When I started looking after my own money and began to invest things moved very slowly. There were no FIRE blogs, or even FIRE books that I was aware of. I didn’t know that FIRE meant financial independence retire early. My inclination was to save and invest as I began to earn money, but I had no long-term plan or target. With no internet back in the 1980’s my research was limited to the money sections of the newspapers. Looking back on things now I can see that it took me the first six years to accumulate the first 1% of the portfolio I had after the full thirty years of my working life.
My progress to date since I began investing in equities is illustrated in the graph on the top right of the sidebar, i.e., 1985 to 2020. Beginning a couple of years earlier the table and graph below shows some key points in the progress of my portfolio as I reached 1%, 5%, 10%, 25%, 50% and 100% of the endpoint in 2013.
| Years | Portfolio % |
|---|---|
| 6 | 1.08 |
| 10 | 6.66 |
| 14 | 11.49 |
| 21 | 25.73 |
| 27 | 56.16 |
| 30 | 100.00 |
(Portfolio % is the portfolio value at year 6, etc, as a percentage of the portfolio value at 31 December 2013.)
In that same six years I earned nearly 6% of my total career work earnings after-tax and spent nearly 9% of my work years spend. I saved less than 2% of what I would save and had benefited from less than 1% of my eventual investment growth.
| Year | Portfolio % | Earnings % | Spending % | Savings % | Growth % |
|---|---|---|---|---|---|
| 0 | 0.26 | 0.00 | 0.00 | 0.64 | 0.00 |
| 1 | 0.13 | 0.32 | 1.29 | 0.31 | 0.00 |
| 2 | 0.13 | 1.06 | 2.36 | 0.33 | 0.00 |
| 3 | 0.27 | 1.89 | 3.43 | 0.65 | 0.02 |
| 4 | 0.50 | 2.91 | 4.92 | 1.13 | 0.07 |
| 5 | 0.65 | 4.22 | 6.65 | 1.30 | 0.21 |
| 6 | 1.08 | 5.88 | 8.67 | 1.72 | 0.63 |
| 30 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
(Earnings %, Spending %, Savings % and Growth % are the cumulative values at year 1, etc, as a percentage of the cumulative values as at 31 December 2013.)
The thirty years included six years when the portfolio value went down, and twenty-four when it went up. Those first six years included five of the seven years showing the lowest increases in value. Incremental gains in those individual years were all less than 0.43% of that endpoint in 2013. Not knowing of the advances to be made later I was not disheartened at my then progress. I had the most I had ever had, at that point in time.
Spending
I maintained a modest and cautious lifestyle for the most part in those years. In many ways it was quite a boring time for me. In earlier years as a student, I had learned to live within the limits of my student grant and had graduated with no debts. In these early years of working, I continued to live within my means and never incurred consumer debt. Credit cards could be used but were paid off in full each month. I maintained cash book records of my financial position so I knew where I stood. Spending less than I earned was my key target here. These were useful habits to see me through the full thirty years and beyond. I was less cautious when it came to buying my own home. In the first year I plunged into the property market and bought a new build studio flat. This is reflected in the portfolio falling in year one as cash was spent and being static in year two as I was unable to save much. I was fortunate to have had help from my parents who provided some of my deposit money. I could and would have gone ahead without that but would have had to borrow more.
Saving
This graph shows my starting point and my savings in each of the next six years. The first year sees me spending about half of my savings as I buy my flat. I am able to save something in each of the following five years. I had only 1.72% of my eventual savings at this point.
Investing
In the third year I was beginning to save money more easily and began to invest in equities (company shares) using unit trusts that were advertised in the money sections of the newspapers. I invested just in time to make some gains ahead of the 1987 stock market crash when I lost one third of the value of my investments in two days. This was just a few days before I was due to move from my studio flat to a bigger two-bedroom flat. Fortunately, I had recently sold some investments to help cover some of the expenses involved in a property move. I didn’t need to raise any more cash so I could hold onto my investments until they recovered. I ended 1987 having made a small gain on my shares. It was useful to learn about investing from my own experiences and without too much skin in the game. As yet I had insufficient money invested to either enjoy big gains or incur big losses in £ amounts.
Earning
During these years I was trying to establish my career and make some progress in my work and my earnings. It seemed like there was slow progress at first. The first year has only a half year of working. In my first three years I earned less than 1% of my career earnings in each year and less than 2% in total. Then my earnings rose from this low base by over 20% in each of the next three years as my qualifications, experience and responsibilities increased. After six years I had more than doubled my earnings and was hopeful of continued progression. Earning close to average earnings in my first job but being able to double that in my twenties gave me a good opportunity to save and invest more. I had only 5.88% of my total career work earnings after-tax at this point.
Conclusion
I think now that those first six years taken to get to the first 1% laid the foundations for what was to follow. I had enjoyed rising earnings and had maintained cautious spending habits. I had no consumer debt, a reasonable level of mortgage debt, and was building up equity in my flat. Property price gains over five years at that time would have given me a 50% stake in my flat (although that was about to change for the worse). I was building up my investments in unit trusts and also held some of the privatisation share issues. I felt that as my income rose, I would spend more, but I would also be able to save and invest more. I was shortly to begin to think of having enough investments and savings to be able to live for a year without earning or to pay off a part of the mortgage. I wasn’t anywhere near thinking about financial independence or retiring early. I was still in my twenties and those ideas were unknown to me back then.
I like to think that my story is relevant to others. If you have only a small amount in your portfolio, that could still be a good starting point, if it can be a foundation that you can build on, especially if you have time and future prospects on your side. If your earnings rise more than your spending does and you invest your savings in equities, accepting the risks, then your portfolio can begin to enjoy compound growth. You may also have built up a foundation of habits connected to earning, spending, saving and investing that will equip you well for the journey ahead.
Fascinating.
My records are pretty hazy for the earliest years of my working life. However, it was about seven years after I started working that I first acquired any equities. These were mostly SAYE share options. Ten years later I had around 10% of the Pot I finally pulled the plug with. So, at approximately the half-way point in time I had about 10% of the necessary means. This looks remarkably similar to your experience. I suspect this might just be a thing. What do you reckon?
Thanks for sharing your experience. Like you I suspect others will have a similar experience of it taking a long time to make a little progress before things speed up. Maybe others can also share their experience in the comments.
Re: “Maybe others can ….” that would be good to see.
Our ‘sprints to the finish line’ are not entirely dissimilar either!
I will cover that final sprint in a future post, but markets were helpful!
I can also relate pretty closely with this post. Having commenced work in the mid-80’s, after 15 years of constant working away at the coal face and squirrelling away almost as much as could manage, i too had accumulated about 10% of my ultimate 30 year number.
It’s somewhat reassuring to hear that after all of the investment mistakes that i undoubtedly made along the way, i probably ended up going round this financial course in a very creditable level par. Unlike the actual golf game regrettably!
Thanks for commenting. That makes three of us with financial journeys that are a bit similar.
I have a real minimilist lifestyle and nearly 18 years worth of expenses in CASH savings after 10 years working… I know this is a terrible situation to be in at ~0.8% interest only and possible material inflation, but I fear that buying equities now at the top of the markets is a stupid idea.
I have never been a huge earner in the 10 years I have been working, but do now save about 4 years of (minimalist) expenses each year which means I can get to the 25 times expenses limit even with just cash fairly soon. I have been too scared to buy equities, and as covid hit – a somewhat optimal time to invest – I lost my job, which was fine and I moved on at only a minimal pay hit, but it put me off dumping huge cash amounts into stocks as I felt insecure given the covid impact on my career. I know the sensible idea is to just bite the bullet and go into a world index with some of the funds, but outside my tax free options (like work pensions and government tax protected accounts), I have no equities. My route into all-cash is because of my background and no knowledge or trust/training in the stock market so I had no guide growing up as my family and friends were not wealthy. I know it is/was a mistake now that I have gained more understanding but it is very interesting to note that I enjoyed the safety buffer I had when I lost my job that I wouldn’t have had if I lost my job at the same time the markets were tumbling and I was mostly in equities.
It is interesting seeing how your early years went. I never will have a super high income as I am a worrier, so happy just doing an above average, decent paid job. My financial journey has been a boring one. Since discovering lite-FIRE (or bargain basement FIRE to cover the minimum expenses), that has been my simple aim. The corporate world is a terrible place for people like me that just want to do a good job and go home – I view money as a necessary evil. Being a worrier also means I struggle with taking risks. My plan is to get 20 years in cash then keep working for another two years, simply putting one year of minimal expenses into a 40% equity lifestrategy fund, so at the end regardless of what happens with the fund, I should still have a decent amount of cash savings and I trust that even in a market collapse, I will be in a decent place. I don’t know what I will do at that point, I don’t think I will retire, but I do need to be out the corporate world as I just don’t care enough about making other people money.
Thanks for your post, it is always interesting to see how people have navigated the financial independence waters. I hope that my comment makes some people who read your blog think also about personalities and upbringing, as reading blogs on FI initially felt like another world and group of people that I never felt like I belonged to because people brought up poor don’t have the knowledge and understanding of these matters to take the risks involved, and others like me, don’t have the personality type to take big risks. I could sleep at night losing 2-3% due to inflation slow-burn (compounding annually too) while I am still saving hard every month, but losing 40+% over a day/week would probably put me in hospital.
I hope this post opens some eyes to your readers as FIRE require more than a good income and low expenses – I have a good/moderate income and low expenses, but my health and wellbeing would not manage the traditional route, whilst I was brought up thinking only rich people had shares/equities because I had no role models suggesting otherwise.
Have a good day everyone.
Thanks for sharing your situation. You have done very well to save 18 years of expenses in only 10 years of working. If you have an above average salary job then that probably puts you in the top 40% of earners. To take advantage of your good income and your strong savings rate then it would be useful to overcome your hesitation over investing in equity assets that carry risks. You could create an imaginary portfolio and track that in order to better understand how the investment markets move. You could start investing by committing only a very small amount such as less than 1% of your cash, or you could start a monthly savings plan from as little as £25 per month. You can also read more widely to gain more knowledge and understanding about investing. I hope that you are able to find a way to overcome your hesitation.
Loss aversion is a real thing – and often seems to comes on [stronger] as your time horizon shortens. From what you have sketched out above I would estimate that you probably have a sufficiently long time horizon to be able to ride things out, see, for example: https://monevator.com/the-investors-lifecycle/
Thanks, Al Cam. I agree. Drawing on that monevator post, I think they (nobodycoder) have the ability to take risk, because they have time and a cash pile on their side. They need to take risk, because they will need their assets to produce a return greater than 0.8%. The 4% rule, i.e., 25 times expenses, relies on a real after inflation return of close to 4% per annum. They need to somehow develop the willingness to take that risk.
For info, ERN gives a relatively simple way to calculate an approximation of the, so-called, safe withdrawal rate (using the Excel PMT function) with negative real rates, see:
https://earlyretirementnow.com/2021/09/14/bucket-strategies-swr-series-part-48/
Thanks for that info. Using that formula suggests that a real rate of return of around 3.2% is needed for a 40 year retirement using a 4% “safe withdrawal rate” when running the portfolio down to 25% of its starting value. A real rate of return of -1.2%, i.e., 0.8% interest less 2% inflation suggests a “safe withdrawal rate” of only 1.16%!
I thought the formula may interest you & FWIW, I agree with your calcs.
However:
a) I am not sure if 40 would be long enough (as he/she does not give their age),
b) the calculation method assumes flat returns of x% for the duration, ie no sequence risk, etc., and
c) using the whole portfolio does not help terribly much either, e.g. -1.2% for 60 years to empty pot gives “SWR” of 1.14%
AFAICT – if you want to get geeky – the term the “perfect withdrawal rate” (PWR) is sometimes used in the literature for the the constant consumption rate
that will deplete a portfolio to the desired bequest level (inc. zero) at the end of the term given perfect foresight of the return series realized over the deterministic term.
Hi,
Thanks for input. Yeah, as indicated in my post, I know I need to sort this. My post got a bit messed up when I tried to state my proposed solution. Basically I am going to try save 1 year of minimum expenses in a vanguard lifestrategy fund every month (either 40% or 60%). Assuming no market crash, I should have 25 years of mimimum expenses in 25 months… I know it won’t work as tidily as this and we probably will get a market crash, but whatever, I know i need to take the risk.
My situation is not entirely dire investment wise as I do have pension contributions (always paid maximum to get max employer matching) and a Lifetime ISA (full contributions) which are in index funds 60% equity – I dont want to count these as part of the 25 years. So, I do/did know the theory etc and hopefully in time I will be in a proper FIRE scenario, at least in a mimimalist sense.
The problem I face now really is lack of tax free wrappers (my own mistake I realise – fine), as well as my continued worries about the risks generally that I just need to live with.
In essence though, provided I don’t get made unemployed and always have a job, I will work until I get in a better investment position. As long as I don’t go below 5 years cash, sort of my floor on cash savings, I think I can handle this.
The point of my post really initially was to point out that if you had a minimal upbringing with little knowledge of this, and are extremely risk averse, the FIRE world can be quite threatening and a place where people might not feel they belong, irrespective of learning and knowledge. The irony of my situation is my background, education and training is in statistics – I absolutely understand stochastics and time series etc – I know the theory as well as how the past has played out.
If someone like me can end up in this position it basically is a sign that FIRE is not as straightforward as good income and/or even just low expenses – investing your own money with possibility of substantial overnight losses can be very threatening even for people who read books on probability with martingales for fun, and understand stochastic differential equations.
I hope this clears some things up – my situation will be repaired over a few years and is not as bad as it sounds from my initial post. Apologies for not filling out the details with things like age etc, it’s not because I am ignoring, I just am being a little cautious online.
Thanks for the input.
I noticed you mentioned pensions in your original post and one thing I thought about suggesting was for you to analyse the returns etc you have achieved therein to help you get a handle on your own real world experience. However, I left this – and some other suggestions – out, in the interests of space, etc.
FWIW, my own upbringing/background is entirely devoid of investment experience/mentors too; and I suspect I am far from alone.
As I mentioned at the outset, loss aversion is a thing – and I would be wary that it often comes on [stronger] as you age. FWIW, I hold more than 5 years of cash. Best of luck.
My returns have been good obviously given I started basically 10% UK index, 40% world (ex-UK) index (slight home bias), and 50% short term bond index. Some drift that I have only minimally rebalanced over time moves that about but while its <60% equities I don't really bother.
I invested pension+lisa with no hesitency after a trivial back of envelope calculation that (for lisa) went like "each £80 invested gives me £100, if I do approx 50% equities – even if the equities markets are wiped out by 50%, that £100 becomes ~£75, assuming bonds only decrease minimally. So compared with what I see today, on paper, a 50% equities crash puts me not much worse than I would be if I took that money as cash and saved. The pension justification was easier again for every £x I put in, it's matched leading to £2x, then even if that was put 100% in equities, a halving of the equities would not even take me below the starting £x, and that's before any tax savings. The above trivial justifications alone meant I don't have issues – I know the loses under each scenario are (much) worse than those simplified situations suggest since you do get taxed with pensions on withdrawals etc so it's not all rosy but on paper TODAY even a 50% equities crash wouldn't make pension choices bad, and the lisa is so very low value in the grand scheme of things, so fine. To be clear, the above justifications are more psychological ones, I know there are multiple substantial holes in the above logic but it is how I justified the investing as a risk adverse person, everyone else can make their own decisions appropriately for them etc.
The above probably is also good evidence that what is already in place in the UK at least is good to encourage pension savings etc but does lead the large gap I have between now and until I am in my late 50's where collecting pensions becomes remotely relevant. Using equities outside of pensions to achieve the 25*expenses feels a lot more risky. I am on my way to resolving but yeah, I might not make it all the way down to 5 years of cash expenses, will see what happens!
Hope GM does not mind me posting another link?
Suggest reading this six part series, starting at:
https://monevator.com/how-to-maximise-your-isas-and-sipps-to-reach-financial-independence/
Thanks to both of you for continuing this conversation. I do hope that nobodycoder can build more confidence in investing in equity risk assets over the next few years. The Monevator blog provides some interesting reading and links on these topics.