You wake in the morning and take the time to cook yourself a proper breakfast. You turn on your laptop and have a glance at the financial markets.
Stocks and shares have been taking a beating recently, but on average over the past 3 years, despite not holding a job, you’ve been waking up £100 richer than when you went to sleep. This is the life of leisure. The life of a Rentier.
What is a Rentier?
The ‘Rentier class’ is an academic term for the group of people who are able to live on economic rents alone. In plain speak, rentiers live off the investment portfolio that they have built.
The phrase ‘rentier’ is used mostly in relation to ‘rentier states’, which are countries which collect income from their assets their tax revenues.
Examples include the oil-rich Gulf states which use their oil reserves to support a heightened standard of living. In this regard, ‘rentier’ is hardly a complimentary term.
It is more often used to draw attention to the inability of a country to produce a reasonable quality of living through the productivity of its citizens alone.
However, in this article, I’m applying the ‘rentier’ concept to individuals. It’s is a positive and aspirational term which is similar to financial independence.
In personal finance terms, a rentier is someone who has invested in shares, owns property or land or simply has a huge sum in a bank account, and the interest or income from these investments is sufficient to cover their living expenses.
You may immediately think of the wealthy upper classes of Britain who in the 1800′s, owned large pieces of land and became ‘gentlemen and ladies of leisure’.
While this is a perfect example of rentiers, I suggest you set your sights a little lower and envisage a comfortable and active retirement community in Florida with Spas, gyms and golf courses.
For these people are also rentiers; they lead lifestyles of leisure and have no pressure to go to work.
Rentiers Are Quite Common
As you can see, the concept of becoming a rentier is rather similar to the idea of retiring and becoming a financially independent pensioner.
Wondering how you can become a rentier at a reasonable age is actually equivalent of say, wanting to know how to retire at 50.
Not all of us succeed in becoming a true rentier by retirement age. The majority of the population, especially those who were house-wives/husbands during their productive years, rely on government pension benefits to receive a reasonable income.
However, a sizeable bunch of folk do manage to make it, and I’m not talking about self-made millionaires or CEOs.
Hard-working yet prudent professionals can achieve rentier status within 25 years if they put some serious work into doing so.
The Path to Becoming a Rentier
Here is the tricky part, and the reason why so many people fail to become financially independent – they want material things now, rather than financial freedom later.
Which would you choose – a brand new car (£20,000) during your late 20′s, or an extra income of £2,000 per year for the rest of your life from your 40s onwards?
This is a tough choice that would split a room in half.
Both camps have some pretty solid justifications for either side, but what is clear is that those who would choose the car might never become successful savers, and thus will never become rentiers.
Their dispensation is towards consuming, and it is more likely that they will only put away the bare minimum for retirement. A person who is personally driven to spend will increase their expenditure if their salary rises, and thus will never take advantage of their increased ability to build up capital.
The rentier mindset
The inconvenient truth about becoming a rentier is that this status demands a sacrifice. If you could ‘keep up the Joneses’ and make significant savings at the same time, then everybody would be doing it.
The fact is, there’s a stubborn behaviour at play here, which guarantees that only a small % of individuals will become a rentier during their productive years.
In their hearts – most people believe that they will work for 40+ years. At the same time, they want to enjoy a standard of living similar to their peers.
This core belief seeps into all decision making. Reality then aligns to the belief.
- Mortgages are taken out over long periods, e.g. 40 years – this frees up plenty of cash for spending, but almost guarantees that early retirement is out of the question until you are 60.
- People put money into their pension on the basis of a standard retirement date (e.g. 65). This makes people believe they are ticking the box to prepare for their future – but again, it guarantees that they won’t be ready to leave work early.
Consider for yourself; what would happen if every young person in the country received a 20% pay increase? Would the retirement age of a generation suddenly come 10 years closer, due to skyrocketing savings?
Or do you think it’s more likely that everyone would use the extra cash to upgrade their standard of living? This demonstrates the issue.
As a society today, we are so much richer than previous generations, yet our retirement dates remain the same.
Becoming a rentier isn’t about earning a lot of money; it’s about not spending it.
Retaining enough of your income to create an independent income stream which will fully support you will require some intelligent decisions as well as self discipline.
Rentiers have beaten the game. Rentiers are have tamed capitalism and have made it start working for them in a different way entirely.
If you think this is possible by just cutting back occasionally on groceries, you still have a long way to go. It’s about keeping all essential costs to a minimum, like considering cheaper mobile tariffs and other low-cost overheads.
The Life of a Rentier
As highlighted in the opening paragraph, a rentier has the freedom to live life however they like.
If they want to settle down and live in a nice property, they can.
If they want to travel the world and meet many people, they can. If they want to financially support their children and show them a better life, they can do that as well.
The life of a rentier sounds somewhat dreamlike because it simply gives you the real choice to do what you want. I hope this article has introduced you to the benefits of becoming a rentier, and has also given you reality check on how difficult that journey may be.
From my point of view, the sacrifice and the hard work will all be worth it. As our lives grow longer and longer – those who fail to build up capital will be forced to work themselves to an early grave.
While those who were smart and saved enough capital, will be able to relax, spend on medical care, and live many many happy years after retirement.