#32: Financial Independence & Early Retirement

SAM: Hello and welcome back to the lazy entrepreneur podcast. I’m Sam Priestley and once again we got a special co-host on.

BEN: I’m back.

SAM: He’s back it’s Ben Larkin again my business partner and we’re here today to talk about financial freedom and should financial freedom be your ultimate end goal? I’ve actually been really looking forward to this one because it’s something I think about quite a lot and I’m sure Ben does as well?

BEN: Have you written anything about financial freedom because it’s kind of like it goes underneath, in between the lines of a lot of stuff that you talk about. It does, yeah I have written a couple of blog posts, especially early on, so I wrote one. I’ve written quite a lot about my investing strategies and a lot of them then link back to an original blog post about financial freedom and about early retirement. Before start talking about that, Ben what is your definition of financial independence and financial freedom?

BEN: Well I do want to ask you, are they meant to be the same thing or are they different things? What is the term that we’re using?

SAM: Let’s go with financial independence because there is this FIRE movement I heard about which is Financial Independent Retired Early. Which is kind of the online name for this kind of group of thinking.

BEN: The mister money mustache brigade.

SAM: Yeah exactly exactly, mister money moustache is another blogger who posts a lot about financial independence?

BEN: Okay what is my definition of financial independence? I mean the independence bit makes me think you’re no longer reliant on a job or a active business so financially, you could stay in bed for the rest of your life and the money would still be coming in so there’s no, you’re not forced to have to go to work or do a business or anything else like that because you’ve saved up enough money that it’s just ticking over.

SAM: Yeah that makes sense.

BEN: That’s why I don’t know is there an official definition of financial independence?

SAM: I don’t know if there is an official definition but I did an interview on Pat Flynn smart passive income.

BEN: Oh yeah I forgot about that, you should have made a bigger deal about that.

SAM: I should of it was quite a big win for me. And in that I kind of outlined five different types of financial freedom or four.

BEN: Did you go for freedom?

SAM: I don’t think I called it that, I think I kind of explained you know my thoughts about certain things and they wrote up as an article delineated by this different stuff okay, then we talked about the different ones. So the first one I put was when you’re earning enough to not need to get a job, but you could still be working quite hard. So you’re kind of doing your own thing you’re independent that could be you’re working on your table tennis business or whatever and it’s earning some money. In that ways you’ve got financial independence, you don’t need to be going and working for someone else for a job.

BEN: Because you are making your own money.

SAM: Step two I put where you are earning most of it from kind of passive businesses, so business you still need to work on but they are on time for money so you don’t need to work really really hard.

BEN: So you’ve done the hard work and now the business is taking over but you still need to overall manage it.

SAM: Yeah exactly. Step three was it doesn’t rely on active income anymore. I’m getting mixed up by active and passive but what I mean by that is your saving and investments are completely passive, you never need to touch. There’s no managing your earning, you got enough money to get you.

BEN: What I was saying about staying in bed all day.

SAM: Which is what you’re saying about staying in bed all day.

BEN: There’s zero active work you would have to do because yeah whatever stock market or bonds give you enough income just to.

SAM: And so our table tennis business is pretty passive, we don’t spend much time on it but if I didn’t touch it ever again it would quickly disappear.

BEN: Yeah so that’s the stage two.

SAM: Right not the stage three and then stage four is you have enough money to not just live how you are but also to put money into stuff you want to, into stuff you love so that could be investing in your hobbies or helping out family.

BEN: Ok so that’s just a richer financially free person.

SAM: That’s a richer financially free person so you just got more money earning your passive income so step three I’d say you have free time, you got all the time you want you’re time free so if I wanted to start another business I would probably at step three I would not want to spend too much money on it. If I wanted to start a hobby I’d do a hobby where I could spend a lot of time but wouldn’t take up skydiving or something like that.

BEN: So you don’t need to work but you have to live a relatively frugal lifestyle.

SAM: Exactly.

BEN: Step four frugality is thrown out the window.

SAM: Yeah doesn’t matter what you do, you’re going to be fine. But that’s just something I made up and how I kind of think about things because there was a time where I thought you need to be earning enough from stocks and shares, that was like the goal, but then once I started earning money from these more passive businesses that I still slightly managed, my opinion on that kind of changed. There was a time in 2014 when I made a decision to quit a business, gambling stuff that was making me a lot of money whereas if I just been going for financial independence I would have kept doing that to the point where I had enough in savings and stocks and shares and stuff like that, but I quit it because I had other businesses that were making me enough which were more interesting, a bit more passive and I had some investments.

BEN: Yeah because the whole retire early thing you could be working 14 hour a day city job just with the with the long-term vision that I’m only gonna do this for ten years and then I would have saved up this amount so it doesn’t mean that you’re chilling around starting businesses, you might be slogging away at this horrible job but just you’re doing it for a purpose of getting X amount of money so that you can retire.

SAM: And it comes down to what is the goal of retirement. And so for me, what I thought about what would I do if I retired, well what did I do in 2015, I went traveling full-time, I started working on my blog and a few business that I was interested in and sort of self-improvement stuff so doing a lot more Brazilian Jujitsu.

BEN: And this is very tim ferrissy 4-hour workweek, the new rich. You might not be rich in the sense that you’ve got ten million in the bank but you’re rich the fact that you can be tossing around South America doing jujitsu when everyone else is slugging away on a tube.

SAM: So instead of working really hard for another three or four years or five years or ten years or whatever it is to get to that step three, I kind of quit a step two which kind of brings me on to is early retirement all it’s cracked up to be?

BEN: I guess we wouldn’t know would we?

SAM: Oh we wouldn’t know but we could, doing the travelling one of the reasons we stopped traveling is we travelled for about a year and a half one of the reasons that we stopped was I started to feel a bit uncomfortable with living like a hedonistic life and not building much and not actually being a productive member of the community.

BEN: Yeah because we were gonna go travelling, me and my wife, and someone from church like after we told them randomly said have you thought about how are you going to serve God in your year traveling and it really like rubbed me the wrong way because I was like no I’m just gonna just let me go I’m young just let me go travelling.

SAM: Like toss around for a bit.

BEN: After I let it sink in and I did start to think like this is like I have literally given no thought to anything but I want to go and go traveling. Who cares about anything else? I’ll just do I want because that is the mindset of a lot of that niche area isn’t it it’s like if you want to go and be on a beach, go be on a beach.

SAM: Live the dream yeah.

BEN: And there’s so much stuff now that says about how happiness and fulfillment doesn’t come from trying to do everything you want to do because you really quickly get bored of that and then you’re left with nothing.

SAM: Yeah I actually wrote a blog post kind of on this sort of stuff not that a few years ago actually quite a long time ago, and I called it, can you buy pray or sleep your way to happiness so I looked at a bunch of different things like the correlation on how much sleep you’re having to well-being. One of the things I looked at was how age is impacted by happiness. So kind of your happiness increases till you’re about 20.

BEN: You mean happiness is impacted by your age.

SAM: Yeah then it decreases consistently till about 50, 51 and then it starts increasing again and it increases until the point you die and over 75 are the people with the highest level of well-being.

BEN: That’s not what you would expect.

SAM: So that to me says that work is rubbish, everyone working is, and then at 51 you’re really just starting to retire, you got that retirement age in sight hmm but then I also started looking into how it affects your life expectancy, retiring early because I have this kind of concept that working is good for you and if you retire and then start dossing around and doing nothing, that’s really not very good for your health.

BEN: At least doing something is good for you.

SAM: And I couldn’t really find, I found a bunch of studies all saying completely different things. My conclusion was it kind of depends more on the career you’re doing because there are certain careers that aren’t good for your life expectancy, they’re just really stressful. Either really stressful or like physically bad for you like you’re doing a lot of physical labor or in dangerous environments.

BEN: So I coached able to to a guy who was like mid-70s, very wealthy, has been very successful and one day I was asking him why do you keep working so hard now. Mid 70 still gets up early, goes into work, works all morning really hard, got all these things he’s trying to do. What’s the point like when you’ve already so he’s obviously financially. Why does he bother doing it? And he just said what else am I gonna do, sit and do nothing? And you don’t want to do that do you? But that seems to be the goal of so many young people when I think it’s like let’s work really hard whether it’s in the city or starting some crazy business and if by the time we get to 40 I can retire and I’ll have all the money I need but it’s like but then you get there and you’re like oh what do I do now? I’ve got no reason for being alive really, I’m just consuming stuff.

SAM: I think that was my realization that the life I would live if I was retired is the life I live currently. I don’t think there’s much I would change and then when I was thinking about it and the stuff I would change is what I changed, which was quitting that business which I didn’t really enjoy. I do think that’s interesting though because I think about my grandparents who retired and then kind of never left their living room again.

BEN: I mean I can’t remember a time when one set of my grandparents weren’t retired because they took early retirement in like mid-50s and they’ve been retired for like 25 plus years, so that’s their life. As far as I’m concerned, they’ve never done anything but just putter around but your tagline actually it’s puttering around starting businesses so you’re still puttering around but you’re just doing something about it.

SAM: Active puttering, it was a bit like the podcast we recorded last time about turning your business into a hobby where we’re saying there’s a big difference between an active hobby where you’re engaging your brain in it and a passive one where you’re just kind of monging out and consuming.

BEN: Watching loose women which is a daytime TV show. I used to watch it a lot at table tennis academy.

SAM: I think there’s also something about contribution to society right. Even if you’re doing a job that doesn’t really add much by the job itself, the money you’re earning is then you’re paying taxes on it and then the money you’re spending is having VAT on it and ends up getting back into the system and circling around whereas if I just accumulated as much as possible then that money is then sitting there not contributing anyone. Well if I am buying property it just raises the price of property for everyone.

BEN: Making life worse for everyone! Yeah if the end goal is to become this self-sufficient, living off unearned income type person, that’s great for the odd man but you can’t have the whole of society living off unearned income because the world can’t function like that yeah. So you’ve set as like the highest goal, the person who we think is most successful is the person who’s actually just like a parasite off of everyone else which doesn’t make any sense.

SAM: All their wealth hoarded somewhere where because it’s a churn isn’t it that’s what’s good for society, the money going in and out, the turnover. But then I suppose there are people like that 75 year old person you coach. Not everyone’s going to do it because obviously there’s people who don’t want it because there’s people who’ve shot right past early retirement and are still working. Any kind of multi millionaire or billionaire could have retired and lived a very comfortable life and chose not to.

BEN: I guess the financially independent and retire early are two different things that you don’t have to subscribe to both. He is financially independent in a sense that he has no stress about money but that doesn’t mean that he wants to retire so maybe some people have the goal of being financially independent, other people have the goal of retiring early and it’s not the same thing.

SAM: Yeah that’s very true. Well let’s talk a little bit about the mechanics of financial independence. First of all, how much money do you need?

BEN: Well what does mister money mustache say he’s got his little formula doesn’t he?

SAM: He’s got a little formula he says he needs about 25 times your yearly expenses stored in stocks and shares basically.

BEN: Because he thinks you’ll get a 4% return or something.

SAM: No he thinks you’ll get a 7% return of which 3 percent will be inflation so you can withdraw safely 4 percent and then that will last you forever.

BEN: Which may or may not be true.

SAM: Because the stock market could halve, could go to 0. There’s loads of things that could happen.

BEN: You would probably end up always slightly worried that you haven’t got enough so you keep looking at your bank balance like, ah finally got a million pounds and then you have like a party for about ten seconds and then you think, but is a million pounds going to be enough or do I need 2 million pounds to be completely sure.

SAM: I was reading the blog post from someone. It was his yearly report for the end of 2018 already in 2017 and the 2017 goes oh and Bitcoin has done so well that I’ve now reached my financial independence so I’m gonna throw a party I’m gonna figure out what I want to do with my money. You read 2018 he’s like and so bitcoin has lost all its value.

BEN: He keeps all his money in bitcoin? Because that’s not giving you a return that’s speculation.

SAM: So he hit his target and then lost it again. So mr. money moustache really pushes the frugal living side. There’s two ways to save more money, you can earn more or you can spend less yeah so he’s saying if you work a normal job, a city job like a middle-class job you can by living not like a middle-class person basically save a lot of money and retire early. So I think he retired at I think 31 and him and his wife.

BEN: And that was through just working jobs.

SAM: They were on good salaries but not huge salaries.

BEN: And saving my over half their income or something.

SAM: I think it’s something like if you say 75% of your income you can retire in eight years or something like that. So what about you, is financial independence a goal?
BEN: I don’t think it’s like an obviously stated goal I mean for most people our age getting a house is a goal isn’t it? Because that’s such a big purchase that once you’ve got one it kind of feels like you’re a bit more financially independent, but I don’t know really.

SAM: Do you have financial goals?

BEN: My financial goals are just to make enough money each year to pay us the salary that I want to pay us.

SAM: A lot of people think they need to balance their income and expenses.

BEN: I definitely don’t do that.

SAM: And I think there’s something about being self-employed and running your own businesses that means you don’t think like that because you don’t have a set amount coming in each month that you can rely on. It changes every month so you always want a little threshold above what you’re spending and so I have pretty much forever really just lived the life that I want to live in terms of expenses and then just treated the income side of it completely separate. And most of time I’ve had more income than expenses but I’ve definitely had times when especially actually two years ago I had a year where I spent more than came in, an expensive wedding, gave quite a lot of money to charity.

BEN: Yes I mean we’re both saving money so to an extent we are both working towards something aren’t? We don’t just we spend everything we earn.

SAM: There’s a reason why I’m paying a large amount of money I’m filling up my I sir and I’m investing in my Vanguard life strategy 80% accumulation fund every year because that is one goal. It’s not the primary goal You know I want to do good, I want to give to charity but giving to charity is the opposite of saving for financial independence so how do I balance those two desires in my life?

BEN: Especially if you’re going for like the frugal living save everything you can method. Like I don’t see how giving to charity can really be justified as part of that it doesn’t make sense does it? Yeah unless you’re really committed to giving to charity but then that would have to supersede your financial independence. Frugal financial independence thinking.

SAM: And that would be a side to it thinking well if I get to financially independence as soon as possible then I can quit my job and I could spend all my time helping people.

BEN: And I think you do see people that do that, work hard to get to a position where they’re then able to use all their time in the church or working on some project that is going to help the community or something.

SAM: I think it’s all about balancing your goals and the lifestyle you want but I think the retirement for retirements sake shouldn’t be a goal.

BEN: I’m quite happy with the financial independence idea I’m less happy with the early retirement concept.

SAM: Having a nice big buffer of cash in case you get really ill or something, that’s not a bad thing to have. But retiring and moving to a beach and doing nothing I don’t think it’s particularly good for your mental health really to live that sort of life, there is something about work and being productive now might be that you’re working a job where you’re not getting any of that. I get to choose what I do for a living, I choose my job it so I can choose stuff that are linked to my hobbies and linked to my interests whereas if you’re working in a company that you think isn’t doing good for the world or where you’re just spending all day not really doing anything productive, dealing with bureaucracy and office politics, then maybe that is a really good goal that you should want to be able to get to a level of financial independence where you can quit that job and go do something more productive more interesting.

BEN: What do people recommend you should invest in?

SAM: Well they recommend a world tracker fund okay like a really cheap expense ratio, world track a fund.

BEN: But the way that this stock market is these days they’re all linked anyway so it seems like.

SAM: Yeah if you’re in the FTSE 100 you’re kind of in global aren’t you?

BEN: Yeah so by saying well actually I’m diversified over the whole world, they will crash and goes up they’ll go up to an extent see you can tell yourself you’re really diversified but actually you’re not you’re a false diversification.

SAM: Yeah and they’re all the big companies. You’re not invested into smaller businesses and then they say that as you get closer to the age you want to retire, you should start shifting that a percent of that into bonds, into more stable income.

BEN: So you don’t get much return on bonds at the moment do you.

SAM: You get like 1%. So what do you invest in what do you do with your savings?

BEN: I mean I’m a bit out of the box with investing thinking aren’t I?

SAM: Just leave it in a bank account, cash under the bed.

BEN: I mean I like to have a fair amount of disposable. Say something happens I want to have money that I can do something with and I mean I don’t have loads of money. A fair amount that needs to be ready to go.

SAM: I wrote a blog post not that long ago called investing in the light of Brexit saying I’m putting a large amount of my money instead of into traditional investments like this into places I can get access to it really quickly, so like peer-to-peer lending with kind of a 30-day access because I think that I can get a better return by spotting opportunities, building a business around it or finding arbitrage opportunities especially with something like brexit where there’s going to be a lot of turmoil and a lot of opportunity then I would by just sitting in the FTSE 100 which seems to be quite overpriced and who knows what’s going to happen? A lot people predicting a financial crash?

BEN: If the whole end goal is like living off investment income maybe you should spend a bit of time trying to like learn more about investing rather than just in a tracker.

SAM: I don’t know well most people invest their money in houses, that’s what people think is a good investment. Middle-class people. When I tell people what do I spend my money on and I say I put it in stock market they’re always a bit oh that’s a bit gambling isn’t it and they think if they have spare income they’d want to buy a house and rent it out.

BEN: Although I think probably less so now because the prices are so expensive and the tax way that they’ve set things up isn’t any good anymore.

SAM: But people see them really expensive and that they weren’t that expensive that long ago and I think that makes a good investment.

BEN: Yeah which would be what I’m saying about maybe if you’re gonna gamble your whole like life on investing, maybe you should learn something about investing.

SAM: There’s also something we haven’t spoken about which is if you’re working in a normal job you get a pension whereas we don’t have that being self-employed.

BEN: Yeah and that goes to our I was going to mention this earlier, I don’t think I think in an accumulating money sort of way, I think more in a creating income way so some people will say like oh you’ve not got like an official pension, what are you gonna do when you’re 60? But I feel like as long as I keep starting businesses that are creating income that’s relatively passive then by the time I’m that age I should just have money coming in from things. So you’d still be getting an income as if you’re working anyway.
SAM: And do you ever see yourself retiring is the thing.

BEN: No probably not.

SAM: Me either, because I’m already doing what I want to be doing and what I want to be doing might change but I’m sure I will still be creating stuff and building income sources. So, back to the original question. Is financial freedom, financial independence the ultimate end goal?

BEN: I wouldn’t say it should be the ultimate end goal and I’d definitely say retiring early shouldn’t be the end goal. I think that’s the more dangerous idea. I think people do need some sort of big long term goal to be aiming towards.

SAM: You should have financial goals and that might not be to earn as much money as possible in a short period of time, because you might have other goals. But you should have some sort of goal and some sort of strategy behind it. Especially because you want to have redundancies in place. If I became really ill and I wasn’t able to earn money for myself, I want at least some sort of runway.

BEN: Yeah because we don’t know what’s gonna happen and part of the thinking behind financial independence is like I am completely in control of everything. I’ve set everything up so that at this age I have this amount of money and like I know everything that’s going to happen and the stock market’s gonna make this amount each year and it’s like, this lining everything up in your head where you think that it’s all gonna work out, yet it never does because that’s not how the world works. You don’t want to get too much into that way of thinking because then when something bad happens you’re completely destroyed by this is messing up my plans. But the world doesn’t work on your plans.

SAM: And there’s probably something about living in a mindset where you were talking about earlier where you’re focused on trying to create things and create new income streams. If something really bad happened and you lost everything and had to start again, you could do that whereas if you spent your whole life with this grand plan and then suddenly something happens because people do lose all their money through no fault of their own. That does happen. Nothing is nothing a certain. Well alright well on that morbid note, let’s end the episode thanks again Ben that was interesting yeah and goodbye.