In this third and final instalment of posts on planning for early retirement, I’ll be looking at how long it will take me to save a big enough pot to reach financial independence and what that will look like. In part 2, I calculated that I will need £725k based on an annual spend of £29k in retirement and I’m picking 46 as my target age – 15 years away – although I’m not set on this and it may change as my circumstances change.
I’m very lucky that in my current job I am able to participate in my employer’s defined benefit pension scheme. The scheme website tells me that if I retire at 46, my deferred benefits would be worth £20k per year. To estimate the total value of the pension, I can multiply by 25 to get £500k. With a total requirement of £725k, I then need to find £225k from other sources.
Alternatively, I could say that this pension will reduce the income I need from other sources from £29k down to just £9k. Recalculating the size of the pot needed to fund this level of income by multiplying £9k by 25 as I did in part 2 gives me the same requirement as above of £225k to find outside of my workplace pension.
So far so good but there is a key question here – when can I take my pension?
To receive my full workplace pension, I can’t take the benefits until I’m aged 68 (unless they change the rules by the time I get there and it’s actually 96!). So I need a separate pot or pots that will provide me with £29k per year for 23 years from ages 45 to 68 plus £9k per year after the age of 68 to top up my workplace pension of £20k. I’m ignoring the state pension because it will be tiny if it still exists when I become eligible.
For ages 46 to 68, I used an Excel spreadsheet and a process of trial and error to find the total pot needed to withdraw £29k per year during this time period based on a conservative annual 4% return. I settled on a total pot of £450k which gives me a buffer of £33k the equivalent of more than 1 year of expenses.
|Age||Total pot||Withdrawal £||Return on balance||Pot remaining|
For the period after the age of 68, defer back to the standard calculation:
25 x £9k = £225k
Adding these together gives me a total of £675k.
I’m luckier still in that I also have three small rental properties currently valued at £230k, however, I also have mortgages totalling £168k. Currently, I have long term tenants in all of the properties but that may not always be the case. I always have the option of selling so for the purposes of these calculations, I will conservatively assume that I sell when the mortgage is nil and get the current value of £230k.
So we’re now down to £445k to find! Sticking with my conservative annual 4% return, I used another spreadsheet to figure out if it’s possible to save this amount of money in 15 years with a very small starting balance.
|Year||Balance||Savings||Growth @ 4%||Total|
And it is possible but I need to save £22,000 per year leaving me only £12,800 to spend on my current salary and giving me a 63% saving rate. That is definitely a challenge! But I’m glad I have something to aim for and it’s motivation to shave off some expenses and look into generating some additional income.
A further consideration is where should I hold this money? I’m creeping into the 40% tax bracket even after taking into account my workplace pension contributions. It would therefore make sense to invest some money into a Self Invested Pension Plan (SIPP) to save the tax now. This I will be able to take earlier than my state pension age and hopefully at age 57 roughly half way through the time period between retiring and taking my workplace pension.
So that’s my initial plan for retiring early! I’ll be reviewing it each year to keep track of changes in circumstances but for now I’m happy with it. Do you have a plan for early retirement? What does it look like? How many years do you have left?