We all have goals, in my case it’s to be financially independent and retire early in 10 years.
Having been in the FIRE space for a while now, I’ve a pretty clear idea as to how to get there.
So my plan to get to be financially independent and retire early within 10 years is as follows:
The first part is to figure out how much I’d need in my ISA in order to be able to retire early.
Using an early retirement calculator, I can see how much I could expect to have in my ISAs.
From there, I need to see how much I’d need in my pension to retire for the rest of my life.
Using a pension calculator, I’ll see how much I’d have by the time I can access my pensions.
In this post, I take you step by step on how I plan to retire early and then stress test my plan.
From seeing my plan, hopefully you too would be able to see how you too could retire early.
I’ll be referring to GBP and UK retirement accounts but this also works if you’re not in the UK.
How much do I need in my ISA to Retire Early?
To set the scene a bit: I am currently 30 years old that means I plan to retire by the age of 40.
I currently invest into a pension, but I won’t be able to access my pension before age 55.
Hence, I must also invest into an Individual Savings Account (ISA) that I can access at any age.
Once I reach 40, I’ll use my ISA to fund my retirement until I can access my pension (15 years).
Once I reach 55, I’ll use my pension to fund my retirement for the rest of my life (30+ years).
To figure out how much I’d need in my ISA by 40, I take my desired income X my inverse SWR.
I’ve estimated I’d like a monthly income of around £3,000, therefore a yearly income of £36K.
Sustainable withdrawal rate (SWR) refers to a percentage you can withdraw from your investments each year with a low risk of running out of money by the end of your timeframe.
For a 15 year timeframe, I’d be happy with a SWR of 10% (I’ll explain why in a future article).
The inverse of 10% is 1/10*100 = 10. Therefore £36,000 x 10 = £360,000 in my ISA by age 40.
So the next question is: am I on track to have £360,000 in my ISA after investing for 10 years?
How much could I expect to have in my ISA in 10 years?
To recap, to retire at 40 with a yearly income of £36,000 I’d need to have £360,000 in my ISA.
My ISA need only last for 15 years (40 to 55) at which my pension will take over (55 onwards).
So the question is: am I on track to have £360,000 invested in my ISA by the time I reach 40?
To calculate this, I’ll use the MYB Early Retirement Calculator which asks for the following:
Starting age: 30; Starting amount: £10K; Investment growth: 10%; Monthly contribution: £1K
After plugging these in, I see that I’ll have £260K in 10 years. I have a few options at this point:
- I increase my monthly contributions over the next 10 years in order to reach £360K.
- I wait until age 42 to retire instead of 40 where I’d have £360K by that point.
- I retire at 40 as planned with an annual income of £26K instead of £36K if happy to do so.
As you can see, only by knowing what my ISA could be can I then see what my options are.
How much do I need in my pension for Standard Retirement?
As a reminder, during over these next 10 years I’m investing in both my ISA and pension.
I’m investing more heavily into my ISA than pension because I’d like to retire early in 10 years.
But with my pension, I can’t access them until 55, so that means they have 25 years to grow.
So the question is: how much do I need in pension by 55 that I can use for the rest of my life?
The equation is as follows: your desired annual income (£) x inverse of withdrawal rate (%).
As mentioned previously, my desired annual retirement income is £36K i.e. £3K a month.
(I should mention that this figure adjust for inflation ever year i.e. multiply by inflation rate).
As for sustainable withdrawal rate (SWR), according to research, 10% would be too much.
According to data, for a 100% equities portfolio, 4-5% would be a suitable SWR for 30+ years.
For me, I would be comfortable with a 5% withdrawal rate for the duration of my retirement.
Therefore: £36K x ((1/5)*100) = £720,000 is how much I would need in my pension by age 55.
But the question is: at my current trajectory, will I have this much in my pension by this age?
How much could I have in my pension by age 55?
So I know I’d need £720K in my pension by 55 to withdraw £36K a year for the rest of my life.
Unlike my ISA where I’ll be paying into it until I access it, this is not the case with my pension.
That’s because as soon as I reach 40, I’ll stop paying into my pension as I’ll have retired early.
Therefore between the age of 40 to 55 (15 years), I’ll be relying just on capital appreciation.
That’s why I’d need a significant sum in my pension by 40 to give it the best chance of growth.
To calculate this, we’ll need two tools: the MYB pension and MYB early retirement calculator.
Using the pension calculator, and plugging in my variables, I see I could have £85K in 10 years.
Assuming that my wife will also have £85K, I’ll say that together we’ll have £170K by age 40.
The next step is to see how much our pensions could be after 15 years of just compounding.
Using the early retirement tool and plugging in our variables, we could have £710K by age 55.
That’s just shy of £720K, but if we’re only off by £10K, we could wait a few months till then.
You need to Stress Test your Plan
As you can see, you need to stress test you plan in order to see whether you plan could work.
Having stress tested my plan, I see that in terms of standard retirement, we’re in a good place.
However, in terms of early retirement, I can see that I’ll be off by 100K for my ISA target.
I’ll have never known this unless I ran the numbers to see if my plan is actually viable.
Having ran the scenario, I now can see what I need to do and adjust the plan accordingly.
One thing to note: this is the future we’re talking about, no one knows what the future holds!
Perhaps market returns will be 20% over a few years getting me to my target much faster.
Or perhaps I get significant salary increases such that I’m able to contribute much more.
All I can do is focus on the things I can control: investing in my ISA and pension every month.
As the years go by, I can reassess my plan to reach financial independence and retire early.
To find out more about early retirement, check out our articles on retirement and investing.
Do you know what your FIRE Score is? Take our FIRE Quiz to see how close you are to FIRE.
Are you on the path to early retirement? How is it going? Feel free share in the comments!
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