How Much Money Do You Need To Retire?
How much money do you need to stop working and retire early?
If you are happy to work until you are 65 then live off an average salary, then you won't need a huge amount of money, but if you want to retire early and live a life of luxury and travel the world you will need rather more, but how much do you need? How should you invest for an income in retirement? How much do you need to put away each month?
Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.
Retiring at 65 or 66 or 67 or later
If you are happy to work until you are 65 or older then live off an average salary (currently the median income in the UK) of Â£20,000 a year, then you won't need very much. There are also many ways to boost your income in retirement.
The best annuity rates are about 7% * (at time of writing) and the old age pension is a little under Â£100 per week, so to achieve "average" pay in retirement would need just Â£200,000 in a personal pension (or an ISA - Individual Savings Account) and to achieve "minimum wage" (a little over Â£10,000 per annum working full time) you would need just Â£70,000. Unfortunately most people actually have rather less than that when they retire. Obviously most of us hope to retire on a lot more than minimum wage.
Theoretically you need less money when you give up work than you do while working: you no longer need to pay for transport to and from work, nor for work clothes, expensive coffee, lunches and after-work drinks etc. and your tax bill may also drop (higher personal tax allowance and possibly a marginal lower tax rate) but you also have more free time and more time to spend your money.
* You of course don't need to buy an annuity to provide you with an income, but it is a good gauge of how much you could hope to take from your investments each year without too much risk of running out of money in old age. Another way to determine a sensible income to assume from an investment portfolio, is from the UK Government Actuaries Department or GAD tables which are downloadable from the HMRC web-site and provide a maximum pension "drawdown" rate depending on your age and current 15 year government bond yields.
Extra Income in Retirement
But I want to retire early!
How much Money do you need to retire without too much risk?
What are your minimum outgoings? This is the amount that must be covered before taking any risk with your assets: The costs that must be covered such as bills, food etc. In the 1990s many "Day Traders" went bankrupt because they needed to trade just to cover the bills and during a losing streak they ate into their capital and once you have lost it it is difficult to get it back. If you have bills of Â£1,000 a month that have to be paid this should come from some reliable source. Index linked government bonds are the only guaranteed way of getting inflation-proof return forever, but pay just 1.5% (plus inflation) so you would need Â£800,000 invested in index-linked gilts just to cover the bills, before even starting trading shares or Spread-trading
How About with a Bit More Risk?
Alternatively, taking a little more risk with a balanced portfolio you could have less than Â£250,000 invested to cover these essential costs. If you are willing to take on some part-time work or can cover some of this amount from blogging or with your Squidoo or other internet earning then this safety margin can be reduced. You then need to decide how much money you want to earn on top of this minimum risk reducing part of your portfolio and adjust the risk of the remaining part of your portfolio accordingly. Remember that if you lose your money you cannot get it back.
For details about how to earn money on the internet and create a suitably engineered portfolio to meet your requirements please see the related articles: