How Much Money Will You Need To Retire Early

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Fancy retiring in your forties or even your thirties? Millions are following the formula of an extreme saving and investment movement known as Financial Independence, Retire Early (Fire).

Even if you think some of the methods are a bit too much for you, adopting some of the general principles can shave years off your expected retirement age.

In this article, we explain:

What FIRE is and how it works
Is it possible to retire in your 40s?
How much do you need to retire at 40?
What are the steps to retire early?
How much do I need to retire at 55?
Should I open a pension, ISA or both?
Having a back-up plan
Planning your lifestyle in retirement

Find out how to retire early using this ISA trick

Make sure to think through your decision to retire early carefully – and plan ahead

What is the Fire movement?

It started in the US and has a growing fan base in the UK. Its main ideas originate from the 1992 book Your Money or Your Life, by Vicki Robin and Joe Dominguez.

The aim is for you to follow the methods in order to retire early by:

Being frugal
Using extreme saving methods such as setting aside half of your earnings
Generating an income through passive investments

It appeals to those who:

Want to quit work
Are dissatisfied with consumerism
Want to gain financial independence
Move their retirement age forward

It seems to have gained more appeal as a result of the pandemic; one in four 18 to 34 year olds setting early retirement as a new financial goal, according to research by the wealth management firm Moneyfarm.

What are the principles of the Fire movement?

Fire involves:

Saving as much of your income as possible (up to 70%)
Living exceptionally frugally
Paying off all your debt, inclifestluding your mortgage

Fire's magic calculation says:

You need to build up a net worth of 25 times your estimated annual spending to achieve financial independence
You should then withdraw a maximum 4% from your pot each year.

We explain more on this formula in this article.

Part of the Fire plan requires you to balance a number of elements:

You need to have an emergency savings pot of three to six months' worth of salary set aside
Grow your savings by investing, typically in cheap tracker funds that mimic the performance of the stock market.
Outright home ownership is an important element too; this is because retirees will have more disposable income if they have already cleared their mortgage.

If you expect to spend – not earn – £20,000 a year when you retire, you will need a savings pot of £500,000. Once you have retired, you withdraw 4% of this (£20,000) annually from the pot.

Is it possible to retire in your 40s?

Yes, but it will be really tough. You need to be incredibly disciplined and make big sacrifices while you are young. It also helps to have a well-paid job.

It requires some luck too; the Fire movement's rise in popularity coincided with a sustained bull run on the stock market, which has boosted the investments of Fire fans.

If big sacrifices don't appeal, you may prefer a lower level of Fire saving while living a more normal lifestyle.

After all, the basic principles of the movement – save and invest – make good financial sense.

Find out more: "My ISA and pensions will let me retire at 40"

Tom is building wealth in different ways so that he can have stopped work aged 40

How much do you need to retire at age 40?

You have to figure out how much you are likely to need to spend every year once you retire, which give you an idea of the income you will need.

If you want to retire at the age of 40 with an income of £20,000, you need to multiply this by 25. This means you need a pension pot of £500,000.

To get this size pot, you would need to save £16,000 a year from the age of 21.

Of course, how easy or feasible it is to save this amount of money will depend on your earnings. For example:

If you earn £30,000, you would need to save about half of it every year
But if you earn £70,000, you would need to save about a quarter of your income

Royal London's figures assume:

5% investment growth each year
A constant salary
Annual investment charges at 0.5%

REMEMBER: Even if you're planning to retire at 40, you can't gain access to a pension until you are 55. This means you would have to use other types of investments, such as a stocks and shares ISA or buy-to-let.

If you are shopping for a stocks and shares ISA, Fidelity has been given top marks according to our independent ratings. Find out why here.

Read more: How to retire early: the ISA trick

What are the steps to retire early?

1. Save

Most Fire savers put aside 25% to 50% of their income every month.

In order to save this level of money, you might need to identify essential expenditure and make some lifestyle changes. You might want to try out these money-saving tricks.

You also need to decide where to put your savings. Most Fire savers will invest using a tax efficient product like a stocks and shares ISA.

2. Invest

If you left your money in a poorly performing savings account, it will be eroded by inflation. You need to invest it instead to give you savings the best chance of growing.

Most Fire savers invest in low-cost tracker funds which mimic the performance of a stock market. You should use a stocks and shares ISA to shelter your investment returns from the taxman.

Fidelity has been given five stars for its ISA offer. Find out why here.

3. Earn more

It's not all about saving. The next step would be to try and boost your income. This could include:

Taking a part-time job or extra consultancy work
Asking for a pay rise
Changing jobs with a better salary
Starting a side hustle
Retraining for a higher paid job

4. Spend wisely

Think carefully before buying anything. Many Fire savers avoid luxury items and save money in anyway they can.

That might mean stopping that takeaway coffee habit and avoiding Pret sandwiches.

You could use the money you save to pay off your mortgage quicker or invest more money.

Why not give these money-saving tricks a whirl.

How much do I need to retire at 55?

Some Fire savers think 40 is too young to stop working but are using the principles to retire in their 50s instead.

Many people retire after they reach state pension age, which is currently 66, so retiring in your 50s is still considered early retirement.

If you want to retire at 55, you need to save £6,000 a year from the age of 21.

If you have an annual salary of £30,000, you would need 20% of your pay cheque
If you have an annual salary of £70,000, you would need 9%

Bear in mind that you usually can't access your pension pot until the age of 55, rising to 57 in 2028. This is why it's a good idea to use a mixture of pensions and ISAs. We explain more here.

Read more: Everything you need to know about stocks and shares ISAs

Nicola Richardson has tweaked Fire principles to suit her joint income of £42,000 a year with her husband, and she's on track to retire at the age of 50.

Nicola is doing her own version of FIRE so she can retire at age 50

Should I open a pension, ISA or both?

If you plan to retire early, it's a good idea to have a mix of pensions and ISAs. We explain why here.

Pensions come with more perks than ISAs:

Pension contributions attract tax relief (between 20% and 45%, depending on your income). ISAs don't have this tax perk.
When you take money out of your pension, the first 25% of the pot is tax-free, but the rest will be taxed at your highest income tax rate.
With workplace schemes, there will also be employer contributions

If you're shopping for a ready-made pension, Nutmeg is one of our top-rated providers. Find out why here.

But it's a good idea to take advantage of ISA perks too:

Any cash taken out of an ISA is completely tax-free (so you don't have to worry about income tax)
You can dip into an ISA at any age, making it a useful product for Fire advocates

Find out why Fidelity scores highly for its stocks and shares ISA.

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Retiring early during the pandemic

The rush to retire early and the rising popularity of Fire coincided with the decade-long bull run on the stock market since the financial crisis, which boosted Fire devotees' investments.

In March 2020, that luck ran out when the spread of coronavirus caused global markets to drop by 20%.

This posed a problem for early retirees hoping to live off their investment income because their pot was smaller.

Early retirees Alan and Katie Donegan had the majority of their savings in index trackers. They saw the best part of £200,000 evaporate in two months as the markets crashed.

Read more: What became of the Fire savers who dreamt of retiring early?

Early retirees with an income from rental property would also have faced pressures due to the pandemic as tenants struggled to pay rent.

"A market calamity such as Covid has highlighted the need for more than the basic three to six months' worth of outgoings in reserve."
Sam Cowan, a financial planner at wealth manager charles stanley

Have a back-up plan

Being overly reliant on one source of income is a bad idea, which is something that many Fire savers realised during 2020.

That's why you should make sure you have alternative sources of income to fund your lifestyle during market turmoil.

The first port of call should be surplus savings. This is what emergency reserves are designed for, to provide income typically worth three to six months of living expenses when money is needed fast.

It may be necessary to return to paid work. It's important to keep your eye on the long term. "An emergency reserve may give your investments some time to recover, but, don't forget, with life expectancy rising, you may have 30 or 40 years to fund", says Sam Cowan from Charles Stanley.

If you don't have enough savings, you may have to decide between turning to a credit card or cashing in investments.

If you are growing investments to retire early, be flexible about your retirement age.

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