Moneywise asks five 40-something wage earners what sum they have in mind that would enable them to leave their jobs and retire in comfort.
Tim Brierley (pictured below) knows exactly how much money he would need to quit work. The 43-year-old, who works in the chemical industry, has calculated that an annual income of £12,000 from his investments would be enough for him to retire early.
“People can’t believe how little that is, but I’ve crunched the numbers loads of times,” he says. “I live quite frugally, so the idea of giving up work is more important than being able to buy the latest iPhone – and I could cut costs further by cancelling my Daily Telegraph subscription!”
Tim, who lives with his husband in Warrington, Cheshire, earns around £40,000 a year and has always been a conscientious investor. In fact, he has accumulated a £300,000 nest egg and hopes to start cutting back on work as early as next year.
“I’ve always been very career minded, but there’s more to life than getting stuck in a traffic jam on a cold autumn Friday evening,” he says. “I want the freedom to pursue subjects I enjoy such as music, history, and gardening.”
Tim, who has already paid off the mortgage on the three-bedroom semi-detached home he bought for £60,000 in 1997, has two final salary deferred pensions that would give him a combined £7,000, as well as a money purchase scheme with his current employer.
But most of his money is in investment trusts, the oldest type of investment fund. Investment trusts are structured as companies with independent boards; their businesses are investing in assets on behalf of their shareholders. For more about these read My love affair with investment trusts.
Tim started investing a relatively modest £40 a month when he graduated from university and has always made his own investments, inspired by a book called How to Read the Financial Pages.
“Learning how to understand business accounts interested me and then I got into looking at how investment trusts worked,” he says. “I like investing with a clear goal and not being dependent on others to make it happen.”
As a buy-and-hold, long-term investor, Tim has been gradually moving his portfolio from growth into more income holdings. “My mantra is if I only take the natural yield of my investment, I’ll never run out of capital unless all my companies go bust, which is unlikely,” he adds.
He would like to transition into early retirement by initially having a part-time job paying £12,000 a year. This would enable him to reinvest any income from his investments. “With compounding, that means in less than five years I could stop work completely,” he adds.
While some of his work colleagues have him marked as something of an investment guru, Tim insists this isn’t the case. “I prefer to make my own decisions,” he says. “If it goes well, I can pat myself on the back – and if it goes wrong, I don’t have anyone else to blame.”
How much do you really need to achieve financial freedom?
It comes down to your desired lifestyle, and not everyone is prepared to live on £12,000 like Tim Brierly. We speak to four more people in their late 30s and early 40s to find out how much they have saved up now and what figure they have in mind to quit work.
‘I need £1 million to quit work’
Alan Chaplin, a 46-year-old married dad-of-two from Dorking, Surrey, estimates that he needs £1 million before quitting work. With his current pension pot of £200,000 and the equity in his property, he is a third of the way towards this target.
“It’s not realistic for a little while, but I could see being able to cut back a bit in five years when my youngest child goes to school by possibly working four days a week,” he says.
Alan earns £65,000 a year as a manager in a start-up company involved in pensions software. Although a modest amount goes into his pension each month, most of his efforts are focused on paying off debt.
As well as paying support for a 15-year-old child from a previous relationship, he also has a three-year-old child with his wife, Aylin, 36. The couple have been married six years and bought their house relatively recently. They also took out a loan to help pay for improvements.
“I would love to retire early, but I have a young child, a mountain of debt and nowhere near enough in the pension,” he says.
Alan believes the start-up business in which he’s involved could hold the key to early retirement if it’s a success. But he is equally aware that it may not work out as planned, so is happy to see what the next few years have in store.
“A personal net worth of £1 million is the point at which I could start to think about giving up work,” he says. “This would mean our house, which is worth around £400,000, would be paid off and we would have at least £500,000 in the pension.”
‘I need £40,000 a year but haven’t a plan to get it’
Marketing director Janet Du Chenne, who lives in south-east London and turns 40 in January 2018, loves the idea of retiring early as it would give her more time to devote to writing and travelling.
“I love to write,” she says. “I also blog now and again about my travels (Janetduchenne.com) and will soon be travelling with friends to Malta.”
Janet, who is single and doesn’t have any children, estimates that she needs around £40,000 a year to live on. “I worked that out by taking my mortgage, monthly bills and outgoings, such as leisure activities, from my monthly salary,” she explains.
Her current financial situation means she’ll be looking to give up work by the time she is 60. “I have about £50,000 in savings,” she says. “I also have a corporate pension scheme and another personal pension, but I’m not sure how much is in them to be honest.”
‘My wife and I want £50,000 a year joint income’
Investment director Adrian Lowcock, 42, would like to retire in his mid-50s. The married dad-of-two, who lives in Bristol, believes an income of £50,000 in today’s money would be sufficient to look after him and his wife in retirement.
“My outgoings are high with a mortgage and nursery fees,” he says. “The fact is that over the next 20 years it’s difficult to know what the rate of inflation will be and how my spending habits will change as I get older.”
Adrian maintains being aggressive with saving in the early years will eventually make life easier. However, he also acknowledges the importance of balancing this out with enjoying a decent quality of life today.
He points out that equities generally reward investors over the long term, even if they are quite volatile over shorter periods. “I primarily focus on contributing to Isas (individual savings accounts) and pensions. The allowances on each are fairly generous and they allow investments to grow tax free,” he says.
He has £300,000 in his pension, as well as £68,000 in a final salary pension (transfer value), £150,000 in an Isa, £60,000 in cash, and a further £10,000 of assets.
He believes a combination of tax-efficient investments makes sense. “Isas will give a tax-free income in retirement, while pensions allow for larger tax-free contributions,” he explains. “My cash is probably on the high side, but that will come down with further pension and Isa contributions.” Ideally, he would retire within 15 years. “Retirement might not be the end, but could allow me to change my career or do some voluntary work.”
‘We want a £100,000 pot alongside equity from our house’
Claire Hares, 39, has always planned to retire early and is working hard to turn this into a reality with her husband, Rob, 43.
“We’ve never wanted to work for ever and are saving hard to build up different pots,” she says. “The dream is that once the kids reach an age where they’re self-reliant, we will be able to go off for a few months at a time to visit different places.”
The couple have always had one eye on the future. When they received an inheritance about 15 years ago, they invested in a buy-to-let house. They have cleared the mortgage on this property, which forms a central part of their long-term income generation plans.
In addition, they estimate around £100,000 needs to be accumulated before they can retire early, although the immediate priority is to move into a bigger house while their two children – aged five and eight – are still young.
The difficulty is estimating how much will be needed in the future. “The aim is to have around £100,000 in accessible investments, such as bonds, Isas and cash,” she says. “My husband’s pension is better than mine, so we’ll be relying on that as well.”
Claire stresses the key is to strike the right balance between enjoying today and thinking about tomorrow. “It’s about not being either Scroogelike or being tied to doing something for ever,” she adds. “The idea is to be smart with our money – but not tight!”
TIPS TO ACHIEVE FINANCIAL FREEDOM
The first step for anyone wanting to retire early is to estimate how much income they’ll need in later life.
Justin Modray, founder of Candid Financial Advice, says: “You’ll need to factor in things such as whether your mortgage will be repaid, as well as your likely outgoings.”
You can then estimate how much any pensions or investments you have might be worth and how much income they’ll provide. “Find your bank and credit card statements, decide which of your current outgoings are likely to continue in retirement and add them up,” he says.
Remember to include items you may want to spend money on in retirement that aren’t on the agenda now, such as travelling.
“If you have a partner, work out how overall income would be affected were one of you to die to ensure either of you are not unexpectedly left short,” he adds.
Mr Modray suggests holding a mix of funds that invest in company shares, fixed interest and commercial property.
“They can all produce income and don’t tend to move in the same direction at the same time,” he says. “This helps to provide a consistent income that keeps pace with inflation.”
He adds: “Don’t underestimate how much it might cost and ensure you have a plan B if your finances struggle, which could be working longer or part-time, as well as downsizing if required.”
Unless you come into a windfall, achieving the dream of retiring early requires extreme savings habits and a willingness to make short-term sacrifices, according to financial adviser Martin Bamford, managing director of Informed Choice.
“Everyone should be saving at least 20% of their net income towards the future – and for an early retirement goal, it’s likely you will need to double or triple this amount,” he says.
Mr Bamford believes there is a simple rule of thumb: If you can save 25 times your annual expenditure, then you can probably afford to retire. “Someone who plans to spend £30,000 a year would need £750,000 saved or invested to achieve their early retirement goal,” he explains.
His calculation is based on the 4% income rule of thumb, which suggests you can sustainably withdraw 4% of your invested assets each year, with it maintaining its value against inflation. “For younger retirees and those who are more cautious, I would suggest a multiplier of 30 times rather than 25 times,” he adds.
Moneywise says: Note that the calculations for the 4% rule were carried out by William Bengen, a former financial planner, two decades ago and this rule has recently been described as outdated due to current economic conditions and improvements in life expectancy. In 2017, research by pension company Aegon and actuarial firm EValue found the “safe withdrawal rate” should range between 1.7% and 3.6%, while research by Morningstar found that if you want to be 99% sure that your money will last 30 years, then the amount you can ‘safely’ withdraw each year from an invested pension drops to just 1.8%.
Moneywise readers would give up work for £1 million
The magic figure Moneywise.co.uk users would need to come into to give up work is £1 million.
But research from financial services provider One Family identified £500,000 as the amount needed for a comfortable retirement, with one in five Moneywise readers picking that sum too, and others picking smaller amounts.
Our poll didn’t ask people to enter their ages, so some of the votes for smaller sums may indicate that some readers are nearing the end of their working lives and that they’ve already paid off their mortgages and accrued some savings.
Rob Griffin writes for The Independent, Sunday Telegraph and Daily Express.