Why your 30s and 40s are an optimal age to start towards Financial Independence
Does anyone else have a pang of regret that they didn’t stumble across the concept of financial independence sooner? I’ve certainly felt like that. It must be pretty common. A version of the fear of having missed out. So many of the poster children for Financial Independence retired in their 30s or at least by their early 40s. That was the sort of age that I first heard about Financial Independence. The pioneers were done right at the age I was just starting.
Pretty depressing huh?
I’ve seen a few people say similar things on twitter. The stock response to that tend to be along the lines that “Well the best time to plant a tree was 20 years ago and the second best time is now.” Well, yes, that’s true but it’s not the entire story.
I’ve been giving it a lot of thought and I’ve changed my mind. There are undoubted benefits to starting your financial independence journey early. However, I now believe your 30s and 40s are an optimal time to start towards financial independence. Here’s why.
Knowing the unknowns
In my 20s my life had a lot of uncertainty. What job will I do? Am I going to get married? Do I want kids? Where do I want to live? Underlying it all: what do I want from my life?
I think I was a pretty typical 20-something in that regard.
All of these uncertainties make it hard to lock down a number and a plan for financial independence. How certain are you that you’ll be happy moving to a low cost of living area for the next half a century or more when you’ve only lived away from your parents for a few years? Will you have a life partner? If so, how much will they earn? Will we have children? If so how many, how does it even cost to bring up a child? What if they have particular needs?
Of course you can plan for a wide range of contingencies, but that just pushes your number higher and further out.
By contrast when you’re older some things are more certain (although, nothing is fully certain). You may know where you want to live, whether you have – or want – a life partner or children. Your career path may be more certain, and you will have a better sense of what earnings trajectory you’re on.
In addition I’ve already done a lot of the things I want to do in my life. A simpler and cheaper life won’t leave me with regrets.
All of that has two benefits. Firstly it reduces the variability and size of the stash that you need, and secondly you will have a more realistic view of how you will build that pile.
As you get older it can be easier to make and execute a realistic plan.
When you’re younger you don’t know what’s coming over the bridge
Your earnings are growing
Most people spend their 20s learning how to do their job. If you’re in your 20s then I’m sure that you’re very good at what you do but, as a sheer function of time, you just won’t have as much experience as you do in your 30s. Rightly or wrongly employers tend to link salary to the numbers of years of relevant experience that you have. In an unfair way this then tends to work against people in their 50s and 60s as ageism kicks in.
The result of this is that your salary will tend to grow fastest in your 30s and 40s. To be clear I know that this isn’t the case for everyone. There are a lot of people in that age bracket who will feel like their earnings have stagnated, but this is generally true. The figures from the Office of National Statistic show that women hit their peak earnings in their 30s while men hit it in their 40s.
The consequence of having more earnings is that it’s easier to save more. This matters as ultimately there is a cap on how much you can cut back, but there’s no cap on earnings. When you earn more, you can save more and so you can achieve Financial Independence sooner.
Yes you won’t have the savings from your 20s, but if, as is very possible, you are earning multiples of what you earned in your 20s you can catch up quickly.
Managing hedonic adaptation
Related to the speed of earnings growth and knowing the unknowns is the ability to manage your hedonic adaptation. For those who haven’t come across the term before, hedonic adaptation refers to the idea that after either a positive or negative event in your life humans tend to revert to a broadly stable level of happiness.
In the financial independence world a lot of people talk about hedonic adaptation in the sense that buying more stuff, having a bigger house, a new car, more expensive holidays etc won’t lead to a lasting increase in happiness.
I totally agree with that. But, in your 20s you run the risk of being unrealistic about the standard of living that you are happy to have for the rest of your life. To give the obvious example, when I was in my 20s I totally loved living in a rented shared house with my friends. I couldn’t think of anything more fun. Now that I’m older and have a family I think that if I had based my financial independence number on living in a shared house for the rest of my life I would regret it.
You can take this and apply it to meals, hobbies, holidays, whatever.
The advantage of starting the journey later is that you’ll have tried a lot more things. That means you’ll have a much better evidence base on which to make trade-offs. To go back to my accommodation example, since living in a shared house I lived in variety of owned and rented flats and houses with various combinations of spouse and children. I now have a much more realistic sense of what housing I’ll be happy with at various points in my life.
Achieving professional goals
One of the big reasons that I’m feeling sanguine about the idea of stopping work is that I’ve achieved my professional goals. I’m now in the role that my predecessor retired in and I have the job title and the responsibility. I’ve manged departments, teams, people and budgets. I’ve traveled, spoken at conferences, got training and all of the other things people benefit from at work. From a financial perspective I’ve hit and passed the salary targets that I’d set myself earlier in life.
Yes, there are a few other things that it would be nice to have done, but they’re relatively minor. I’m not too bothered about them. While I could do the job the next promotion up it’s essentially professional management which doesn’t excite me.
Professionally I’ve got what I wanted. If was fired tomorrow there would be no professional regrets. That feeling is, for most people, a function of time. It comes about through sticking through a career and getting the promotions. There are absolutely some superstars that get to these positions before they’re 30, but they tend to be the exceptions.
To be clear, of course you can carry on working after you reach your number in order to hit those professional goals. However. I know that my attitude will change soon as I hit my number. It’s already happening. I now try to do the right thing and do things right. Often I’ll call out and push back on bad behaviour and unreasonable demands. That makes me happier but it’s less likely to lead to promotions.
I get that this isn’t something that everyone will care about but, for better or worse, it matters to me. Being older has allowed me to fulfill those goals.
I’ve achieved my professionally goals
Less life to fill
The 4% rule gets discussed a lot in the Financial Independence community. If you haven’t come across it before this is the idea that you should save 25 times your annual spending as your retirement stash. The plan being that you draw down 4% of it every year when you stop working. There are lots of caveats / questions / challenges to that rule which I won’t get into now. However, it means that people stare at a really large number that they have to save if they want to become financially independent.
What I’ve realised is that this is a bit different for me as I am older. Well before I heard about the idea of early retirement I got the idea that if you put money into a work pension then you can often get money for free from your employer. Someone had also put in my year the idea that if you should be saving half of your age into a pension. As a result I saved a lot into my pension from my early 20s. The consequence is that even if I don’t add much to my pension I’ll be OK (not flush, but OK) when I retire.
In essence I’d been accidentally saving my stash
That means that my Financial Independence number isn’t 25 times my spending, it’s the bridge number to cover my spending from now until I can get at my pension. That’s a much smaller number that it’s a lot easier to conceive of saving.
I appreciate that this may not apply to everyone but it’s more likely to be true if you’re older and by accident or design started to save into a pension.
The advantages of starting earlier
Look, I don’t want to knock the value of starting earlier. There are clearly huge benefit and that’s where my regrets originally stemmed from. The biggest ones for me are:
- Longer to benefit for compounding
- Not getting into debt that has to be paid off
- ‘Retiring’ earlier and so gaining the advantages younger
- If a lifestyle change post Financial Independence doesn’t work out then there’s a lot more time to go back and start again
Those are major benefits and there are probably a lot of others that I have missed. If you can start earlier I’m absolutely not suggesting that you should wait. But, if you haven’t managed to start on the journey to Financial Independence sooner this post is to say that you shouldn’t despair. There are also benefits in starting later in life.
Conclusion
Now I know that a lot of 20 somethings reading this will be up in arms that this is all wrong for them. To be clear this is #NotAll20Somethings. There are a lot of people a lot younger than me who are FAR more mature and sorted in life than I am.
Let me be clear though, this isn’t about knocking 20 somethings. As I said if you can start earlier why wouldn’t you. No this post is to encourage those who, like myself found the Financial Independence movement later in life. It can feel like we’re starting with a handicap but actually there are lots of benefits.
Ultimately though there’s no perfect age to start toward financial independence. Your 20s, 30s, 40s, 50s and 60s are all optimal ages to start your journey. If financial independence is something that you want from life then the most important thing is to start to make the changes to your life that will get you there. You can work things out from there, no matter how old you are!
Thoughts?
How about you? What age did you start your journey to Financial Independence (if you’re on that path)? Do you think your age made it easier or harder
21 Comments
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Interesting points. I feel like I’m very behind, starting at age 40 to really save much at all for retirement. It doesn’t help that the few funds I did have were in a medium- to low-risk fund, so they grew almost not at all. I changed that this year when I switched to Vanguard. And seeing how much it’s already grown am kicking myself for being conservative when I first started out.
At any rate, I don’t think I’ll reach financial independence short of regular retirement age, though you’re right that we need to save less because there are fewer years between us and Social Security/pension/whatever that person has coming. But I can at least scramble to make sure I’m not having to pinch pennies too hard in my golden years. And that’ll just have to do.
So many people get to 40 or 50 or older and STILL aren’t saving properly for retirement so I think you’re doing really well (it certainly looks good from your monthly updates!). Similarly with the Vanguard switch, by taking the time to understand what you are invested in and taking the active decisions about what you do you’re way ahead of the game.
There are an awful lot of people out there that have no plan for there retirement. Some of those may never be able to retire in any meaningful way and that must be a scary feeling… I certainly wouldn’t want to be there.
I’d say I’ve always been on the path though didn’t have a name for it. Always put a decent amount in a pension and have about 200k in it now.
Put the rest of my money in my house before this and now have good equity and despite a divorce a mortgage less than 3 times salary. The missing link for me was isas. I saved but only really to have a cushion. Am now rectifying that bit but in good shape. Do you actually share your numbers on here anywhere?
I think that you and I are in very similar places FBA – although I suspect that I’m older and so further on in my pension and mortgage journey. Like you the ISA bit is what I had missed. Also like you it’s the bit I’m fixing now. I said in another post that we are planning to fill our ISA allowances now that we have paid off the mortgage so that is helping quite a bit.
I haven’t shared my numbers yet. Not because of any reticence particularly but because I’ve not properly pulled them together. The way I see it is that I know to a few tens of thousands where I’m at, but I’m hundreds of thousands off a full FI number. What I’m thinking about more is about what I can do to manage the bridge to my pension the ‘best’ way.
Yes I’m 38.
Being frugal certainly helps when life throws you a lemon. My wife and I divorced amicably about 5 years ago now and she took 100k out of our joint net worth. I made that back within two years by keeping the house which was very fortunate and the right thing to do though I have spent about half that erasing anything that reminds me of that time and refurbishing the house
Rebuilding 100k in two years is amazing FBA, great job. Sometimes spending money on things like refurbishing a house that can be exactly the right thing to do
Great article. Something I have been thinking about lately myself. Although we had to always budget out of necessity, it was exactly age 40 for me when I wanted something more. It took until then to have moved past single income household so my wife could raise our kids, move up the corp ladder, get out of debt, and realize that the upper heights of the corp ladder sucked and there must be something better to strive for. I will say that better late is always better than never. Life happens and we do what we have/need to do until we have the will and ability to do better. I retired early at a less than extreme age of 51. As far as I concerned, getting serious at age 4o still brings huge benefits.
Thanks Tommy. Congratulations at retiring at 51! That’s 14-17 years ahead of most people which is an incredible achievement.
That’s exactly what was behind my post. As you have showed you can get serious at the age of 40 and be done just over a decade later.
I think you (and I) are very typical of people in the sense that it just takes time to work out a) what you want from life, and b) how to DO life. Rare indeed is the person in their 20s or 30s that has really got things nailed now. Heck, I’m in my 40s and and STILL haven’t got everything sorted!
As someone who has discovered FIRE in her very late forties I love this article. I think that I had also worked out that the challenge is not to save enough to live on for the rest of my life, but to work out how to have enough money so I don’t have to work between now and when I get my pension. I started paying into a pension in my early thirties, but am fortunate that working in the public sector I have always been on defined benefit schemes which are very generous so by the time I am 67 I’ll be fine. I could start drawing a pension aged 55, but it would be paltry. We are still paying off our mortgage and I am battling between saving and paying it off. My head tells me to save the money, my heart tells me to pay it off, as it would be a great burden lifted if we didn’t have a mortgage and without that our monthly outgoings would be minimal. I think that I am just grateful that I discovered FIRE at all and have made such significant changes to my financial situation that the future will be better no matter whether I retire early or not.
If it helps for me I’ve gone the investment route first. The way I figure I can pay a max of ten % of my mortgage a year extra so may as well build my assets until they are generating that much then use the yield to clear the mortgage if that makes sense
Glad it resonated Sam! A public sector defined benefit pension must be great. I have a private sector defined contribution pension but it’s doing OK.
Your last sentence is the key one. That’s why it’s so valuable to start the FIRE journey no matter how old you are. Wherever you are in life you should be able to apply the principles to put your life in a better financial position than it is today
Love this post! It makes me feel better about myself. However, you can’t really argue with compound interest. I may have missed more than a couple of boats (ha, ha, ha).
No, sadly the maths of compound interest are rather compelling. I guess my point is that people shouldn’t be discouraged from starting. Compound interest is good but it’s not everything!
At 24, I feel very fortunate to have found the FIRE-movement and benefits of investing very young. It is natural to save and invest for me, which I’m also grateful for 🙂
– NF
It’s great that you’ve found FIRE so early NF and even more so that it fits with your natural instincts! I should be very clear that if people do find FIRE early they should absolutely not wait to start pursuing it! My point is more to encourage those that have found it later to not get discouraged.
Great post, Caveman – I have a draft post where I reflect upon on discovering FIRE in my mid-40s – never too late to start saving and investing!
Thanks Weenie. Exactly that. It’s never too late to start using, and to reap the benefits of, the tools that lead to FI.
I definitely agree with all of this! I wish I’d come across solid personal finance advice in my 20s (saving and investing), but I’m glad I didn’t learn about FIRE until I was 30. I may have focused too much on chasing money instead of taking risks and following my passions. I’m definitely behind financially because of these choices, but I’m happy with that trade-off.
I think you made a good choice. I can’t bring myself to regret working and saving in my 20s, but I definitely sacrificed passion, health and (some) friends along the way. The task for me now is to rebuild all of those. But better to realise that I need to do that now than to work it out in my 60s!
I definitely know where you’re coming from in regards to being in your 20’s and having that sort of ‘uncertain’ ‘what am I going to do next’ in my life type scenario. Just out of university I wanted to specialise in the digital industry given that we are in the digital world and that demand is massive right now. After working in a few businesses, I took the plunge and went full hog in setting up my own – it took some serious effort – worked a 9 – 5 and then moment I was home worked from 6 till 3am for around 6 months to get it off the ground.
For me, late 20’s my work running a business has definitely accelerated my life in terms of what may be perceived as things most do in their mid-30’s such as ‘settling’ down and buying the ‘forever’ home. The business has put a few grey hairs on me, but it’s almost made me realise what’s important and have those foundations laid down already. It’s also of course greatly help save and invest for the future.
I don’t believe me and my partner will have kids – hasn’t really crossed our minds and we haven’t that urge of ‘oh my the clock is ticking we need kids’ etc
Just my two pence!
Wow. That’s some commitment Jase. Amazing!
I’m not really arguing that people in their 20s shooting for FIRE are doing it wrong. People like you show that it’s totally doable. For me it’s more about encouraging people who are discovering this later. As you rightly say, the most important thing is to discover what it is that matters to you. Once you have that then working out how to get their becomes much easier.