Firstly, retirement means an end to steady paid employment to me. It doesn’t necessary mean an end to earning money. Early retirees need to make this call. If retirement means your pension arrangements will be your only means of support you will need a much larger pension pot.
It’s wage slavery I want shot of. I also want my time back; my current job is reasonably well paid so if I’m going to be working for the Man I may as well stay put. But I am looking at retiring about 10 years early relative to the normal retirement age for my job.
The keys to successful early retirement are
- clear debts
- reduce outgoings
- save more
- develop alternative income streams
I owe nobody – Debt Free and Mortgage-Free
I didn’t achieve this by winning the lottery. It’s taken me two thirds of my working life and it was done the boring way; I spent less than I earned and I paid my mortgage in 18 years, by overpaying for a few years. There are no short cuts; I had fewer holidays than most and stayed closer to home – while colleagues were jetting off to Egypt or Australia I stayed in the UK or Europe with the odd foray to the States.
Unlike many personal finance bloggers who became inspired to master their finances after building up frightful debts, I never ran up traumatic debt and juggled credit cards. I credit my parents for that, they’d even put sixpences into a tin towards the bill when they used the phone when I was a kid.
Clearing mortgage debt is liberating – it means I can focus my efforts on saving over 70% of my take-home pay. By saving half of it in my company pension additional voluntary contributions (AVCs) I keep Gordon Brown’s grubby mitts off it.
I live on considerably less than the take-home of someone on Britain’s minimum wage last year (full-time UK NMW is about 12k gross or 10k net). That’s not as hard as it sounds for me since I have no mortgage or rent outgoings. It does mean no foreign holidays and low-cost staycations, which is hard when working the 9-5 life. It was particularly hard last year, what with some of the nutty practices at work after some dreadful business results meant HR are trying to stress people to leave by abusing the performance management process to avoid paying redundancy money.
There’s no way round it, not getting a decent break is the grimmest part of living frugally but working in a stressful environment. It brings it home just how much holidays were as much a respite from work as a positive acquisition of new experiences. However, I figure a year or two of that is worth it to win a permanent holiday for the rest of my life!
Reducing my outgoings also gives me a dry run on what it would be like on a lower income – the fact that I can do it gives me good confidence in my retirement calulations. I’d recommend it to anybody thinking of retiring early – live on what you plan to retire on and save the rest. That way you test the theory while you can still back off and work for a bit longer if you got the estimates wrong.
If you can save 50% of your take-home then for every year you work you can take a year off. It’s obvious when you think about it, the half you don’t use this year pays for your next year. I thank Jacob from Early Retirement Extreme for bringing it to my attention in his blog post.
Find alternative income streams
I have to admit that I am not really doing that well at this. Most of these need creativity, such as writing, recording, photography, and this is at a low ebb while living frugally while tolerating a poor work environment. I’ve got some ideas and am improving my writing.
And of course I am investing, both in shares ISAs and in pension AVCs, and my ISA and company sharesave holdings are paying dividend incomes. But the stock of capital is pretty low so that is not a large alternative income. And realistically, these alternative income streams are dwarfed by my employment income. At times I am in danger of getting sucked into the one more year before comfort trap that ERE highlights.