So what sort of salary do you need for early retirement in the UK then?
OK we are a few posts in to my humble corner of the interweb so I think it’s time for a quick little recap:
We’ve analysed living expenses in the UK and have come to the firm conclusion that we should be able to live fairly comfortably on 10k per year (per adult wage earner, more if you have kids!).
This relates back to the argument that we could, theoretically, if we so wished, retire with *just* £250,000 in net worth, as long as that was in asset producing investments.
The third and final piece then is your savings rate, as this determines how early you may be able to actually retire. A nice graph-ical demonstration of how this works can be viewed here.
So let’s take a savings rate which is considered to be fairly standard by the early retirement crowd, but probably ridiculously extreme by the average consumer’s standards, which is a 50% after tax savings rate. A lovely round number, and easy to work with on many levels. For every pound you take home in your pay packet, one pound will be invested. As we can see from the graph this gives us a retirement projection of just 16-17 years assuming an investment return of around 6% per year.
Great news, right!
There’s more. I had a play around with a supremely useful UK tax calculator for the year 2013/2014 and a lovely bit of serendipity happened. I was trying, you see, to find out what sort of salary you’d need to achieve a 50% savings rate, which for the percentages literate of you will have already worked out, would mean an after tax take home of £20,000 or more. After about 3 seconds of shoddy mathematics* I tapped in the semi random figure of £26,500. This came in nicely over our our 20K marker at £20,837.76, yea yea, that’s real nice right? My final goal though was to compare this to the averages UK salary to see realistically how achievable early retirement could be for a large proportion of the UK population. I thought my initial estimate was a bit high for that average, so I decided to work my way down to exactly 20K take home to see what the pre-tax salary would be. The results I can tell you’ve all been waiting for, are here:
How much salary you need to take home £20k
Yes that’s a minimum of £25118.30 pre-tax salary** needed to live comfortably off of 10K per year, save 50% of your income, and retire in 16-17 years. This is kind of mind blowing, when you think if you start at age 25 you could retire at age 42 on a fairly average wage.
I’ve started to make assumptions again there, so how does this actually stack up for you average Brit? Oh yea… serendipity, that’s what I was harping on about! The reason being, after a quick Google search, it turned out that the average wage in 2012 was, in fact, £26,500 – I hit the number on the nose on my very first guess! So there you have it, conclusive proof 😉 that pretty much anyone with any kind of moxie could retire early in this lovely old country of ours. Roughly 23 years early in the above example of our 25 year old!
One other thing which might blow your mind. I was browsing through Wikipedia looking for confirmation of the average UK salary, and came across a nice little table which shows how much net-worth you’d need to qualify to be in a certain percentile of UK wealth ownership. As you can see to be in the top 10% of the Country you’d need £176,221 – this was back in 2004-2005 though. Inflation adjusted for 2013/14 that works out as £229,928 – putting our average Brit who saves 50% of his salary in that top 10% bracket in under 16 years. I had no idea this could ever be possible for me, let alone someone on average salary.
You often hear the old saying “Money goes to money” or “You need money to make money” and this is in part obviously true, but it is normally spouted by those who seem determined to spend their whole paycheck every month. It’s generally used as an excuse… “I’ll never be wealthy as I have never started with any wealth”, we tend to look at people with money as either having had a large inheritance or just think they are lucky. I think this attitude is more rife in this country and Europe, than other more pioneering counties (read USA). The numbers above prove that luck very rarely plays a part in wealth accumulation, and there are really no excuses on why you can’t be a part of that ellusive top ten or even five percent – £352,502 net-worth needed adjusting for inflation, if you are interested ;). It just takes time, and therefore patience, plus a bit of hard work (not much more than average) and some determination.
On a final note, I am not expecting any naysayers from the early adopters of the blog*** but as it hopefully grows, any doubters on the figures of the concept can work with this basic example to see how possible it is. I’m not saying you can do it on a part time 10K per year job, I am not saying you can do it if you have 7 kids, but the example above covers a worst case scenario, salary wise at least, for a huge amount of the working population, who have literally no idea (and almost certainly no inclination) that this is a path they may be able to take through life.
If you’ve stumbled across this blog and have never heard of these Early Retirement concepts before I would really love to hear your views on it. Do you just think we are all barking mad? Do you love work so much you are happy to do it till your 60? Do you think the numbers just don’t stack up? Or do you kinda like the idea’s that are being presented here, and can envisage your path to freedom by substituting your own numbers into the examples I’ve presented so far?
To all the pro’s out there – what are your numbers!? Are you already at FI, and if not how many years have you got to go?!
*estimation / pure guess work. Back ↑
**Note that I’ve left out any pension contributions or any other complications to keep things as simple as possible. Back ↑
***Thanks again for anyone – naysayer or non-naysayer – reading at this stage by the way, you are quite obviously a highly intelligent and enlightened member of the human race! Back ↑
Discussion (10) ¬
I think you have this about right, but I’d disagree with your methodology of ignoring pension saving. In the UK housing is expensive – one of the keys to FI is getting the ongoing cost of this down, which means either paying down your mortgage or getting enough investment income to pay your rent (a capital base of 20* the annual rent would roughly do that). Unfortunately both of these you have to do from taxed income.
If you target your eventual individual income of 10k as a judicious mix of untaxed ISA income and taxable pension income you can avoid paying tax on the pension component (‘cos it’s below the personal allowance) which sort of favours seriously considering the pension part, particularly for anyone paying 40% tax – it’s like a 60% bump up on your savings rate (for every £60 of income you forego £100 goes into your pension capital base, ie a £40 profit on an investment of £60). A basic rate taxpayer whose employer offers salary sacrifice can also do well, saving £100 for every £68 they forego.
Because you can only draw a pension at 55 the overall trajectory in the UK is to save in both ISA and pension (ISA because you need income from retirement at 42 in your case to 55), pay off all but your 25% pension commencement tax free lump sum from the mortgage then run IO from 42 to 55, paying off the mortgage with the tax-free lump sum at 55. For the rent option the PCTFLS goes toward building your capital base to pay your FI rent for you.
I didn’t get this right so I discharged my mortgage before I left work because I didn’t realise some of the wrinkles, so I have less income now than I’d have post 55. But it’s good enough. Work is vastly overrated and I can’t recommend FI highly enough 😉
Thanks for commenting ermine! You truly are a legend on the UK FI scene! I really must get by your place more often, I keep getting distracted with all the US based blogs. 🙂
The retirement accounts are clearly not to be ignored in real life, it was just to keep the calculations here as simple as possible, I tried to make that clear in the post so apologies if it wasn’t. I am going to run some more realistic scenarios in an upcoming post in fact.
On that note can I just ask what you mean by “pay off all but your 25% pension commencement tax free lump sum from the mortgage then run IO from 42 to 55”
I think I get the basic strategy of what you are saying but can you explain in a bit more detail (Not sure what “run IO” means for example which may be the key thing I am missing). It sounds like a strategy that could be very useful to myself and others in a similar boat.
Thanks again!
Run IO = run interest only…. so stop paying down the capital on your mortgage for those years, then use your lump sum to clear the remaining capital.
That said, I still need Mr Ermine to expand on the FI benefits of doing this.
I’m not sure this will suit all anyone, depends on what your mortgage circumstances are. Personally, Mrs LCIL & I have an offset mortgage that is already fully offset, so we already pay no interests on our debts. We’re paying down the mortgage as slowly as our provider allows us & taking the extra cash into ISA’s.
Thanks for the clarification LCIL! I should have guessed.
Surely the benefits are similar to how you have offset your mortgage, by paying interest only then you have more to stuff into an ISA? Obviously this only works if the rates remain low as they are nowadays, if they increase significantly by the time you get to this stage then it may make more sense to just kill the debt.
Would be good to get a full answer from ermine though as I don’t want to put words in his mouth!
Thinking about it you could be right: re- Ermines comment.
For us though, interest rates on our mortgage are now irrelevant – there is zero incentive to pay the debt off early. Our mortgage payment each month just pays down debt in it’s entirety, & then we have that same amount of cash “freed from offset” to invest in the market. I actually welcome increases as that will lift our other cash/cash ISA savings significantly.
A fully offset mortgage is basically the perfect place to leave your “emergency 6 month living costs fund” plus cash you can’t get inside an ISA wrapper each year. Mrs LCIL is self employed, so we also accrue her tax savings here. Someone at the bank is probably acutely aware of how little money they make of us! 🙂
This is an interesting strategy LCIL, and one that I had not considered before!
At the moment I am on a 2% mortgage rate (tracker) and earning 3% on my cash, so I am thinking I am marginally better of with this set up over the offset… however if rates rise even slightly then the situation would be completely reversed. I will have to look into this set up, thanks! What bank are you with if you don’t mind me asking?
FS,
We spoke recently. I am Ireland based.
If you can get your monthly nut under control you can achieve FI. Take this from someone who got wiped out in 2008. I went all out since then, ended up over the crossover point this year. I am a working FI person, anything I earn monthly is all invested, according to my plan (IPS).
Same problem over here, cant draw a pension until age 60. The way I look at things, anything I earn is net and thats what I have to play with.
I can tell you, things quickly mount up, when you are spending the minimum each month.
DH
Hi DH,
Many thanks for your comment and email, much appreciated!
I would love to hear more about your story, the offer still stands, if you would be so kind to provide a case study/guest post on how you got to FI, what your expenses break down is, or anything you’d like to write about really then give me a shout.
Any wisdom we can get on here from those who’re already “over the line” is invaluable!
Let me know and thanks again!