Most FIRE seekers are currently in what I call Phase 1 of retirement: Wealth Accumulation.
This means they are currently saving and investing to be able to retire both early and later.
So what are these phases of retirement planning and what does each phase comprise of:
Phase 1 is Wealth Accumulation: where you are actively saving and investing for retirement.
Phase 2 is Early Retirement: where your investments fund your years before pension access.
Phase 3 is Standard Retirement: where the pensions fund the remainder of your retirement.
Phase 4 is Late Retirement: where you get a boost from the government with your pensions.
In this post, I break down these 4 phases of retirement planning, which will be part of a series.
I talk about what each phase consists of and how long each phase of retirement could last.
Finally, I share some tools and calculators you can use to see when you may be able to retire.
Phase 1: Wealth Accumulation
This is likely the phase most of us are in now: saving and investing our income for retirement.
Note: this doesn’t mean just funding our early retirement, but also our standard retirement.
This means that every month, we are investing into both our pensions and our ISAs. Why?
We invest into our ISAs (individual savings account) so we can access it for early retirement.
We invest into our pensions because this will fund our later standard and later retirements.
The reason why we invest into an ISA is because we can access our investments at any age.
Because we want to ideally retire as early as possible, we try and aggressively invest in ISAs.
As for pensions (workplace or private), we can only access these later in life (from age 55+).
Because these accounts have more time to grow, we don’t need to invest as heavily in them.
The duration of this phase depends on when we reach our desired ISA size to enter Phase 2.
Phase 2: Early Retirement
At this point you may be a bit confused, so I will explain this phase by giving some examples.
Let’s say that you are currently 30 years old and would like to retire early at say 40 years old.
That means that you have 10 years in phase 1 (30 to 40) and 15 years in phase 2 (40 to 55).
Remember that in phase 1 you’re investing for both early and standard retirement.
Let’s focus on phase 2: how much would you need to have in your ISA by the end of phase 1?
In this example, let’s say you’d want to withdraw a monthly income of £3,000/£36,000 a year.
Usually, we would use the 4% or 5% withdrawal rate to figure out our target portfolio size.
But the 4/5% rule is for 30+ years, meaning it’s too conservative for a 15 year early retirement.
What is a suitable withdrawal rate for shorter timelines? I will talk about this in a future post.
For this example, let’s say a safe withdrawal rate (SWR) for a 15 year early retirement is 10%.
That means you’d need £360,000 in your ISAs by the end of phase 0 to be able to retire early.
Phase 3: Standard Retirement
At this point, you’ve been retired for 15 years! From 40 to 55, you’ve been living off your ISAs.
Based on your withdrawal rate, it’s likely that you are coming to the end of your ISA portfolio.
That’s ok, that’s what it was designed for: to get us through to the next phase of retirement.
Once you reach 55 (potentially 57 in the future), you can now withdraw from your pensions.
Unlike phase 2, your phase 3 pensions are supposed to last you for the rest of your life.
Let’s assume that you want your pensions to last you around 30 years (from age 55 to 85).
You may recall that in phase 1, we were investing for both early and standard retirements.
Even though we stopped investing at age 40, your pensions have had 15 years to compound.
In terms of SWR, 10% wouldn’t be suitable as we risk depleting our pensions within 30 years.
This is where the 4/5% rule comes in, as it was designed for retirement lengths of 30 years+.
Phase 4: Late Retirement
The last part of your retirement journey is the state pension that you’d be entitled to receive.
This is money that is paid out to you by the state once you reach the ‘state retirement age’.
In the UK at the moment, this age is 66 – however this will change to 68 in the coming years.
How much money could you expect to receive? It’ll depend on how long you’ve been working.
To qualify for any state pension, you’ll need to have worked for at least 10 years.
But to receive the full state pension, you’ll need to have worked for 35 years.
Therefore as early retirees, it is unlikely we’ll receive the full state pension – but that’s ok.
The state pension is not an essential part of our retirement plan, but more of a nice to have.
Based on the 4/5% rule, your portfolio should comfortably last for your 30+ year retirement.
The state pension is just a nice bonus – a nice top-up to support you later in your retirement.
How much money can you expect in your ISAs and Pensions?
Now you know how the phases work, you now need to figure out how much money to expect.
First you must identify how much money you need, such as £3,000 a month or £36,000 a year.
Use the Early Retirement Calculator to see how much you could have in your ISA at Phase 2.
Using a 10% withdrawal rate, see if your ISA would give you your desired income in Phase 2.
If not, you may need to delay early retirement, or be willing to work a bit to meet your needs.
Use the MYB Pension Calculator to see how much you’d have by the time you reach Phase 3.
Using a 5% withdrawal rate, see if your pensions would give your desired income in Phase 3.
If not, you may have to delay standard retirement, or be willing to work a bit to start earlier.
Finally, use the State Pension Forecast to see how much money you could receive in Phase 4.
Hopefully with this additional income, it will act as a nice bonus to your standard retirement.
To find out more about retirement planning, check out our posts on retirement and investing.
We provide you with all the tools, strategies, and support to facilitate your early retirement.
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