Why most people can’t quit work young and wealthy

Many people believe that the way in which they will retire will be to build up a lump sum in a superannuation fund that they will withdraw when they are around 65 years of age. Hopefully, the amount they have built up will last longer than they live. Some of those who have the option to do so consider downsizing their place of residence or using a reverse mortgage to free up some capital.

To me, this is a flawed thought process, and a very risky one for obvious reasons. The risk of the cash running out can be mitigated through selecting an appropriate annuity product, whereby actuarial percentages dictate the level of your annual income based upon your life expectancy. This mindset shows why most people are unable to be financially free at a young age. The numbers simply don’t stack up.

If you want to retire at 65 the amount you will need as a lump sum is approximately 13 times your desired retirement income. Therefore, if you want to retire on $100,000 per annum, a lump sum of $1.3 million should be your goal for age 65. But what if you want to finish working full-time younger than that? Well, naturally, your life outside of the full-time workforce will run for a longer course, so the required multiple of your desired annual earnings increases.

So far, so good, for at least this gives us a target figure. The flaw in this idea, though, soon becomes clear. If you want to quit work entirely at the age of 40 with an annual income of $100,000, you Will need a lump sum balance of around $2.5 million. This is fine in theory. The problem as I see it is that if you are a person who has the financial capability to build a balance that runs into the millions by age 40, you are highly unlikely to be satisfied with an annual income of $100,000.

I hope to demonstrate that the goal of financial freedom is not nearly as difficult as most people believe. The problem for most of us starts when we are young, as the current school system barely educates us financially at all. When you consider that money and finances affect every single one of us, it is curious that the school curriculum fails to recognise the importance of personal finance.