This post explores ways of attaining early retirement in the UK using investment vehicles available such as ISAs, SIPPs and Pensions. In the FIRE (Financial Independence Early Retirement) community we define early retirement as being able to retire at a relatively young age when compared to the traditional retirement age, most likely in your 30s or 40s. This can be done by achieving financial independence, where investment or business income can cover your core expenses, ensuring that you do not need to rely on a corporate job to make a living.
There are numerous posts out there about how early retirement can be achieved by people earning an average salary in countries such as the US and Canada. The methodologies used take advantage of various retirement accounts and loopholes in the system. In this post and a downloadable investor guide, I present a strategy that I use personally and believe can achieve the same for a UK based person.
It is also important to understand the basics of investing in the stock market before starting this journey. An excellent starting point is to read the compact, well written The Little Book of Common Sense investing by Vanguard founder Jack Bogle.
Early retirement strategy
To achieve early retirement, the basic methodology involves consistently saving and investing a good proportion of your income until your assets produce enough income to cover your basic expenses. As a rough guide, below are how long it would take to achieve this goal:
- Save and Invest 15% of your income and retire in 26 years
- Save and Invest 40% of your income and retire in 14.5 years
- Save and Invest 55% of your income and retire in 11.6 years
- Save and Invest 70% of your income and retire in 9.6 years
As you can see above, the savings rates needed for early retirement may seem daunting at first but can be are achievable. It all depends on how you view your assets and contributions.
A high savings rate is key
To determine the savings rate I first add up the following – monthly cash savings, Stocks & Shares ISA (Individual Savings Account) portfolio contributions, SIPP (Self Invested Pension Plan) contributions and Employer’s pension together with tax relief provided by the government. A detailed guide for opening an ISA is provided here.
The next step is to divide this total by net income to determine the savings rate. This will show that the savings rate is actually higher than expected.
You can view my current savings rate on the real-time expenses coverage tracker on the Goal Progress page.
Two stage process:
- Stage 1 – Early retirement to age 55
The first stage is to build an accessible portfolio that will cover your expenses in the period from when you retire early to age 55.
By accessible, I mean funds that can be withdrawn at any time without any penalties applied, for example an ISA or cash savings. Accessible funds are also taxable accounts as they are funded by after tax income.
I use 55 years old because from this age you will be able to utilise the funds from a SIPP/ Company pension to cover expenses.
Taking this perspective makes things a whole lot easier – it means that you can become Financially Independent with a much smaller accessible portfolio. For example, if you retire at 39 you will need funds to cover you for only 16 years, until 55.
- Stage 2 – After age 55
The good news is that the SIPP/ Company pension is likely to be growing – starting from the time you take early retirement until the time that you will need to access it. These types of funds are not accessible before a certain age but have the advantage of being tax-advantage, meaning that they are funded by pre-tax income.
Over time the growth would be substantial for example £80,000 compounded at a rate of 7.5% would become over £250,000 over a period of about 15 years.
UK Financial Independence Early Retirement (FIRE) Overview chart
The chart below summaries the early retirement strategy outlined.
My strategy is visualised in the image above. The key is to maximise saving and investing while minimising expenses. Directing your funds strategically is also crucial to ensure the optimum financial independence date.
Side hustle to get there faster
The whole process can be made easier by earning additional income on top of a day job. This will enable you to supercharge your investments by buying more stocks and shares index funds with additional income earned.
There are many ways to do this and I will share my thoughts on this site. I am trialling gaining extra income with the Amazon FBA programme. This will be detailed in a series of posts starting here.
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