How to Retire Early on £20,000 a Year
THIS is my Optimistic Early Retirement Plan is for those people who think the sun always shines and their glass is always half full. It carries slightly more risk in the later years than My Early Retirement Plan but would let me quit work with less cash saved.
However, an optimist I am not. My glass is always half empty, even when it’s raining. I’m a pessimist when it comes to money matters and especially when it comes to something as important as retirement planning. I’d much rather err on the side of caution.
So these are just a couple of fun scenarios to show how I could quit my job more easily and smell the flowers…
The Slightly More Optimistic Scenario
As explained in part one, I’m investing my spare money every month in low cost, index-linked global stockmarket trackers and I have been able to boost my Freedom Fund because the returns are better over the long term than just holding cash.
I need 20k a year to live a comfortable life in retirement.
Once retired I’ll stay invested (probably 60% stocks 40% bonds) and this will turbo-charge my returns even more as the years go by.
Since I’m in the UK, I’ll be using the money in ISAs to get me from early retirement to the age of 57, when I can start to live off my personal pension.
The basic idea is that stockmarket returns will average out at 4% per year over the long term after inflation.
Now let’s see how the figures stack up…
I can’t access my personal pension until 57 and for every year I retire early I need 20k.
My investment returns are 4% each year.
So to quit work at 40, I need 270k in my ISA which will last 17 years until I can get my hands on my personal pension.
To quit work at 47, I need 180k which will last 10 years.
At 57, I’ve probably got 30 years of life left, and my investment returns are 4% each year. So I need 360k in a pension to see me to the grave.
But if I quit work at 47 and get returns of 4% in my pension pot for the next 10 years until I can access it, I only need 250k in my pension at age 47. After 10 years, it will be worth 360k.
If I quit at 40 and get returns of 4% in my pension pot for the next 17 years until I can access it, I only need 190k in my pension.
Total Freedom Fund Needed…
360k to retire at 57 (360k in personal pension)
430k to retire at 47 (180k in ISA + 250k in personal pension)
460k to retire at 40 (270k in ISA + 190k in personal pension)
I’m also going to build up an additional cash buffer of 3x annual expenses (60k) which I will dip into when the stockmarket has bad years and allow me to withdraw less from my Freedom Fund.
I want to retire at 47. Now I’ve got an optimistic number to shoot for. I need 490k.
The Very Optimistic State Pension Bonus Scenario
This is a bonus I decided not to count on in My Early Retirement Plan.
If I get a full UK state pension at 67 this will pay me an estimated 10k every year for life (half of what I need in retirement).
This means that in my personal pension I only need 290k at age 57
After withdrawals, this figure will be down to 170k at 67 when the state pension of 10k a year starts. So at that age, I’ll get 10k from my personal pension and 10k from the state pension.
But if I quit work at 47 and get returns of 4% for 10 years in my persional pension, I only need 200k in my personal pension at age 47. By the time I hit 57, it will be worth 290k.
If I quit at 40 and get returns of 4% for 17 years, I only need 150k in my personal pension.
Total Freedom Fund Needed…
290k to retire at 57 (290k in personal pension + state pension at 67)
380k to retire at 47 (180k in ISA + 200k in personal pension + state pension at 67)
420k to retire at 40 (270k in ISA + 150k in personal pension + state pension at 67)
As before, I’m also going to build up an additional cash buffer of 3x annual expenses (60k) which I will dip into when the stockmarket has bad years and allow me to withdraw less from my Freedom Fund.
I want to retire at 47. Now I’ve got an even better number to shoot for. I need 440k.
Wow! How’s that for optimistic. Just by being slightly less cautious and also trusting the government to pay me a state pension, I’ve managed to hack 160k off the 600k target from My Early Retirement Plan. That’s years of savings.
It shows just how possible it is for me to escape work and give me a minimum target to shoot for. But I still want to hit that 600k by the time I’m 47.
After all, better safe than sorry.
Do you have an optimistic early retirement plan? Do you think I’m being too cautious or confident with the amount of money I need? I’d love to hear from you in the comments below. If you found this article helpful, please share it using the Twitter icon. PS. Try out your withdrawal rates with this handy calculator.