How To Retire Early and Live Life On Your Terms

How many times have you wished you could quit your job and retire early?

Think that’s an impossible pipe dream? Think again!

The FIRE movement (Financial Independence Retire Early) is becoming more and popular, and it’s one that I’m a tiny bit obsessed with. So I decided to write this post introducing early retirement and explaining the super simple math behind it, basically I’m going to spill the (not so secret) secret behind how to retire early!

I am seriously excited to bring you this post about early retirement and financial independence. It was less than a year ago that I started reading Mr Money Moustache’s blog learning all about this subject and I can honestly say it’s changed my life.

Previously I felt kind of lost.

I didn’t want the prescribed life of work, retire, die, with maybe a house and a few kids somewhere amongst that. It wasn’t that I had some massive burning desire to do anything in particular. I just wanted the freedom to live my life on my own terms. Which is exactly what early retirement and financial independence allows and provides; the freedom and security to live life the way you want to.

So without further ado, let me introduce early retirement and financial independence!

What is early retirement and financial independence?

Contrary to popular belief early retirement and financial independence isn’t necessarily about quitting work. Confused? Don’t worry I was too at first.

FIRE is actually about having enough money saved up that work is no longer a mandatory obligation for you to live your life.

So, in a nutshell, it would be someone having enough money saved and invested wisely that the income they received from that saved money more than covers their outgoings. Therefore they are no longer reliant on a paycheck. They may still choose to work in paid employment, they may volunteer or they may just chill. The point is their income is coming whatever day to day activity they take part in. (Assuming their annual spending doesn’t increase).

I bet you’re now thinking that early retirement is just for the rich? Well actually anyone can retire early (within reason) and I wrote this post explaining how you can retire early on a low income!

Related Reading:

Can you really retire early on a low income?

Renting Versus Buying: Which is best for early retirement?

Is owning a car really a deal breaker for early retirement?

Surely you must need millions and millions to retire early?

Well no actually. You probably need far less money than you think and if you carry on reading I will show you how to work out exactly how much money you need to retire early! Plus, it’s really easy to calculate, win!

But I don’t want to quit work

Not something I’ve ever felt but I will take your word that some people enjoy their jobs… Sounds fake but okay.

But seriously, if you really love work and want to continue that’s fine, reaching financial independence doesn’t mean you have to quit. In fact, a lot of early retirees quit their career but then take up a work more meaningful to them because they aren’t relying on a paycheck anymore they can do work that traditionally has a low pay, such as an artist or carpenter, for the enjoyment of it.

But then what’s the point of becoming financially independent if you’re not planning on stopping work?

Now this question here, this is the most important question to ask.

How about never having to worry about money again? You know your bills will be paid, you know you can afford that holiday. There will always be food on the table and a roof over your head. Plus if you lost your job or had to leave for some reason, no worries at all!

Financial independence to me is the ultimate sign of succeeding in life (In the financial/ money arena that is.) To me that mean you have literally made it.

That’s why I think everyone, regardless of whether they want to stop work or not, should be aiming for financial independence.

All that freedom and all that security. Don’t wait until you’re 65 to be financially secure. Surely do it now and then you have the best years of your life to enjoy that security and freedom.

So FIRE???

That’s right. As I mentioned earlier FIRE stands for Financially Independence Retire Early and this is the main nickname for the movement. It’s also called financial freedom, financially secure and many other variations on the theme.

Seriously FIRE is the coolest thing is personal finance. Except for maybe compound interest, which is basically magic money (I must write a post about that…)

Now is the time to get onboard with FIRE because it can only change your life for the better.

So let’s get FIRE’ed up!!!

(Too much? Sorry …

So how much money do you need to retire early? (The math behind early retirement and financial independence.

There is no number that works for everyone. It’s entirely based on your annual expenditure.

So next time you read some financial advisor touting random numbers. Oh, people in their twenties will need at least 60 million saved otherwise they will have to work until they are 105.  Well, it’s just wrong. Each person, or household (however you most prefer to work it out) will have a different number.

To work out what your magic early retirement number is we’re going to use some info from the Trinity Study. This paper is now widely used in the investing and retirement industry. It basically says that with a retirement portfolio, so money saved up invested properly in stocks, you can afford to withdraw 3% to 4% of the total amount each year without the portfolio ever running out.

This is because, historically, investing in the stock market has produced average annual returns of around 7% to 9%.

Now obviously the stock market can be quite volatile which means that you may have to adjust your withdrawal if it’s a particularly bad year. But realistically the good years should even this problem out.

So as long as you don’t increase your withdrawal rate all should be well and you should have enough money until you pop your clogs.

For example, you have your pot of money that you’ve invested, the first year it increases by 50%. Crazy year. The following year it may drop by 40%. Everyone is really worried but you’re not because you know that the stock market has averaged out. And as you’re using the safe withdrawal rate of between 3% and 4% you know that your pile is unlikely to run out.

Also, in case you were wondering, inflation is also covered by the safe withdrawal rate. Brilliant!

(If you want some further info regarding the mathematical nitty-gritty involved start with Mr Money Moustaches post. Then see what he links to and go from there. I think it’s fair to say he’s like King of Early Retirement and has been living it for years now, so he really knows what he’s talking about.)

Let’s work how much YOU need to retire early!

So the formula is:

Your annual spending x 25 = (Total pot you would need for a 4% withdrawal rate)

to

Your annual spending x 33 = (Total pot you would need for a 3% withdrawal rate)

While 4% withdrawal should be fine, I like to be on the safe side and aim to have a pot between 3% and 4%. (The smaller your number the less likely it is to run out…).

Example time: my annual spending is £9,600 (I know I’m frugal).

£9,600 x 25 = £240,000

to

£9,600 x 33 = £316,800

Therefore I would need a pot of money amounting to between £240,000 and £316,800 to retire early. A happy medium would be a pot of around £280,000, I would feel comfortable retiring on that.

Now realistically I’m young, no kids etc and would probably want to spend more than that annually at some point in my life. But for now, that is an excellent goal for security and freedom.

Let’s do another example just so you can see how easy it is.

A household spends £35,000 per annum.

$35,000 x 25 = $875,000

to

$35,000 x 33 = $1,155,00

So you would want a pot of between £875,000 and £1,155,000 to never have to earn money again.

Pretty cool right? And so darn simple!

How long will it take me to save that much?

Well, that depends on you and your savings rate. When I was earning I was trying to save around 50% of my income. I was (and still am) frugal and budgeted well.

The suggested savings rate of 10% to 15% in my eyes is wayyyyyy too low. You are literally setting yourself up to work forever!

The absolute best way to see how long it gonna be until you retire is to use this free early retirement calculator here. (By the way, that’s not an affiliate link or anything, its just a free, no sign-up tool that I love using).

If I plug my own data into the tool. Assuming I earn £25,000 per anum and my expenses are £9,600 per anum. It will take me only 11.7 years to retire. Waahooo that’s a lot better than mandatory work until I’m 65 plus!!!

Put your own numbers in and see what you come out with on the free early retirement calculator.

Mini FIRE Roadmap:

Now, this post was only meant to be an introduction the FIRE life and math behind it and I was going to leave the post there. But I felt like it would be more helpful if I wrote a kinda of roadmap/ basic action plan to early retirement so you can see the different steps needing to be done. This obviously doesn’t cover everything because things like debt, or home ownership all will affect it. But it’s just so you can get an idea of what you need to do to retire early.

Step 1:

Work out your annual expenses.

Step 2:

Work out how much money you would need in you retirement savings pot by using the formula above.

Step 3:

Plug that data into the tool I shared so you can see how long it will take you to save with your current savings rate and current annual expenses.

Step 4:

Reduce your annual expenses to speed up the process.

Step 5:

Increase your savings rate further by increasing your income. Thus speeding up the process even more.

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Step 6:

Invest your money into an index fund. Again kudos to Mr Money Moustache who has written another excellent post when you can learn all about index funds. (If you’re not from the USA, all the basic info is still really relevant. Just the exact products he uses might not be available to you.)

Step 7:

Rince and repeat until your retirement savings pot is looking healthy and full.

If you have any questions or just something you want to say please go ahead and comment or send me an email at [email protected] where I will happily answer any questions!

Also if you enjoyed this post would you mind sharing it on Pinterest, it would massively help me out! 🙂