pots you can’t access until age 55.

  • 4 The Rhino October 15, 2013, 12:43 pm

    One thing that I’ve been thinking about is what you should do with respect to your portfolio when you hit FI?

    Its commonly quoted that you might want to have your portfolio consist of 100 – age in terms of % equities.

    But does this assume you are still in an accumulation phase in your 30’s, 40’s, 50’s ?

    What if FI means you are in a distribution phase in your 30’s, 40’s, 50’s ?

    Taking a purely hypothetical situation of someone hitting FI at 35 and moving from an accumulation to distribution phase. Say they had the bog standard portfolio split roughly 60:40 equities/fixed income in a bunch of accumulation type funds. What does hitting FI mean that they should do next?

    Maybe you have to have a change of mindset and think about preserving wealth/purchasing power now that you no longer have a target portfolio size to aim for fuelled by salaries? You would also have to think about the technical details of how you would start drawing an income from that portfolio.

    Does this imply something like selling all your accumulation type funds and buy income type fund equivalents perhaps? Change your asset allocation perhaps, say to something more conservative?

    Should you assume the same risk tolerance as a pensioner as you have effectively retired?

    I’m a little unclear on this specific part of the puzzle and can’t remember reading much on this site or in Hale as to what actions you should take when making the transition and whether age should still be a factor.

  • 5 Snowman October 15, 2013, 1:10 pm

    Crikey. You could be precisely describing my embarrassingly detailed financial spreadsheet in your post. I have negligible earned income these days having majorly downsized.

    My expenditure is calculated by downloading bank statements, and credit card statements and after sorting splitting into categories.

    My expenditure figure is cross-checked by checking how my total savings have decreased or increased year on year after adjusting for income (such as salary) and amounts moved to investments, and taking out the affect of savings interest income. This check can help locate against mistakes or unrealistic expenditure figures. Sometimes it is easier to determine what monthly amount you have left over from net salary after paying bills to save or invest, than it is to add up the corresponding expenditure.

    There is an allowance also in my spreadsheet for one off items like house maintenance, new car etc which may not be represented in yearly expenditure figures.

    Everything is expressed in real terms which makes life easier. If I had to make one suggestion to someone working on a financial independence spreadsheet, it would be do numbers in today’s terms. If you crunch the numbers in absolute terms then it becomes ridiculously messy and prone to error. For example you can guess what state pension you will get in real terms, from a current state pension forecast, but calculating it in absolute terms involves projecting forward with inflation and then you have to project back at some stage also.

    I have an input on the spreadsheet equal to the real return on savings and investments that I can change that tells me how vulnerable I am to not achieving good real returns.

    The other thing I would suggest from experience is to start simple. Over time you can build up your spreadsheet to cover more things.

    Like the FI wheel of fortune by the way, brilliant!!!!

  • 6 ermine October 15, 2013, 1:46 pm

    In exchange for the expectation that I can take more when I’m retired. Hence my savings rate is higher today, while my spending in the future will be higher as a result.

    Maybe not. Holidays are a very different matter for someone retired. You have more time, which dramatically opens some opportunities for you. You may not be subject to school holiday restrictions.

    I’ll be going on my third (out of four) holidays this year in a little while. The pattern is totally different than when I was working. As a worker it was all about max drama and being as different as possible from the working environment. Now I can move towards what I want and not away from what I don’t. It means more, but shorter and less frenetic holidays, which happen to be cheaper than my pre-2009 holidays while working.

    I suspect it’s the time spent on holidays and the serendipity of discovering new things that accumulates the experiences I recall, and not the drama of purchased experiences. But everybody is different and wants different things of holidays. And that probably includes your future retired self as opposed to your current working self.

    People seem to underestimate the savings that derive from having control of your own time. When you can choose the time you will do something, or fit in with somebody else going that way, or get somebody to do work for you that fills in a hole in their schedule rather than has to happen on specific day x, life often gets a lot cheaper.

  • 7 Mr Careful October 15, 2013, 1:47 pm

    Couple of points…..

    I’ve been heading down this path for the last 6 years or so – I have found the most important number to get as right as you can is an honest “expenses” number. Not just what it is now, but look ahead and make allowance for possible changes to circumstance (Really difficult). I have found that by adding 30% onto my annual average expenditure has covered every unexpected or overlooked expense.

    Also, I think a 4% real rate of return is generous – maybe history has shown this as realistic, however, we live in a different world these days – i’m not sure I would feel safe assuming this. (Regardless of what so called “experts” are predicting). Being the ultimate safety freek I am calculating my numbers using a 1% real rate of return (And a 3% Withdrawl Rate).

    Using the above numbers it puts my required savings level into the stratosphere, however, if I pulled the plug with any less I wouldn’t enjoy myself and would constantly worry that I’m going to run out of money.

    I’ve probably put far too much padding & safety into my plan, but that is the beauty of this stuff, it’s a personal journey and you have to make your plan based on you and you alone – just make sure they are informed and intelligently made choices.

    Great Blog – I’ve passively followed this for years and you have been very very instrumental in helping me get to within 6 months of breaking free and becoming FI – Many thanks.

  • 8 vanguardfan October 15, 2013, 2:11 pm

    Thanks TA – great post as always, if a bit of a whistle stop tour! The tax calculator – worth mentioning that if you live with a partner, you need to put in half your projected total household income or you will end up with an overestimate of tax take and required gross income (assuming you are able to set up income so that it is about 50/50, which is the most tax efficient).
    I think safety margins are also worth discussing. My problem with all of this is that I can know with reasonably certainty what I need/want to live on today. Fast forward 30 years, and its really anyone’s guess. (just think back 30 years – no mobile phones, internet, computers…) some of the most important uncertainties, if contemplating a long period living off unearned income, are around the price of energy and food, and health and personal care. And of course investment returns and tax regimes. Ultimately its a leap of faith! The ability to be flexible and adaptable is key – thats a lot easier when you are relatively young and healthy, and also without dependants.

  • 9 Juan October 15, 2013, 2:21 pm

    If you withdraw a 4% of your portfolio each year as a matter of fact you would never run out of money, would you? But that 4% could end up becoming smaller and smaller.
    I assume the 4% is an aproximation, since it might be inconvenient to adapt our annual expenses to the volatility of our portfolio (even if the stocks’ part is small). The logical thing to do would be to withdraw a fixed amount each year (inflation adjusted) whatever the size of our portfolio that particular year.

    There is an interesting chapter about this topic in Bernstein’s “The Four Pillars of Investing”.
    If I don’t remember wrong, he says that a withdrawal rate of 4% gives you 90% chances of not running out of money, being the worst scenario a bear market in the first years of retirement.

    Then, a final remark: this planning is made with the typical stock-bonds portfolio we know.
    But at retirement time we particularly seek safety and fear financial ups-and-downs. So, wouldn’t be also a good option to switch at the end to something in the line of Browne’s Permanent Portfolio, which aims precisely at stability?

  • 10 Juan October 15, 2013, 2:31 pm

    @The Rhino

    Yes, my last remark suggests a possible answer to your question

  • 11 Neverland October 15, 2013, 4:18 pm

    I really hope this blog isn’t going to turn into an English version of Money Mustache, the Jim Jones of personal finance blogging

    I work with spread sheets for a living and the marvellous thing about them is that they give you a very precise view of the outcome from one set of parameters which are very unlikely to actually take place

    An inability to appreciate that simple fact led to a lot of the world’s leading banks having to be bailed out by taxpayers

    The same could happen with your personal balance sheet if you rely on them blindly

    Its better to have a plan than no plan however

    Before you embark on a dramatic course course of action I would suggest you need to do a lot of contingency modelling around stress testing your parameters, including:

    – bond and equity market crashes
    – high inflation
    – unexpected large expenses
    – reduced availability of state pensions/medical cover

    In 1980, when government bonds yielded double figures and inflation had peaked at 27% in the previous decade, no one could imagine the financial conditions that exist now, but that 33 year window is well within the time period you are trying to assess when drawing up “Financial Independence” plans for your 40-50s

  • 12 Georgina October 15, 2013, 5:35 pm

    Thank you very much for inspiration along the way. Target reached today. I am debt free and I intend to remain so. Inshallah.

  • 13 George October 15, 2013, 8:36 pm

    > Also, I think a 4% real rate of return is generous

    I’ve been averaging 20% annual returns since 2007 (yes, pre-crash), so to me, 4% real feels nicely conservative. It’s all in one’s perspective.

  • 14 The Accumulator October 15, 2013, 10:03 pm

    @ Mr Frugal – Most of the anecdotal evidence suggests that people generally spend less once they hit FI and still end up earning despite themselves, I guess it’s a question of how long you’re prepared to wait for the lifestyle you want. You’re right to think about a safety net and of course you can plan that in. One thing I didn’t go into is finessing things like withdrawal rates. I should think I’ll be able to withdraw at a higher rate than 3 or 4% for the first 12 years because after that our State Pensions will turn up, provide a fair whack of our income and take a load off our capital. You could annuitise too, if you’re old enough, to achieve a higher withdrawal rate.

    @ Rhino – I think you can safely cast aside rules of thumb if you’ve hit FI in your 30s. The conventions won’t apply to you. There are many different ways to handle the distribution phase. The studies I’ve read on withdrawal generally assume portfolios at the 50% equity level even in ‘retirement’. If you’ve knocked your targets for six though, you could definitely pull back on risky assets.

    There is fascinating new work being done by Professor Wade Pfau however that suggests you should reduce your equity level in the period before and after you retire, perhaps down to 20%. Then allow it to glide back up at around 1% a year. The theory is that you are most vulnerable to a sequence of returns risk around the time of retirement, so you reduce risk at that time. As you grow older then you can increase your exposure again. If equities rise then fall then the rise you experienced earlier in your retirement should cushion you from the later fall. If they fall then rise, then your exposure is reduced during the bad times and you’ll benefit from a rising market later. If the market does nothing but rise then you’re blessed and if it does nothing but ball then we’re all doomed anyway. Having said all that, Pfau’s research doesn’t have sprightly 30-something retirees in mind.

    @ Snowman – Good to hear from you. What categories do you have for one-offs and how much do you set aside?

    @ Mr Careful – Love the name. The longer you track your expenses the more realistic they’re likely to be. I’ve been tracking mine for 5 years and am reasonably confident in them. You can also set aside a monthly amount to cover expenses like buying a new car as Snowman does, and a chunky reserve helps too. I do hope your 1% scenario doesn’t come to pass or I’ll never get there.

    Which brings me to another point. I think there’s a danger of being so pessimistic about the future that you decide it’s futile to even bother. Adding 30% to my income and a 1% withdrawal rate would set the bar too high for me. I’m all for realism but let’s not make it too gritty 😉 How high is your savings rate if you don’t mind me asking?

    Finally, congratulations on being within touching distance of your goal. Sounds like an incredible journey given the standard you’ve set. I’m proud to have helped in some small way.

    @ Vanguardfan – Good point about the tax. Agree 100% with your other comments. It’s a step into the unknown but it’s a leap we’ll all have to make at some point. I mostly hope I’ll be able to resist the desire to buy mind-reading pills or whatever’s all the rage in 2025. Or that productivity gains in other areas will offset the cost. Food-wise I’ve got plenty of scope to grow my own or shop more seasonally and am planning home improvements to reduce energy consumption. As for health… um, ride my bike, eat spinach, cross my fingers 😉

    @ Juan – You definitely can run out of money at 4%. That 90% rate of success you quote is only good for 30 years and using US historic rates of return that have not been replicated across much of the rest of the developed world. The UK ‘safe’ withdrawal rate equivalent was 3.77% or thereabouts, 3.59% for the Swiss, 1.25% for the French and worse if you lost WW2. Those rates also assumed no portfolio costs and taxes. In short they’re very misleading numbers because they’re definitely not safe. I read a later book by Bernstein in which he said that 4% was an OK figure, but 3% is far more comfortable.

    @ Neverland – That sounds like the perfect recipe for never making a start.

    @ Georgina – Congratulations!

  • 15 The Rhino October 15, 2013, 10:29 pm


    maybe an article beckons on what to do when one pops out on ‘the other side’, perhaps a guest article from someone who’s made it there already!

  • 16 SemiPassive October 15, 2013, 10:38 pm

    Thanks for another thoroughly detailed post Accumulator which touches on quite a few points bought up previously. Much appreciated.
    I’m not terribly mustachian at present, and don’t do budget spreadsheets, I would probably fail the Latte Factor and I don’t make my own soup out of moss from the garden or anything like that.
    As such it will probably take longer to achieve FI, added to which the end game is not just FI but living somewhere nice so you don’t have to pay to go on holiday to “escape” all the time. This is something my retired folks have mentioned before.
    I also have a tiered set of FI-related goals (mortgage clearance, your bare minimum stash size in various assets, date you can consider shifting from working 12 months a year to 6 months or less, and so on) rather than one single date which is too far ahead and too uncertain to focus on alone.
    But whatever motivates you best works, whether its waiting for a single big bang date to kick The Man in the crown jewels, or a gradual build up of goading him by flicking the Vs and prodding him in the ribs before the final KO of full FI.
    Apologies for childishness. But you have to visualise The Enemy sometimes.

  • 17 dearieme October 15, 2013, 11:02 pm

    “living somewhere nice so you don’t have to pay to go on holiday to “escape” all the time.” In my view there are plenty of “somewhere nice”s in the UK and France that require escape only for a week or two of sun in January – when it’s cheap. I know a very nice somewhere in NZ but I’m not going to mention it in case I drive up the prices.

  • 18 BritinKiwi October 16, 2013, 9:48 am

    @dierime – I can recommend Nelson and Golden Bay and summer is coming in the Southern hemisphere!

    @Monevator – not a criticism but at this moment in time I’ve no idea what my expenses are as I’m trying to live life to the full whilst still working full time having a reasonable final salary pension and having some savings. Before we moved here (NZ) I was on track for FI in 8 years – now I’m not so sure. Everyone is different and I’ve chosen to enjoy life a little more whilst I still can in my mid 50’s.

    As ever – love the blog and keep it up!

  • 19 Mr Careful October 16, 2013, 11:20 am


    As mentioned – I am obviously being extremely cautious, plus I take no account of any potential future earnings (part time or any sideline stuff) I would be suprised if my pessimistic outlook is realised. My savings rate is somewhere around 85% at the moment, however, with a good run of dividend income this could end up around 90% this year. I don’t consider myself frugal, I just make sure I get value for money on what I want, I don’t buy crap and get the best deal I can on fixed expenses. My main goal is trying to get to a point where my dividends / investment income covers all my outgoings plus a 30% buffer – I don’t want to touch the capital sum ever.

    I think what most people are searching for when they seek FI is to break from a rut, but are scared of what happens next, thus, having enough money coming in “for the rest of your life” is a lifestyle safety net. I think the reality is that most people who make the jump from the rat race move onto opportunities that they could never imagine before, thus the need for FI becomes somewhat less of an issue. I for one do not imagine doing nothing for the rest of my days but I don’t actually know what opportunity awaits……..So, I have a crazy over the top plan to compensate for my fear of this unknown. Actually reading @ermine’s blog over at simple living in Suffolk is very interesting and reassuring in trying to get your head around making the jump. Plus, when it comes to a rant – this man sets the gold standard.

  • 20 WestCountryEscapee October 16, 2013, 1:52 pm

    “…living somewhere nice so you don’t have to pay to go on holiday to ‘escape’ all the time.”

    SemiPassive, Dearime and BritinKiwi – we moved to Devon for this reason and I hope to expound upon this on my own blog. As well as the feeling of ‘being on holiday all the time’ things do seem a lot cheaper and there are fewer temptations for spending money.

    We’re heading to Dunedin next month on holiday and New Zealand is tempting, especially for remote working where there is no requirement to visit a UK office…

  • 21 dearieme October 16, 2013, 1:54 pm

    @BritinKiwi: ah, sod it, the news is out.

  • 22 peas & gravy,Davy October 16, 2013, 3:01 pm

    I will be mortgage free,next year,property 100k +

    As I’m single,self employed,have no pension or savings being 50+(Now I’m panicking about 0ld age,retirement)

    I will be using the full isa allowance,once mortgage is paid

    52% of wage


    cash isa—health probs &unknowns for immediate safety
    stock/shares–vanguard lifestyle

    I’m playing safe,as losses would hurt more than potential returns

    thx–TA—great blog

  • 23 The Accumulator October 16, 2013, 8:21 pm

    @ Semipassive – Love that. Brilliantly put.

    @ Rhino – Like that idea. Although as mentioned by Mr Careful, Ermine has recently made the leap and blogs about the experience at Simple Living in Suffolk.

    @ Mr Careful – that’s a phenomenal savings rate. You are truly an expense-chopping, frugal ninja. I agree 100% about the scary ineffability of the ‘what happens next’ question. I’m starting to map that out in my mind, but am encouraged by those beckoning us from the other side who are clearly loving life. Indeed, I spoke to a retiree recently (of a more conventional age) who told me: “It’s amazing, it’s like being on holiday all the time.”

    @ all – best wishes to all on their personal journeys, including those who counsel caution or are taking other paths. I get it, I really do, and it’s vital to have some counter-balancing opinions. Really enjoying this thread.

  • 24 Valkyrie October 16, 2013, 9:14 pm

    I am aware of the general advice that one should reduce the % equities in a portfolio when approaching retirement. The problem is that ‘retirement’ isn’t what it used to be: far more people now retire early and use drawdown rather than buy annuities. We ourselves are just about to enter ‘decumulation’. We have some other income from bits and pieces of final salary pension schemes, and will have state pensions eventually, but right now we need to start taking an income from a lump sum invested in S&S. For us – with 35+ years of ‘retirement’ ahead – I think the investments need to grow faster than the usual ‘cautious’ retirement portfolios would do. It’s almost as if we need to adopt a similar plan to that of a working person with many years to go before retirement.

    If the new recommendation is to take just 3% or 3.5% as income from a portfolio then why not be done with it and buy an annuity?

    I echo previous ideas that more articles for people in our situation would be helpful, but I enjoy all your articles anyway. Many thanks!

  • 25 Lesley October 16, 2013, 10:15 pm

    New to the site and wanted to start by thanking you for the thought provoking articles, starting to prepare for my FI journey so the advice and discussions are invaluable.

    One question on the scenario above do you take £20k plus increase for inflation each year irrespective of your funds performances each year or do you take 4% plus inflation of the size of the pot that is left? Assuming it must be the first scenario otherwise your income would drop if the equity Market was badly hit

  • 26 Valkyrie October 17, 2013, 11:53 am

    Just coming back on Lesley’s comment:

    I’ve seen a number of different strategies suggested for taking income. How about just taking 4% of the total fund value on each yearly anniversary – never mind about computing an increase for inflation?

    You might want a buffer fund in savings so that in a ‘bad’ year you could forego or reduce the amount you took in income from the invested funds. But taking 4% of actual should allow your income, in general, to increase year by year assuming normal stock market trends.

    This will, of course, mean that you never exhaust your fund: it would be mathematically impossible to do so. That in itself might be a problem for those of us who wish to ‘decumulate’ and have no wish to leave money for others to inherit.

    Any other ideas?

  • 27 The Investor October 17, 2013, 12:37 pm

    Any other ideas?

    Yes, a related one, which is to live off income: http://monevator.com/how-to-live-off-investment-income/

    A lot of the withdrawal literature and strategies ultimately emanate from the US, where there is a tradition of lower yields in the past five or six decades from stocks, and bonds and cash for that matter, too. Hence they have spent a lot of time trying to figure out how much they can safely withdraw without running out of money.

    I am aiming reach the point where I can live off investment income entirely, by being in a position to get enough investment income to replace my salary.

    Efficient market theories say returns from capital and dividends are interchangeable but (a) I don’t fully believe them (b) turning capital into income has costs (c) it exposes you more to sequence of return risks, IMHO. (There is still some with investment income, remember — dividends be cut, rates can fall etc).

    The big problem with the strategy is you need more money, because it assumes you don’t run down your capital. And in practical terms, as you suggest, unless you’re planning to leave a legacy (in which case it’s extra attractive not to spend capital) if you had the bigger pot required to live off income you’d also have a big surplus in capital that you could instead just keep in cash to smooth spending your capital. So there’s probably some cognitive illusions going into the mix.

    But it’s what I’ll probably do, anyway. 🙂

  • 28 vanguardfan October 17, 2013, 12:55 pm

    I think withdrawal strategies are an important and neglected issue. I have noticed that many UK private investors adopt a ‘withdraw the income’ strategy. I think this has pros and cons. I think the main advantage is psychological – by restricting withdrawal to income, you are inhibiting yourself from making unsustainably high withdrawals, and to some extent building in adaptability to market conditions. You’re effectively going to end up with something like 3-4% anyway.
    However, I think there is also an important downside – which is that it could induce people to take higher than average risks, in order to obtain a higher than market average yield.
    So, I guess I agree with TI, that this method is a bit of a ‘cognitive illusion’ – but perhaps that is no bad thing, given that behavioural psychology seems to the main source of risk to private investors trying to live off investments.

  • 29 Valkyrie October 17, 2013, 2:17 pm

    I presume you are familiar with FireCalc?

    This retirement spending modelling software is based on historic stock market data, so obvious warnings apply…. But just used as no more than an illustration it is interesting:

    If I choose to take 4% of the portfolio value each year as income (no adjustments for inflation) then the fund never falls to zero (I modelled it for 40 years) and the upper and lower final values (after 40 years) fall within ‘reasonable’ limits.

    If I model it based on 4% of initial value, adjusted annually for inflation at 3%, then there is an 8% ‘chance’ of running out of money before the 40 years are up, and the spread of possible final portfolio values is enormous: something like minus 150k to plus 2.5 million!

    Of course, finding the line on the graph that corresponds with our future situation is impossible!

  • 30 HHRT October 17, 2013, 2:55 pm

    great article, as always.

    could you explain what you mean by this:
    “I really hope this blog isn’t going to turn into an English version of Money Mustache, the Jim Jones of personal finance blogging”
    i’m a big MMM fan, so i am keen to understand what you’re trying to say here. a quick google search reveals that jim jones was a cult leader leading to a mass suicice of its memebers?!

  • 31 vanguardfan October 17, 2013, 4:48 pm

    I’ve looked at FireCalc. Worth pointing out that not only is it historic data, it is US data – I think Wade Pfau did a study looking at other countries, and all had lower returns than the US.
    I think it also gives an option to simulate whatever returns/volatility you wish, which is useful, but I have no idea what would be realistic numbers for the UK going forward from now.
    Also agree that the range of projected outcomes is so wide as to be somewhat unhelpful. and of course it doesn’t take into account adaptation to poor returns, which surely everyone would do rather than run out of money.

  • 32 The Accumulator October 17, 2013, 5:33 pm

    @ Valkyrie – here’s a piece on possible strategies for the retirement phase of life, including using annuities: http://monevator.com/secure-retirement-income/

    Most of the research on safe withdrawal rates assumes 50:50 equity:bond portfolios, so possibly a higher equity allocation than many people are expecting. But the more capital you’ve stashed away, the less need you have for a high equity allocation.

    @ Lesley – yes, you’re right, the safe withdrawal rate theory assumes that you always draw your required income plus an inflation adjusted top-up. So if you had 500,000 accumulated and the safe withdrawal rate really was 4% then you should be able to withdraw 20K (adjusted for inflation) every year, regardless of stock market performance and never run out of money.

    If you only plan on living for 30 years, don’t pay taxes, don’t pay investment costs, have a 50:50 portfolio and enjoy historical US investment returns. The point of the rate is that it’s a worse case scenario. Many retirees would have been able to withdraw more and not come a cropper.

    But the rate only applies to the conditions outlined above and the UK can’t match them – 3.77% for us. The saving grace is that if you started to run into trouble then you could always adjust your spending down and avoid running your portfolio into the ground.

  • 33 living cheap in London October 18, 2013, 7:46 am

    For me the hardest number to settle on is the income required for FI…. I have a wife, 2 young kids (5 & 3) & next year i’m 40. It’s a very elastic number full of “what ifs” that one!

    If I was just running numbers as a single person, or even as a married couple with no kids it would be a lot easier. As it stands it just feels like a best guess of the most conservative kind…. that whole “bank of mum & dad” being a challenge.

  • 34 Jim October 19, 2013, 10:02 am

    Great article, but it always strikes me that this whole subject is more about philosophy than maths. What are you all saving for? Not working for The Man? Jack in the job then, and sign on.

  • 35 BeatTheSeasons October 19, 2013, 10:14 am

    Jobseekers Allowance isn’t financial independence.

  • 36 peas & gravy,Davy October 19, 2013, 1:46 pm

    saving for security,I don’t trust the government

    liked the job seekers allowance reply (:>)

  • 37 The Accumulator October 19, 2013, 2:29 pm

    @ Jim – I don’t expect anyone else to pay for my philosophy. It’s not that FIers are unable or unwilling to work. Most people who make financial independence continue to work, whether they are paid or not. Ultimately it’s a quest for freedom. Freedom to live life on your own terms. To spend your time and energy on the things that you really want to do, not the things you have to do. To find out what you can make of yourself and the world around you when you have the time to develop new skills and interests, instead of dancing to someone else’s tune.

  • 38 theFIREstarter February 21, 2014, 9:10 am

    Hate to be pedant but I ran the numbers and found that your explanation of how to calculate savings rate is a teeny bit off the mark

    I’ve gone through it all in detail here:


    But if you want the short version, basically you need to ignore the sentence “Compare it to your gross income to find your savings rate”, and do the following calculation instead:

    S.Rate = Total Savings / ( Total Savings + Expenses ) * 100

    Where total Savings is every single penny that has gone into a savings or retirement account, whether you have saved into a SIPP or any other tax wrapper, including all employer matches, and obviously all taxed accounts as well (as you rightly point out in the article)

    Please let me know if I have gotten the wrong end of the stick though and I will update my post with a sincere and most lengthy of apologies? 🙂


  • 39 The Accumulator February 22, 2014, 5:56 pm

    @ Firestarter – Love your post and thanks very much for the correction. I’m glad someone can do maths! I’ll correct the above article in line with your comment and link to your post. Haven’t come across your blog before but I’ve just been having a root around and I’m enjoying it a great deal. Agree about living on 10K per year.

  • 40 theFIREstarter February 23, 2014, 8:02 pm

    Glad I could be of help, and that you are enjoying the blog!
    Your website and articles have helped me immensely over the last year in learning about investing, so anything I can do to help you guys back then I’ll try. Cheers again!

  • 41 Andrew Porter July 28, 2016, 4:52 pm

    What problem would there be with staying in 100% equities if you intend to leave the money in there forever and only withdraw your 3-4% or if the stock market crashes then perhaps going down to a 2% withdrawal rate / getting a little part time work /having a investment property on the side / living in India for a year?

    I’ve been looking into this and know what our expenses are as a couple but planning to have a couple of kids so it’s difficult to calculate how much extra expenses will be. We need to work out our FIRE number to cover short term expenses while they are young and then when expenses drop when they leave home. On top of which is dividing your investments between ISAs and Pensions and when you can take each one Extra sums…….but work the extra effort if it pays off!

    Cheers for the great articles!


  • 42 The Accumulator August 9, 2016, 6:23 pm

    Andrew, there’s no problem with staying 100% in equities, except:

    Very few people can handle watching 50% or more wiped off the value of their portfolio in a very short space of time. They panic and sell out at the worst possible time. You have to be very sure you won’t do the same and you can only really say that if you’ve been through it and didn’t meltdown.

    If you want to drawdown 3 – 4% from equities then there’s a very good chance you’ll be spending capital as well as dividends. William Bernstein recommends stress-testing your plan against a 50% cut in dividends during severe crashes. If you have the flexibility to only live from dividends and you can tolerate such a volatile portfolio then you are likely to be OK.

  • 43 Nadia July 30, 2017, 6:01 pm


    Thank you for this post. Put together a neat spreadsheet for myself this weekend based on it.

    Just wanting to double check something: For point 4, if all of my income is from ISAs or from investments (and not pensions), then the only tax I need to worry about is Capital Gains, right?

    Thank you,


  • 44 The Accumulator July 31, 2017, 11:38 am

    Hi Nada, your ISAs aren’t liable to capital gains tax either. If you have investments outside of tax shelters then capital gains tax is in play (beyond your personal allowance) as is tax on dividends and interest.

  • 45 Nadia Odunayo July 31, 2017, 1:02 pm

    Hi. Thanks for the quick response.

    Yes, I know there is no tax on money I draw from my ISA. The reason I mentioned it is to give an overall summary of where my investments sit.

    So I was trying to ask: given that my money is only in ISAs or non tax sheltered index funds, do I only need to account for CGT? Or are there other taxes I need to think about?

    So, if I take out some money from my non-ISA account, will that be applicable only to CGT, or is there a dividend tax applicable too?

    Thank you!

  • 46 The Accumulator July 31, 2017, 2:02 pm

    Dividend tax is applicable to your non tax sheltered equity funds – beyond your personal allowance.

    Income tax applicable to your non tax sheltered bond funds.

  • 47 Nadia July 31, 2017, 2:13 pm

    Thank you!

  • 48 Kwakil March 1, 2019, 12:03 am

    To anybody reading this post, and considering the many variables around financial independence and or early retirement then I would strongly recommend reading “Living of your money” by Michael McLung. You need to be reasonably financially literate to read it, and it does require some concentrated study. Its an extremely thorough evidence based study of how to safely use your money in retirement examining a number of different investment and withdrawal approaches. Its the most *useful* book that I have ever read because it has given me the freedom to retire at an age when I would not have thought it possible with a very high degree of confidence that I am not going to run out of money. The only real criticism I have of the book is that (a) it has a US bias (but backtests against world markets such as Japan and UK) and (b) almost completely ignores all taxation issues such as tax sheltered vs non tax sheltered investments. But its still very much worth reading. (It is also a sort of follow up to Smarter Investing by Tim Hale, and I’d recommend that reading that first for anybody still accumulating).

  • 49 The Investor March 1, 2019, 9:21 am

    @Kwakil — Indeed. 🙂 And reviewed here for anyone who wants to know more:


    Also, here’s more on Hale:


  • 50 John Q November 13, 2019, 3:41 am

    This is great info
    Does the above calculation in regards to saving rate apply to those on a defined benefits pension? I work in the NHS and our new 2015 Pension links our pension age to state pension age, therefore I cant take my pension without heavy actuarial reduction until 68. The NHS contribution is 20 percent which sounds amazing but I guess it does not go into a pot of money that gets invested, it goes towards buying a guaranteed annuity which I can’t access without penalty until 68. Does that mean there is no point adding my pension and nhs contribution to my total as it doesnt reflect how much money I will actually have?
    Thanks in advance

  • 51 The Accumulator November 16, 2019, 3:58 pm

    Hey John – you’re right. You can subtract your defined benefit from the sum of money you’ll need at age 68 but at first blush it doesn’t do you any good before then. Except, knowing that cash flow reduces the burden on your investments eventually does mean that you could draw down from your pot at a higher SWR earlier in life. For example, if you need £30,000 in income from age 55-68 but only £15,000 from age 68 (due to defined benefit and state pension) then you’re asking much less of your investments than if you needed them to provide £30,000 for the rest of your life.
    To gauge this with confidence – you’d need to model the cash flows on a spreadsheet. Or, if you prefer a baggier approach, you can feel more sanguine about adopting, say, an SWR of 4% rather than 3%, because you know that your pensions will reduce your reliance on your pot to about 2% when you hit age 68. I’m making the numbers up, but you get the idea.
    Or, if your pensions match/exceed your likely later life expenses then you could use a much higher SWR for your investments knowing they only have to provide for 10 or 20 years or so.
    There’s lots of moving parts there but that sketches out the ground.

  • 52 Charles Fox August 31, 2021, 10:28 am

    Further analysis -> 1871 to 2020 US Data Inflation adjusted 40 year returns, 100% stocks – 4% rule is around ~90-93% successful, and the 75/25 a few percent below ~88% ish.

    Conversely – risk-parity portfolio – reducing volatility/drawndowns by negatively correlated assets – show historical improvements to safe (don’t un out) and perpetual (never reduced inflation adjusted initial capital) – withdrawal rates to ~5-6.3%
    Note – currency / funds / home bias can be updated and reflects a ~1.3% lower situation as a UK Focused investor in GBP.

    N.B -> live dangerously… “Your money or your life” -> I feel there are ways to make pulling the trigger earlier – a sensible “safe” choice.

  • 53 The Accumulator August 31, 2021, 12:23 pm

    @ Charles – thank you for the links. Hopefully you’re aware of the built in bias towards the Golden Butterfly portfolio on Portfolio Charts?

    Most of Portfolio Charts data begins circa 1971. Just as gold begins an astounding run-up after it becomes legal for US citizens to own it again. And after the Nixon ends the dollars convertibility to gold. That’s a historical one-off that precipitated a regime change for gold.

    The golden butterfly benefits from that, the bond bull run that begins in the early 80s and the tilt to small cap value which is extremely difficult to replicate in the UK.

    I do think the golden butterfly provides valuable insights into the power of diversification but I wouldn’t assume it can provide that much of an SWR boost into the future. What you’re seeing is the product of data mining.

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