When you distil it down to its most simple definition what most people (everyone?) is aiming for is two things: financial security and financial independence.
That is, to know they can do everything they want in life without money worries on their terms.
What that might look like might be different for everyone, from the highest-paid sportsmen of 2021 to a Romany Gypsy, but the motivation is the same:
“I want to do what I want when I want and on my terms”
Or words to that effect.
I’m going to assume if you are reading this you are neither a global sporting icon or part of a travelling community so your lifestyle desires are more middle of the road.
It may be that your financial security and independence is assured, to which I doff my cap. If you are not there yet, but want to be there are essentially four levers that you can pull to get you there.
You can:
- Earn more (and save the increase)
- Generate higher returns
- Work longer
- Spend less
All levers can and do work, but one is more reliable than the others.
Earn more (and save the increase)
Earning more and saving the increase is a prudent strategy as you progress through your career but your earnings potential might be limited by the field that you are in or the period of your career.
A thirty-year-old lawyer or computer scientist has far greater earnings potential than a fifty-year-old teacher or NHS worker whose job, whilst noble, has more limited earnings prospects.
If you work for yourself you have greater control of your earnings potential but may still face a ceiling dictated by the market you operate in.
Generate Higher Returns
Many pension savers don’t invest appropriately, often taking far less investment risk than they could comfortably tolerate (watch this video if you want to understand more).
It is a truism of investing that the more stock market volatility you can tolerate the greater the long-term returns, which is a simple and effective way to build up your retirement pot and secure your financial independence.
However, it is a long-term game and not one that can be relied upon to build up sufficient wealth in the short term. Because, as true as it is that over the long-term stock markets are a reliable source of investment returns, in the short-term they are anything but.
If you are getting to the point in your life that you want to stop working but feel that you don’t have enough of a nest egg built up, relying on the stock markets to do the heavy lifting isn’t the way to go. You might be rewarded, but equally, you might find yourself on the wrong end of a bear market. At which point you have to decide whether you work longer or live on less in retirement.
Work Longer
Sadly, there is an army of people who are reaching the point when they would like to retire but can’t make the numbers work. The pot just isn’t big enough, the State pension is too far off and is not enough to cover their cost of living.
Working for longer to build up the pension and delay the time it is accessed is one lever to pull to ensure some period of financial security and independence, even if it is further down the line than wanted.
But what if your mind and body are not on the same page? What if you need to work but are not physically or mentally able to?
Spending Less
So that leaves spending less as the only reliable lever to pull to give you control over your financial independence and security and the point at which it happens.
It might be spending less on luxuries in your working years so that you can put more away into your pension for your future self.
Or, it might be that you are nearing the point of retirement and so have to accept spending less in retirement so that your pension and savings last longer.
It’s all a Trade-off (And It’s All Relative)
As I explained to clients of mine the other day, it’s all a trade-off and requires you to work out your priorities. If you really want to retire now, because it’s important that you and your partner enjoy a quality retirement together while you can, you may have to accept having less money to live on.
But don’t think this is just a problem for those with less money. There’s no shortage of people who enjoyed a high income during their careers who also have to weigh up spending less or working longer.
The figures involved might differ but the dilemma is the same.
Photo by Laurent Perren on Unsplash
