After a short break, I looked at my savings, investments and pension pot and realised I could probably make a couple of changes to my portfolio and get along just fine on the income I could generate with the option to convert my pension at a later date to income drawdown.
Basically, the amount I needed to retire on was not so much about a vague idea of amassing a fortune - say half a million pounds - but more a case of being able to generate sufficient income from my assets to replace earned income.
If I possessed a little more foresight in my earlier years, I might have put in place a planned strategy for early retirement. Here are a few thoughts on how younger workers in their 20s, 30s and 40s could start to work out a rough figure to aim for their retirement.
There are two basic questions to be addressed - what level of income do I need when retired and secondly, what level of savings will be needed to provide that income?
So, although this is not a precise science and each individuals circumstances and preferences will vary, here is the outline of a few basic steps towards working out a figure.
1. Set a target date for your ideal retirement - it may need to change as the calculations unfold.
2. If you know what income you need fine, otherwise take your current annual net income and deduct 20% as this is the average work-related expense you will not have to spend when retired. So, if your take home pay is £30,000 this target figure would be £24,000.
3. If you have a works and/or personal pension or SIPP, get a projection of the annual amount(s) to be paid and deduct from the above figure.
4. Multiply the remaining sum by 25 to provide you with a ballpark capital sum needed to generate the remaining income.
Therefore if the replacement income figure after deducting works pensions was £12,000, the lump sum needed to generate this annual income would be £300,000 (£12K x 25). This is based on a reasonably sustainable return of 4% p.a. from the investments.
If you intend to bridge the gap between early retirement and state pension, for example 10 yrs from age 57 to 67, it may be an option to use a lower multiplier figure of say x 18 (rather than x 25) which would obviously reduce the lump sum figure - in the above example from £300K to £216K. The income taken from the lower sum would be nearer 6% p.a. which would be less sustainable long term but certainly a feasible option over 10 yrs.
5. Once you have settled on a final figure and you know the number of years from now to your retirement date, work out what level of savings from your current income would be needed to reach this figure.
There are many online calculators available - I use Candid Money . To generate £300,000 in the above example would take just over 20 yrs saving at 20% of salary in an investment ISA assuming 6% average return.
If you are saving via a sipp or the new lifetime ISA remember to factor in the HMRC tax credits to your contributions.
6. If your retirement date is close to your state pension age of 66 or 67, remember to factor this additional income into the calculations, for example the new flat rate pensions are ~£8,000 p.a. . In the above example, the £12,000 therefore reduces to just £4,000 and the lump sum required comes down from £300K to £100K.
Having worked your way through these steps and maybe played around with a number of different calculations, it is time to make a decision.
Is it worth cutting back on all but essentials, living frugally and increasing the savings rate to 40% or 50% to bring forward the retirement date by maybe 10 yrs like my fellow blogger RIT has recently achieved?
Maybe you could manage on less than current salary minus 20%.
Once you have all the information, settled on your ideal retirement date and worked through the various calculations, you can make an informed choice. Without doing the above, you are not really in control of two important elements - how early you can retire and how much you will receive.
I suspect, like me, most people will be more focussed on the present and possibly just hope things will work out for the best down the line.
Feel free to comment below if you have some thoughts on saving towards retirement