Why you don’t need £1 million to Retire Early

You may have heard that you are can retire early when you save 25x your annual expenses.

Say your yearly expenses are £40k. That means: £40,000 x 25 = £1 million i.e. hello retirement.

However, this calculation is not realistic and does not work for a variety of reasons:

This plan is not realistic because most of us have our wealth locked up in multiple accounts.

Our most common account is our pensions, which we can’t access before the age of 55.

That’s why we must invest into another type of account (ISA) that can be accessed anytime.

Therefore, we must calculate how much we need to save into each account to retire early.

In this article, I talk about how to calculate how much you’d need in your different accounts.

I also use the example of annual expenses of £40,000 and using UK investment accounts.

Finally, I share handy tools and calculators for you to be able to calculate this for yourself.

The Problem with the Standard FIRE Approach

So where does this ‘25 times your annual expenses’ come from? It comes from the 4% Rule.

4% is a percentage you can withdraw from your investments without running out of money.

This assumes you’re invested in index funds that are growing on average around 7-10% a year.

If we take £1 million x 0.04 = £40,000 you can safely withdraw from your investments a year.

Does this mean we need £1 million invested before we can retire early? The answer is no.

The reason is that most of us will be funding our standard retirement using our pension/SIPP.

In other words, from age 55 onwards, our pensions/SIPPs will be funding us for 30+ years.

However, we can’t access our pensions/SIPPs before age 55, so then how can we retire early?

This is where Individual Savings Accounts (ISAs) come into play, which we can access any time.

How much do you need in your ISA to retire early?

To recap, if we just invest in pensions, we can’t retire early: we can’t access them before 55.

Therefore we must also invest into another type of account that we could access at any time.

Introducing: Individual Savings Accounts (ISAs), a type of investment account in the UK.

Just like pensions, we use ISAs to invest in index funds in order to grow our money over time.

So, how much money would I need in my ISA to retire early: £1 million? Thankfully, you don’t.

I can see why you might think that: £40k x 25 (inverse of 4%) = £1 million, but fortunately no.

You see, a 4% withdrawal rate applies only if you want your investments to last 30+ years.

This is the case for our pensions, but not our ISAs. So what withdrawal percentage do I use?

This depends on how early before 55 you want to retire e.g. let’s say you want to retire 15 years before age 55 at age 40. So then what withdrawal percentage would you use?

I’ll write an article on the different withdrawal percentages for the different early retirement periods, but for 15 years I can tell you that a safe withdrawal percentage would be 8%.

That means: £40,000 (you desired annual expenses) x 12.5 (inverse of 8%) = £500,000.

How much do you need in your Pension to retire early?

To recap, you would need £500,000 in your ISA to retire at 40 with an annual income of £40k.

The reason you don’t need £1 million is because 4% applies only for periods of 30+ years.

For shorter periods, different withdrawal rates apply, in this case: 8% for 15 years (40 to 55).

At which point, we can access our pensions – assuming minimum retirement age stays at 55.

So how much do we need in our pensions by 55 and what withdrawal percentage do we use?

You’ve guessed it: 4% because we want our pensions to last the rest of our lives i.e. 30+ years.

Therefore, we would ideally want our pensions to be at £1 million to withdraw £40,000 a year.

But wait, do we have to wait until our pensions hit £1 million before we retire early? Nope.

The reason for that is because even if you do retire age 40, you pension has 15 years to grow.

As long as you have a generous amount in your pension before you retire, it’ll be able to grow.

How much do you need to be investing and for how long?

So, we have our targets: £500k in our ISA by age 40, and £1 million in our pension by age 55.

You may be thinking “how the hell do I achieve these figures?” Well, let’s run some numbers.

Let’s say that you’re 25 years old and starting from 0: £0 in your ISA and £0 in your pension.

Let’s start with the ISA: how much do you need to invest every month to reach £500k by 40?

Using the MYB Early Retirement Calculator, to reach £500k by 40, you’d need to invest over £1000 a month for 15 years. This is based on an average 10% growth over that 15 year period.

What about pension: how much do you need to invest each month to reach £1 million by 55?

Using the MYB Early Retirement Calculator, to reach £1 million by 55, you’d need to have £250k in your pension to grow at an annual rate of 10% with any contributions from you.

Using the MYB Realistic Pension Calculator, you’d need to contribute £400 a month to reach £250k in your pension by age 40 – assuming 10% growth, employer contribution and tax relief.

Reality Sucks

I know what you’re thinking – that sounds like a lot of money that you need to start investing.

However, this is just one hypothetical example, there are so many other variables to change:

• You can reduce your target annual income; maybe you don’t actually need £40,000.
• Maybe you’re happy to retire a bit later, meaning you can contribute much less a month.
• Maybe you have another source of income during retirement, so you won’t need as much.

As you can see, it’s not black and white, there are things we can do to still retire early.

Play with the MYB Early Retirement Calculator, and see what you can sustainably contribute.

Also try the MYB Realistic Pension Calculator, and see what you also sustainably contribute.

At the end of the day, these are just plans, you need to actually take action and start investing.

You’ll be surprised by consistent investing how much closer you will be to early retirement.

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To find out more about early retirement, check out our articles on retirement and investing.

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