Can you achieve financial independence in the Armed Forces?
As I've been developing my own financial knowledge over the years, a term that really caught my attention was financial independence. In short, financial independence is "having enough money saved up to support you for the rest of your life" (defined on Money Crashers).
2 useful rules that apply to financial independence are the "25x rule" and the "4% rule". These rules are (defined on Nerd Wallet):
When I learned these rules, I wanted to dig deeper - was it feasible, as a member of the Armed Forces, to retire in your 40s and be financially independent? The numbers used below may seem way off for some, but they are intended as examples - the calculations can be easily adjusted to your own circumstances. For simplcity, I have also assumed that the income calculations from pensions and property are after tax where applicable, and that savings / investment income are not taxed, as they are within allowances and / or in an ISA and not subject to tax. The additional considerations for tax will be discussed in a future post.
For this example, let's use £30,000 as the annual expenses - you can adjust based on your own calculations and the type of lifestyle you wish to live.
Applying the 25x rule:
That may seem like an intimidating number, but one thing we haven't taken into account is the Forces Pension. Depending which scheme you are on, it wouldn't be unreasonable to expect £12,000 per year and a £50,000 lump sum on leaving the Armed Forces after a career of 20 years or more. Let's apply these numbers:
£400,000 may still look like quite an intimidating number, but far more achievable than the £750,000 we started with, particularly with the right investment strategy, and if you started investing early. We can also consider other ways of generating income - let's say you purchased an investment property during your career and brought in £4,000 a year income:
We can also reverse the calculations to help calculate what income you are able to generate when you leave the Armed Forces based on your own circumstances. For example:
So, can you achieve financial independence by the time you retire from the Armed Forces? I believe it is feasible, but depends on the lifestyle you want to live, both whilst serving to meet savings / investment goals, and when you are discharged. Whether financial independence is your aim or not, doing the above calculations is a useful way to understand what your financial situation will be when you leave the Armed Forces, and what your salary goals will be for your subsequent career.
2 useful rules that apply to financial independence are the "25x rule" and the "4% rule". These rules are (defined on Nerd Wallet):
- The 25x rule states that, in order to retire, you need to have saved 25 times your annual expenses.
- The 4% rule states that once retired, you can withdraw 4% of your savings in your first year, adjust for inflation in later years if required, and not run out of money in retirement. The rule assumes a 30-year retirement.
When I learned these rules, I wanted to dig deeper - was it feasible, as a member of the Armed Forces, to retire in your 40s and be financially independent? The numbers used below may seem way off for some, but they are intended as examples - the calculations can be easily adjusted to your own circumstances. For simplcity, I have also assumed that the income calculations from pensions and property are after tax where applicable, and that savings / investment income are not taxed, as they are within allowances and / or in an ISA and not subject to tax. The additional considerations for tax will be discussed in a future post.
For this example, let's use £30,000 as the annual expenses - you can adjust based on your own calculations and the type of lifestyle you wish to live.
Applying the 25x rule:
- 25 x £30,000 = £750,000.
- 4% of £750,000 = £30,000.
That may seem like an intimidating number, but one thing we haven't taken into account is the Forces Pension. Depending which scheme you are on, it wouldn't be unreasonable to expect £12,000 per year and a £50,000 lump sum on leaving the Armed Forces after a career of 20 years or more. Let's apply these numbers:
- Take £12,000 off of the annual income calculated earlier. £30,000 - £12,000 = £18,000.
- £18,000 x 25 = £450,000.
- Take £50,000 (the lump sum) away from the total. £450,000 - £50,000 = £400,000.
£400,000 may still look like quite an intimidating number, but far more achievable than the £750,000 we started with, particularly with the right investment strategy, and if you started investing early. We can also consider other ways of generating income - let's say you purchased an investment property during your career and brought in £4,000 a year income:
- Take this off the £18,000. £18,000 - £4,000 = £14,000.
- £14,000 x 25 = £350,000.
- Take off pension lump sum of £50,000. £350,000 - £50,000 = £300,000.
We can also reverse the calculations to help calculate what income you are able to generate when you leave the Armed Forces based on your own circumstances. For example:
- Annual pension income = £14,000.
- Income from property = £5,000.
- Lump sum payment = £60,000.
- Anticipated savings / investments on discharge = £90,000.
- Pension and property income = £14,000 + £5,000 = £19,000.
- Lump sum plus savings / investments = £60,000 + £90,000 = £150,000.
- 4% rule applied to savings / investments = 4% of £150,000 = £6,000.
- Therefore total income = pension and property plus savings / investments = £25,000.
So, can you achieve financial independence by the time you retire from the Armed Forces? I believe it is feasible, but depends on the lifestyle you want to live, both whilst serving to meet savings / investment goals, and when you are discharged. Whether financial independence is your aim or not, doing the above calculations is a useful way to understand what your financial situation will be when you leave the Armed Forces, and what your salary goals will be for your subsequent career.