Does the fucking thought of working till you’re 67 (retirement age in the UK by 2028) fucking terrify you? I know it does me, and let’s not even imagine what it’ll be in 30 years time by 2051. This doesn’t just make me want to retire early, it wants me to retire as soon as fucking possible!
The truth is we can not depend on a bloody government pension by the time we retire if you’re in you’re late 40’s or lower and we need to start taking matters into our own hands.
The FIRE(aka Financial Independence Retire Early) movement focuses on retiring as early as possible, and it has become very popular over the last few years as more and more people realise that following your passion is absolute bullshit and generally, work just fucking sucks.
The other problem is that when employers know you NEED a job to survive, they take more and more advantage you if they can, some weekend work here, some unpaid overtime there, using your fear of losing the job to exploit you. This is why we all need a FUCK YOU fund.
Step 1 – Decide how much money you want to spend per month when you retire early
This first step is going to decide how much you’re going to need per month once you’re not working, how much income do you need coming in ? A lot of people tend to overestimate this number, since it’s easy to look at your current outgoings and think that’s what you’ll need, but just make sure you bear in mind you won’t be working ,so costs like commuting, work clothes, work lunches etc will not be needed. Plus, you’ll probably be older, chances are if you have kids they’ll be grown up, or at minimum won’t cost as much as they do now.
For now, let’s assume this number is £2500/$2500 a month.
Step 2 – Figure out how much you need to save before you can retire early using the 4% rule.
The 4% rule is simple, just figure out your yearly expenses in retirement, so based 12x 2500 = £30,000/$30,000 and then multiply this by 25. This brings us to £750,000/£750,000, we will call this your FIRE TARGET. This is the amount you need invested at which point you can retire and you will get an income of £2500 a month, forever.
How this works is, assuming a 7 percent annual rate of return on investments and a 3 percent inflation rate, you get 4% “Real return” on your investment each year which you can then withdraw as your expenses for each year.
One of the easiest ways to do this is to invest in the S&P 500, which has has returned a historic annualised average return of around 10% since its inception in 1926 through 2019.
So the 4% rule is actually quite conservative, historically speaking, but this is one way to make sure you don’t run out of funds deep into your retirement.
Step 3 – Calculate your FIRE PROGRESS
Normally, your main home is left out of your net-worth for FIRE calculations since unless you plan to rent out a room while you’re living there, you won’t be making any income from it.
So calculating this is simple, add up your assets including your savings and investments, pension/401ks, any property, expensive collectors items (that you’re planning to sell in the future).
Now take away your liabilities, any loans, overdrafts, car payments (as per this we’re going to also ignore your main home).
Whatever you’re left with, is how far along you are towards your FIRE TARGET, lets call this FIRE PROGRESS.
For the purposes of calculation lets say your assets and liabilities cancel each other out, so our FIRE TARGET is still £750k/$750k.
Step 4 – Savings rate
Figure out how much money you can save per month, especially if you can use tax advantaged vehicles like Pensions/401Ks/IRAs.
The fact that these vehicles allow you to bypass tax for a certain amount is the best possible return you can imagine! For example, you pay 40% tax on anything you earn over £50,270. That means, if you put that money into your pension via salary sacrifice, you’re already 40% better off than getting it in your paycheck and then putting it into anything else.
If you can always max your tax advantaged accounts first, the downside of course is that you can’t access them till a certain age depending on where you are.
Let’s say you can save, as a household £1000/$1000 a month and you want to access them whenever you want so you don’t use a tax advantage account. If that seems too high an amount, you can check out my tips to increase your savings rate.
Step 5 – Time to retirement
Ok so you’re saving 1k a month, the important part is to start investing straight away for compounding interest to start kicking in, our plan to retire early is now in motion. Fuck yeah.
Now our FIRE TARGET is still 750k, so using a compound interest calculator, assuming standard S&P 500 return and accounting for inflation for a total return of 8%, it would take 22 years and 5 months , which if you’re 25 now, would make you 47.
Remember, this is if you saved 1k a month, wanted to spend 2.5k a month during retirement and had ABSOLUTELY no assets.
If were to tweak these numbers a little for someone who’s in their early 40’s and has been working for a while, which tends to have people in their career earnings peak, and have some assets, lets assume:
Saving rate of 1.5k a month, want to spend 2k a month during retirement, and have assets of 50k
In this scenario, it would take 13 years and 10 months, so assuming you’re 43 with 50k in assets, you can retire at 56!
You can play around with these numbers to create a compromise on how much you want to spend each month with how long you’re willing to work for it.