I’d better get to the point. How am I going to retire early?

Aha, my raison d’etre 🙂

retirementLIt’s long been a dream of mine to retire since I started university in the same year that my dad retired with his NHS pension. I had a great time at university, and would come home for holidays to see my dad gardening and socialising and enjoying life. I wanted the party to go on for ever….

And then I graduated and started work

Although I’ve always been able to save money and never over-spent, it wasn’t until a few years later that I read Robert Kiyosaki’s “retire young, retire rich” and “rich dad, poor dad” that it even occurred to me that to retire early was within my own control. I can honestly say that Robert Kiyosaki changed my life and gave me new drive and direction. From that moment on I was always going to retire young!

Before then, I assumed the only way to fund retirement was with a pension. But now the concept of multiple “passive” streams of income was introduced to me and was very seductive. All I needed to be financially free was to build passive streams of income to cover my expenses. Once that was in place, my work salary is no longer required to fund my lifestyle and I could retire. Simple, eh?

I split my energies into 2 areas:

1- How much do I need to fund my lifestyle? Am I happy with my lifestyle, if not, what needs to change? Are there any major changes in lifestyle coming up in my life (kids, etc)?

2- What the hell are “passive streams of income” and how do I go about getting them? In the early years I chose to focus on maximising my career earnings, which would let me save aggressively (I saved or invested most of my pay rises/bonuses and did not let my lifestyle costs go up unnecessarily), and to make investments in property and the stock market

This was still quite early in my career and my salary and living costs were pretty low. This meant that I couldn’t save that much, but it also meant that I didn’t spend that much either, so my passive income target was much lower

I’ll post in the future a bit more about being a buy to let landlord, property investment, stocks and shares, pensions, etc but right now…

My retirement plan is as follows:

1- Keep costs of living down and to avoid debt (except low rate mortgages). To misquote Martin Lewis: “Do I need it? Can I afford it? Can I get it for less?”. All areas of spend are under scrutiny, from food and gas bills, through to cars, mortgages, holidays and luxuries. The less I need to live on, the more I have leftover to save, AND the less I need to put aside to sustain my lifestyle in retirement. The trick here is that having lower lifestyle costs doesn’t mean having a lower standard of living – and motivation is key to keep reminding yourself that this activity is not a “sacrifice” and that you aren’t missing out. In fact you are making your life BETTER by doing this

2- Build passive streams of income, such as rental property. Reinvest the income for the moment, and later on use the income to live on in retirement. Step 2 is great because it delivers the double whammy of building your nest egg, and then provides ongoing income streams in its own right. In the UK we can currently earn a small amount each year free from tax. It’s £8105 in 2013 for those under 65, and £10,500 for those 65 and over, so I will seek to always use up this personal allowance even during the period after retirement, before my “normal” pension kicks in at traditional retirement age.

3- Build residual investments in stocks and shares, sheltered from tax in ISAs. Each UK adult can shelter up to £11,280 from tax (in 2012 tax year) in this way. This amount rises each year but theoretically a couple could shelter around £250,000 over 10 years using ISAs. I recognise that using all your allowance isn’t affordable for everyone, but the principle is this: Draw a tax-free “salary” from ISAs in the future. For instance 8% of £300k is £24k tax free, which is the equivalent to a £30k job, in addition to any step 2 income. I’ll draw capital and equity growth, and it’s ok to erode your capital to a degree as it’s only really needed until step 4…

4- Take advantage of tax breaks to build a decent pension pot. The government currently allow contributions into a pension to be made gross, so you save the income tax on these savings. As with ISAs, your savings can grow without being taxed any further, but your money is locked away until you are at least 55 years old. At some point after 55, the plan is to take the tax free cash (currently the rules allow 25% of the pot to be taken as a tax free lump sum), and split the rest into an annuity and income drawdown. Top up income if required with ISAs and the 25% tax free lump sum

5- I have a small defined benefit pension, and my wife’s pension will kick in at around 65, and it looks like there might still be a state pension at 68, although I have my doubts that this will deliver so I’m not counting on this!

If you read other peoples blogs (check out the excellent personal finance bloggers on my blogroll) on financial independence and early retirement you will notice that I’m not doing anything revolutionary here – this is a familiar path for many with the same aspiration, although it’s definitely not a mainstream financial strategy due to the seemingly irresistible trappings of consumerism!!

But, but, but….

What I usually hear when I try to talk to “normal” people about this is a combination of the following… But I can’t buy rental property at the moment because the bank won’t lend me money. But I can’t save £300k into ISAs over my lifetime, and even if I could, £24k pa tax free is not enough for my wife and I to retire. But I don’t like pensions, they have a bad reputation and I don’t trust them. But I like to have new cars and clothes and expensive holidays now. But won’t you be bored without a job? But, but, but…

Okay, everyone’s circumstances are different and my simplified retirement plan above is for illustrative purposes only, but it’s a plan that I believe at the very least will give me more options about my lifestyle and career. I will blog about the individual aspects above in more detail in the coming weeks, which should address these “buts” once and for all

The thing I now want/need to focus on is to build as much step 2 income as possible, ideally in my wife’s name as she is in a lower tax bracket than me

What’s not to like?

The journey so far has been eye opening and taught me many great things, such as:

– It reinforces what is really important to me and my life (time with family and friends), and I spend less time looking at what everyone else is doing with their lives

– It provides comfort knowing that I can cope with life’s financial curve balls such as redundancy, pay cuts, stock market fluctuations, recessions…

– Even if I have a bad day at work, I know I am better off today than I was yesterday (stock market fluctuations aside!), and am one day closer to financial independence

I’ve not made the right decisions every time, I wish I’d started this journey when I was younger, and I could probably have made better progress since I begun back in 2005, but I’m sticking to the plan, trying to learn from my mistakes and improve/accelerate  things wherever I can. Hopefully by sharing some of these lessons it might help others to shortcut some of the learning curve

Although this blog is about sharing my early retirement plans, it is not necessarily the best or only approach and I am more than open to comments or suggestions on how to do things better. Thanks for reading

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