When can I retire? This is the question I have been asking myself for the past year nearly, when can I retire, or even partially retire? Being from UK, the age I will be set to retire at, if I follow the crowd, is 67! I don’t want to be a slave to money until I am 67, I want money to be a slave to me! I want to be able to retire early, and still have a stable income coming from investments, and other income streams.
My goal is to semi-retire at 45, and to fully retire by 55. By semi-retire, I mean have my side incomes pay the bills, so I may be working around 15-20 hours a week, though these will be flexible hours, set by me.
You can check out my side income goals in this post, building multiple streams of income.
The truth is, you can retire when you can afford to live on 4% of your investments. This is known as the 4% rule, or the safe withdrawal rate. It is the percentage of money, which you can withdraw from your investments each year, without making them go down in value.
The less you need to live on each year, the less money you need to have in investments to be able to retire early. This is the reason I am trying to live as frugally as possibly, in order to invest as much as I can to retire early, though, this doesn’t mean I am living in a tent eating bread everyday, I live a normal life, go out, do things, but, I am very careful how much I spend, and what I spend it on.
Lets get back to the 4% rule. So, lets say you need roughly £15,000 a year to retire (I think £15,000 a year, per person, would be a nice sum if you can budget properly). To work out how much you need to have invested to make £15,000 interest each year, we need to do a simple calculation.
15,000 = 4%
100% = 15,000 / 4 * 100 = 375,000
How Much You Need to Retire Early
You would need £375,000 in investments, producing at least 7% return per year (I will explain the 7% soon), to retire on £15,000 a year. This does sound like an awful lot of money, but, if you have any form of side income, for example, Forex Trading, you could afford to retire with just £100,000 in investments, and make up the other £11,000 through trading Forex, Amazon businesses, and whatever other streams of income you may have.
4% Safe Withdrawal Rule
If I keep withdrawing 4%, will my money never run out? There has been a study done, it’s called the Trinity Study, and it looked at how much money you’d need to retire, for people retiring every year between 1926 and 2009.
The study found that if you where to invest 50% of your wealth into stocks, and another 50% of it into bonds, your total net worth, will not decrease when withdrawing 4% per year, for a total of 25 years. This is 100% fail safe.
On the other hand, if you where to withdraw 4% over a 30 year period, this may have slightly different results. It works out 96% of the time, the other 4%, your net worth begins to decrease. The reason for this is, the market works in cycles, it has long bull runs, and slightly shorter bear runs, meaning, that over the 25 years, you do not see any bear runs, but over the 30 year period, you do, hence, your net worth will decrease during this period.
If you do not want this to happen, it has been proven that withdrawing just 3% of your investments each year, will never make you go bust, your net worth will always remain steady, or increase.
How do we come up with 4%, or 3%. Inflation is roughly 3%, and dividends/stocks increase in value at roughly 7% per year, so, 7-3 = 4. Thats how we come up with 4%. Even through rough periods, like wars and depressions, the rate of growth has averaged at 7% per year.
So, when can I retire.
We can work out when you can retire using this information pretty easily. You just need to calculate how much money you want to bring in each year to live off, then do the reverse percentage calculation, and you have you answer.
For me, I want to have an income of at least £15,000 per year from investments and side incomes by the time I am 45, and by 55, I want to be able to live off my investments on their own.
When Can I Retire?
If I earn £10,000 a year from side incomes, I need another £5000 from my investments. Personally, I will go with the 3% figure, as I want to be totally safe from going broke.
I will need £167,000 worth of investments, producing at least a 7% return per year to be able to retire and gain £5000 a year from investments. I worked this out using the calculation which I did further up the page.
Now, to work out when can I retire, we need to see how long it will take me to save up £167,000 worth of investments at my current saving rate.
Currently, I am saving £365 a month, £265 of it goes to investments, and the other £100 goes to cash savings. Lets work out how long it would take me to reach the £167,000 target.
Using a compound interest calculator, and giving myself a return rate of just 10% per year, we can see how long it is going to take. 10% per year is rather conservative, as I have already returned 15% in 6 months, but its to try and not make any over estimations and get my hopes up.
So, here is the calculation.
Source: Compound Interest Calculator
You can see from the image above, I should be able to semi-retire after 19 years of investing £265 a month, but, this £265 per month will go up as time goes on, and as I build up my other streams of income, so the target should be reached a lot sooner!!
Considering I am 27 now, this will put me at the age of 46, 1 year more than my goal, when I can semi-retire and live off investments and side income. By the time I am 55, I will very nearly be able to live off 3% of my investments, so its time to really step the game up and get my hustle on!
Hopefully now you can see that investing money in order to retire early, or even retire at all is essential, and the more you invest now, the earlier you will be able to retire and enjoy the rest of your life. I hope that has answered your question, when can I retire.