Whilst the Government gives you a pre-determined date that you will be able to retire by, this is not the only date to focus on. Right now, you can find out the age from which you would be able to receive state pension by using the Government calculator here.

However, in my case, this is a long way away and I don’t particularly want to wait another 50 or so years to retire. That is why I am looking at the FIRE movement, which stands for Financially Independent Retire Early.

There are millions of people around the world who are also looking to follow this movement, whether it be in the form of “Lean FIRE” where you will be able to retire earlier by having low living expenses, or “Fat FIRE” where you plan to live a lavish lifestyle in retirement.

To retire early, it is important to understand your FIRE number. This is the amount of money you need to have saved/ invested to retire as you will now be living off of this amount.

Using the 4% rule we can assume that any money invested in the stock market can be withdrawn at a rate of 4% per year without seeing a decrease in the value of your portfolio over the long term.

For example, you may have £100,000 invested meaning you could withdraw £4,000 but if the stock market grew by 7% then your portfolio is still worth £103,000 (very rough example).

So how can you work out your FIRE number?

Step One:

The first step is to understand what your current cost of living is, and then to understand what this cost of living may be in retirement. For example, you would no longer be spending on commuting but you will likely be travelling a lot more for holidays, etc.

Once you have figured this out as an annual number, it would be sensible to add around 10% extra as a buffer amount. This is how much you anticipated being able to survive on in retirement.

Step Two:

Therefore, using the 4% rule, we will then multiply this figure by 25 to find out how much we need to have invested to retire.

This amount will be your target number to have invested in the stock market for you to be able to retire comfortably.

Step Three:

Now comes the interesting part - we need to understand how much you have invested now and how long it will take to get to the target investment number.

To do this, I use compound interest calculators such as MoneyChimp where you can enter these figures in to see how things change with different variables. Typically the market grows around 8-10% per year and the average stock market gains since its inception are 9.2% annually.

For example, if you are looking to retire soon you will have to invest a lot more money than someone who wants to retire in 20 years as your money has less time to grow from compound interest.

Step Four:

Using the calculator in the step above, and understanding how much you can invest every month, you should now be able to see how many years it will take you to hit this target investment number.

Add the number of years to your current age, and in theory, this is when you will be able to retire.

If this is later than the state pension age or the age you can access another pension, then you can either increase your investment contributions somehow, or you can retire with a higher income than just state pension at your state retirement age.

Example:

I am looking for a somewhat FAT FIRE method for my retirement and will potentially be working for myself to generate an extra ~£10,000 per year minimum.

However, my annual income figure I aim to reach will be around £40,000 per year to enable a comfortable retirement income (even without the extra £10k).

Therefore, we do £40,000 x 25 = £1,000,000 which is my target investment figure.

I currently have around £18,000 invested in stocks and crypto. I am not including crowdfunding investments or pension pots as these come with commitments and potential lock-ups of funds.

Therefore, using this calculator at an annual growth rate of 9.2% I will be looking at 24 years of investing £10,000 per year to reach my early retirement target.

At the age of 22, this means I should be able to retire at 46 so long as I can continually meet my annual investment target of £10,000. This is earlier than my workplace pension age of 55 (earliest access point) and my anticipated state pension age of 68 years old.

Hopefully, that has helped you understand your pension age and the potential age of early retirement! If you have any questions, do let me know on Instagram.

Thomas,

The Bank Engine

Sources:

https://www.gov.uk/state-pension-age

https://www.investopedia.com/terms/f/financial-independence-retire-early-fire.asp 

https://www.fool.com/retirement/strategies/withdrawal/4-percent-rule/ 

http://moneychimp.com/calculator/compound_interest_calculator.htm 

https://www.businessinsider.com/personal-finance/average-stock-market-return?r=US&IR=T 

https://www.nidirect.gov.uk/articles/how-your-workplace-pension-paid