How much does it cost to retire in the UK? How long does it take? What are the benefits?
Retirement is a time where you can finally relax and enjoy life without having to worry about finances. In the UK, the retirement age currently sits at 66 years old but this shows no sign of getting any lower anytime soon.
Having a million in the bank is something that sounds unrealistic for most of us. But what if I told you that you could realistically retire with a million pounds in your pension account? You would be able to travel anywhere in the world, live like a king or queen, and have all the money you need to live comfortably.
In today's blog post I wanted to explore the maths behind retiring a millionaire (or at least very wealthy) in the UK.
The Defining Factors (Time and Income)
So if you are wanting to retire wealthy you need one of two things. The first as most would expect is a high income. Everyone knows if you have a high income then you typically can retire with a higher retirement income; this however is not always the case.
It is not so much the high income that is an important factor but instead the savings rate of your income. Let's say Person A is making £100,000 but only saving £1000 per year and Person B is making £20,000 but saving £5000 per year, then the person with the lower income would likely have a more wealthy retirement.
Checkout our early retirement calculator where you can adjust savings rate to see predicted retirement.
But even with a good savings rate, saving alone is not going to be enough - or at least not the most efficient way of growing wealth. This is where the second factor comes in, Time. The earlier you start the wealthier you will become, and not just for the obvious fact that you have saved more money. But in fact it will be the powerful compound interest multiplying your wealth
Put Your Savings To Work (Compound Interest)
Compound interest is interest that accrues on an investment over time. For example, if you invest £100 in a savings account earning 5% per year compounded yearly, your balance will be £105 after 1 year. Repeating this 5% growth but now including the £5 gained previously in the calculation you end up with £110.25.
This shows compounding can accelerate growth as long as you keep your earnings within the compounding system.
Check out our post dedicated to Compound Interest with further examples and explanations
Compound interest is the magic ingredient which means you don't need to make a huge income to retire wealthy. Instead you must be consistently growing your wealth through assets that can compound your wealth.
You may be wondering then, how can I compound my wealth? There are many ways to compound wealth from investing in the stock market to building property rental portfolios. Each have their own perks and drawbacks. It is important to research different methods for growing wealth and using compounding to your advantage.
Be Consistent and Use Compound Growth!
If you want to get rich slowly then you should focus on getting started early. This is because starting late means you will have less time to grow your wealth. If you wait until 55 to start investing then you will have a smaller window of opportunity than someone who starts at 20 and hence you will need a higher income to makeup for the compounding effect.
To illustrate this change we let's say we have a 20 year old who starts investing into the stock market purchasing index funds that track the S&P500 (the top 500 companies in the US stock market) which alleviates the additional volatility present within the share prices of individual stocks. They can expect an average return of 10.5% annually. Adjusted for inflation this value will be approximately 7.5% which we will use for our calculation. (investopedia)
To become a millionaire by 60 starting at 20 with an annual return of 7.5% you only need to add £100 per week into your investment account. This would result in you having:
£1,321,882.07
Out of the value above you would have only contributed £208,000 in total out of your £100 per week deposits. This means £1,113,882.07 came purely from interest. The staggering thing is that £95,310.82 was in interest within the 40th year alone. Essentially meaning you are getting half of your 40 year deposits back each year 🤯
To put in perspective, the same calculation as above but starting 5 years later would result in having a lower (but still impressive) £886,886.55. So a difference of roughly £450k just for a 5 year difference. Or a 1/3 loss in value for starting 1/8 of the time later. However, I word this I want to emphasis... starting early is the best option.
For a person starting at 55 wanting to retire a millionaire at 60 with the same investment return (7.5%) would need to deposit roughly £3300 per week. Of course at this point it would be unrealistic for someone to contribute £3300 per week unless they already had a great income or good cashflow from current investments.
Live Below Your Means
For most people wanting to pursue this path of retiring wealthy you have one of two options. Firstly you could create some form of business to fund your investments which of course requires a lot of work. The other option is to simply live below your means and stick to your current spending.
One way to more easily allow yourself to live below your means is by creating a budget to manage your finances. Checkout our post on our top apps for budgeting to help you get started managing your finances and setting a little aside for the future.
Another way to help yourself live below your means is to stick to the same budget even when you get a bonus or pay rise. As long as you are living comfortably, any extra unexpected money you can make could go straight into your investments. This doesn't just have to relate to pay rises but any time you get extra unexpected money/disposable income e.g. monetary gifts, bonuses, pay rises, selling old items etc.
Combining the Factors
To get the best results, there is no reason not to try and create a business while also starting your investments early. This way you could be drastically increasing your income within the short term through active work while increasing your contributions for your long term retirement fund.
As you can imagine if you manage to create a profitable business or company early on, then your profits and final portfolio value in the future has the potentially to grow drastically faster than anticipated leading to not only a wealthy but maybe even early retirement as you hit your target value.
Summary
I hope this post has opened your eyes to the possibility of retiring wealthy. Even if millionaire status is still out of reach you can still actively work towards a more wealthy retirement then what otherwise would have been possible. In a future post we will discuss how to reduce paying capital gains tax on your investment earnings so create an account with us or follow us on twitter to find out when we post.
Checkout our following calculators where you can test out what may be more realistic for your savings/retirement goals:
If you found this blog post helpful then please share it on social media 😊 and if you have any suggestions or are planning on beginning your journey to a wealthy retirement then let me know in the comments section below
Thanks for Reading
FAQ
How your child can retire a millionaire?
Starting a pension for a newborn baby – it sounds ridiculous. And yet, believe it or not, baby pensions truly are a thing. Technically called Junior SIPPs (SIPP stands for ‘ self-invested personal pension' ), they are a way for parents, guardians or other relatives to set up long-term savings for a child, which that child can then access as an adult from the age of 55. (unbiased.co.uk)
How some ISA investors have become millionaires?
As Dan Lane, senior analyst at Freetrade, explains, “Hitting the seven-figure mark in your stocks and shares ISA is … all about doing the simple stuff well and consistently.” According to Dan, investors should focus on “the basic habits of monthly investing in a diversified portfolio informed by your financial goals.” (fool.co.uk)
