Over the last twenty years, I can count the number of people who are not looking forward to retirement, on my left hand. Personally, I cannot wait. I cannot wait until the day when I don’t have to get up at 6am, walk to the train station, take a packed train to work, work people I don’t like or respect, take a packed train home in the evening and repeat the process throughout the week.
Remember, retiring does not necessarily mean that you will never work again, but what it does mean is that you’re working on your terms. Retiring provides you the freedom to do what you choose. That choice could mean that you have the flexibility to take a last-minute holiday whenever you want or could simply mean that you can now stay at home, watch TV and relax all day. Most importantly, it’s your choice.
Retirement Is Extremely Difficult
Unless you win the lottery or inherit substantial funds, having enough money to retire is a difficult process that will need a plan, dedication and and many years of savings. In the most simple terms, anyone retiring today aged 66, having paid 35 qualifying years into a state pension, should get a £175.20 per week (which itself rises each year by 2.5%, inflation or average wage growth – whichever is highest) pension per year.
If the mortgage was paid, and I did no travelling, I’,m sure I could live off £175.20 per week, but realistically I would like to have a total income of £24,000 (i.e. £2,000 per month). I’ve got £9,110 through my state pension, and I need another £14,890. Using the 25 year rule (this will take me through to 91 years old), I would need a pension pot of £372,250.
If you are serious about retiring on your terms, you will need to follow the below points throughout your working career:
Make Plans Early
Planning for your retirement is key to success. You need to ask yourself questions such as, when do I want to retire? What do I want to do? Where do I want to live? Once you have a specific plan in mind, you can begin to budget and write up financial plans to meet your targets and realise your expectations.
Using the example above, I need another £372,250 to achieve my financial goals. If I invested £100 per month for 40 years, and the investment grew by an average of just 9% per year, I would have a pension portfolio of £423,705.
If you take the same strategy, but this time invest it for 20 years, rather than the 40 years above, the effect is huge. Rather than having a pension pot of over £400,000, you actually have a pension pot of just £64,155
Understand Your Needs?
Do you understand how much money you’re going to need in retirement? I have a friend call Sam, who was recently boasting that he was on target for a Net Income in retirement aged 50, of £200,000. Being interested, I challenged him to his numbers to see exactly how he was working this out. His rational was that he was making 10% a year on average with his investment portfolio, and result, he only needed a £2,000,000 portfolio to achieve this goal.
While I thought it was brilliant that he was both investing on the stockmarket, and has some plan, I disagreed with his methodology due to the following points;
- £200,000 Gross is not the same as it is Net. While it would depend on what other income your receiving at the time, £200K Gross is around £117K.
- You need to factor inflation into your figures. £200K income today, would not be the same in 20 years time when it comes to Sam’s retirement. With a long-term average inflation running at 2.5%, £200,000 income is actually £303,192
- While you might be able to achieve a 10% growth, it comes with considerable risk that you will not want to take once your retired. A more realistic growth rate is around 5%, allowing you take just 4% of your portfolio out each year.
- Using a 4% withdraw rate, you would need a portfolio of £7,579,800 which is a very different conversation.
Once you have understood your needs, you can then start designing a financial savings plan to achieve those goals.
There are two parts to budgeting, what you can afford to invest and making savings on top of those savings, but it starts with your budget. Without prep-planning you budget, and where you can spend, and where not, life becomes a blur and you suddenly find you’re spending money on things that you don’t need.
One point, life is short and we only live once. You need to enjoy your life and while the focus should be on saving money, if you really enjoy that 6-starbucks coffee in the morning, then you simple need to factor this into your budget.
Once you have understood your fixed costs, and your must have variable costs, you can begin to understand how much you can invest into your future. Remember, the answer might be zero, or in extreme cases a negative number, but its important you understand your financial position.
The final point is making savings on-top of your savings. I have a friend who earns upwards of £150,000 a year but it constantly broke. I made him write down everything he spends on a weekly basis to understand where he was spending his money. The results were scary, but we managed to make immediate savings with basic things like;
- £3,000 per month renting a three bedroom flat, although he is on his own. There is easily a £1,000 per month saving here, simply be reducing down to a smaller flat.
- £1,200 per month on a car he never used – with car sharing platforms such as Hiyacar.co.uk allowing you to rent a car when you need it, this is an easy monthly saving.
- £120 per month on a Gym member ship that he never used. Website such as Hussle.com allow you to pay as you go, therefore saving you money.
- £300 per month on a mobile phone plan, but didn’t used more than half the free minutes/data
- £2,000 per month on socializing although he happily admitted that half the time the was not enjoying himself
I touched on this above, but what happens if you are like me, and have budgeted your spending, made savings where you can, and still have no money at the end of the month to invest for the future.
Up until recently, I had a Net Salary of £2,921, while my wife Sarah, had a Net Salary £2,297, however we had housing and food costs of £2,436, child related expenses of £974 and other variable costs of £2,969 giving us a grand total of Minus £1,161 at the end of the month. How did we afford to live and still invest money into our future each month?
The answer is that we both had second jobs. There is a major list of second jobs that you can do from home here, however my second-job has always been the internet and more specifically blogging. As it currently stands, I make about £1,750 Net per month blogging, although there have been times in the past when I was making twice this, and I have sold websites the past of upwards of £50,000.
Retirement for most people is a pipe dream that they will think about in the future. The honest answer, if this is for you, you need to do something about it today, otherwise its quickly going to be too late.
If you start early, and save just £100 per month into an savings plan and invest it correctly, you could have a £400,000 retirement portfolio by the time you retire. If you take it a step further add further to your investments over your working career, its very possible to both retire early, and retire with a millionaire. Image that.