Ever since I learned about FIRE I have decided that it is the only path in my life that I’m happy to accept. FIRE sets you on a mission to retire early. However the big question that everyone asks is – how much money do you need for retirement?
Long story short – there is no simple answer to this. All of us will have a different retirement in mind and a different amount of money will be needed to be accumulated.
Below I want to share with you the reasons that motivated me to commit to this journey. I will also discuss the approach I took to calculate my monetary goal as well as the ways I’m investing to achieve this. While my approach might work for me, it might not make sense to someone else.
I will also give some other considerations that you should think about before you are able to say thank you and goodbye to your current 9-5.
why retire early?
This question has no answer really … every one who decides to commit to this journey will have their own wishes, goals and motivations.
For me personally though – I realised that there is more to life that working 5 days a week while enjoying only 2 as well as getting an occasional holiday here and there.
I enjoy traveling and exploring. This is a major thing that I would like to do when I don’t have to work.
On top of that, more and more, I start considering of volunteering and helping others. Some say I could do it now and they are definitely right. By doing so currently I would however have even less time left for myself and this would impact my current wellbeing as well as ability to work on my side hustles that are a major part of my plan for an early retirement.
There is something about not having to work and being able to do more of the things that I enjoy.
While all of the above seems like a dream to many – I strongly believe that many can actually get there. I won’t say that this is an easy task. But definitely an achievable one.
There is definitely hard work and potentially some sacrifices that will be needed on the path to this goal. The moment you set it clearly in front of you and start working towards it – everything will become more manageable and doable.
how much annual income you need to retire early?
Once again, this question doesn’t have a clear answer. Please don’t think that I have picked a topic where I don’t have any answers at all. I will explain my rationale below.
There are many other articles I found online that do a good job at trying to give you this magic answer. They even make claims of what this figure is for a comfortable retirement. Weirdly enough, they all give a different figure. This to me is an indication that there is no clear answer to the question above.
I would however suggest you study the numbers provided in this article by FrazerJames. I like how the assumptions are broken down into different buckets. This can give you a great platform to start with what I suggest to do next.
In my view – there is no number for a comfortable retirement. Each one of us will have a very different vision of what COMFORTABLE means.
I would recommend you actually sitting down and trying to imagine – what does your retirement look like. Which of the expenses you currently have you will no longer need once you retire.
But also make sure to do the opposite – add all the expenses that you will have to have in order to call your retirement comfortable.
After doing this exercise – this new number will be your comfortable retirement figure. Your new annual expense projection is what we will be using going forward in this article.
how much you need in your investments/savings?
This in my view is where all the magic happens. The question that most people are really interested in.
There is actually a simple formula to help you calculate the amount of savings and investments you need in order to be able to retire. It all starts with the exercise above and understanding your retirement needs number.
Once you know your expected expenses – you simply apply a 4% rule to it. This rule states – with average growth of your assets in the market, drawing down at 4% will allow you to sustain your pot of cash for the length of your retirement.
The easy way you can calculate this – take your annual projected expenses and multiply this number by 25. For example, if your annual expenses are projected to be £30,000 – you need £750,000 in your savings.
The 4% rule has a number of assumptions that are used with it. One of these – you have invested in a market wide stock index that will return roughly 10% per annum. As some years the returns will be worse – the better years will offset the cash you have used during the bad years.
what tools can you use to get to an early retirement?
There is a number of rules that can help you achieve an early retirement. You have to accept though – an early retirement will come at a cost of what you can do with your money currently.
Very often the first thing that comes to mind when it comes to an early retirement – the FIRE movement. This is also known as Financial Independence, Retire Early.
The fundamental concept that help people achieve their dreams is spending less than what they earn. The difference between the two has to be put to a good use. Usually – invested so it generates more money for you.
The tool that I personality use – creating additional sources of income through side hustles, budgeting as well as utilising emergency funds. These are currently 3 key pillars in my formula.
I’d also like to add at this stage – I try to max out my ISA as a priority. These accounts are tax free for life and let you access your money at any point you wish.
SIPP accounts have great tax benefits. The main reason I don’t heavily rely on these – the age restrictions as to when you can access your money.
I’m also planning to expand my early retirement fund through property investments however this is a step that is still in planning phase.
what types of investments I use for my portfolio?
My investing strategy is simple. I also recommend it to people I know. It is simple to execute and maintain.
There is however a watch out with this strategy – some find it extremely boring. This is often caused by the lack of active engagement from the investor.
The strategy can be simply summarised as buy and hold.
There is a large number of research done in this field. It always returns the same results – buy an index fund that covers a broad market and never sell this. The only exception is for rebalancing purposes.
The index funds that I use in my portfolio are S&P 500, FTSE 100, FTSE 250, NASDAQ and NIFTY 50.
These 5 index funds play the key role in my investment strategy. I also have some individual stocks however I’m cutting down on these and shifting towards index funds. Boring yet time proven strategy.
There is a further step that I plan to do later in my investing career – diversify into bonds. There is a lot less growth in these however they add predictability into my portfolio. An income I can expect to land in my bank account exactly as I need it.
As I get nearer to my retirement figure the focus will start shifting from growing my portfolio to preserving its value. My portfolio will need to sustain me for many years as I’m enjoying the lifestyle that I want.
retire with income on the side
There is a further options that some people consider – partial retirement. This can be an easier target to achieve for some. Others might see it as an option where they keep themselves occupied but being employed in a job that they enjoy.
It is hard for me to say exactly how you will need to readjust the calculations above. It all depends on the income your partial employment will bring and the expenses you will have.
Naturally, as you will be employed – you will be spending less on things like traveling compared to being fully retired and planning to travel the world.
There is also an option to keep working on a side hustle you might have as a way to increase your income. Once again, you will be in the best position to calculate and plan the income you will need as well as what you can expect from your side hustle.
This option might work better for those who are more cautious as having at least some income can reduce the stress from unexpected events that require a lot of money.
be prepared to adapt
Continuing from the paragraph above – in order to retire early, you need to be flexible and willing to adapt. As you say goodbye to your 9-5 there is no certainty what tomorrow might look like.
First step on path to this in my view is understanding what are the minimum expenses that you have to cover. This is what the worst case scenario would have to look like for you.
My personal strategy for this – build a source of passive income that will keep coming in no matter what. Currently I plan to use dividend stocks and rental property to achieve this. One thing I can say for certain – this will definitely change by the time I actually get to retire.
Making sure you are happy to accept the need to remain flexible is the key. There might even be a need to return to a full time job at a point if your life changes significantly.
summary
Retiring early is a dream that many pursue. Significantly fewer have an actual plan of how to achieve this.
The formula is rather simple in my view. Earn more than you spend and invest the difference.
Make sure you know how much you need for your retirement. Times that by 25 as a rough guide to the amount of cash you need.
Make sure to invest in a broad market index funds and do so through tax free wrappers. This way you will be able to achieve your goals at significantly reduced time frame.