If you are a young dad who would love to spend more time with your children, you may wonder if early retirement is an impossible dream. Indeed, the trend seems to be moving in the opposite direction. The number of people retiring after the age of 70 has doubled in the UK since 2010, according to data obtained by Willis Towers Watson. This means that almost one third of workers can expect to still be in the workforce after their 70th birthday. These statistics beg the question: is it possible to go against the grain and retire early? One movement that is quickly gaining momentum is FIRE, which stands for Financial Independence, Retire Early. Its aim is simple is to enable you to retire by the time you are in your 30s and 40s, by following specific strategies – including the 4% Rule.
What is the 4% Rule?
The 4% rule is based on the laws of financial averages. Developed by financial expert William Bengen, it stipulates that because stock portfolios grow at an average rate of 7% per year and the average rate of inflation is 3%, you can withdraw 4% of that growth so you don’t run out of funds. The rule falls into what economists call ‘the Safe Withdrawal Rate’, which is the maximum amount of your savings that you can spend without eating away into the capital or running out of funds for at least 30 years post retirement. Since this rule was developed, subsequent research (including a 2013 study published in the Journal of Financial Planning) found that it is too risky to follow to the letter, bearing in mind today’s low-interest rates. However, it can be used as a general guide, the aim ultimately being to keep as much of your retirement funds intact, as possible.
Frugal Living during Your Working Years
The FIRE movement involves more than calculating how much you can spend upon retirement. It is a lifestyle choice that states that if you really want to retire young, you need to live frugally in the previous decade or two. Take the case of UK economist, Barney Whiter, who saved half his earnings every month, as well as the entirety of his bonuses. By the time he turned 43, he had amassed a healthy amount that enables him to enjoy the good life today (he is aged 48). Reducing expenses is one key requirement and that means exercising plenty of restraint. Whiter, for instance, cycled to work every day of his life to save money. He also sacrificed holidays and leisure expenses that many people feel would feel empty without.
Creating a Financial Strategy
As noted above, the 4% rule is not a guarantee of success. To be able to retire in your 30s or 40s (as is the aim of the FIRE movement) you also need to invest your funds strategically and adopt a strategy that will maximise your savings potential. If you have a 25-year mortgage, for instance, paying a £5,000 will enable you to save over £11,000 on interest and reduce the length of your repayment term. If you are able to invest, seek the help of a financial advisor and discuss how you can diversify risk. Look for ways to maximise your income by investing in further education or training, considering working freelance in addition to your everyday job, and taking out a private personal pension scheme, which will keep you from paying income tax on the amounts contained therein.
Making Goals Meaningful to You
Sometimes, living ultra frugally is impossible if you are parents with young children who have various needs and hobbies. Depending on the school they go to, sports they play etc., the original amount you hoped to set aside may not turn out to be so reasonable after all. It is up to every parent to find a balance between retirement goals and enjoyment of life. For some parents, retiring at 55 (instead of at 40) may actually be the wiser choice, if it allows them to enjoy their kids, take occasional holidays, and reward their kids with treats. After all, childhood goes by in a flash and memories made are nearly always more valuable than material possessions.
Although trends both in the US and the UK are seeing workers staying employed for longer, there is a growing push for early retirement, as seen in movements like FIRE. Although there is no winning formula that guarantees this will be a possibility for you, taking steps to save for the future is vital if you are to enjoy a stress-free retirement. Ultimately, many people enjoy work and prefer to enjoy their earnings on a day-to-day basis, rather than living frugally for over a decade to enjoy various decades of peace upon retirement. The choice is personal, and this case, it is yours. Which lifestyle do you think sounds more appealing?
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