In the goal for financial freedom a popular option, and a dream for many people, is to retire early. Chris Davies, our Chartered Financial Planner in Dubai, shares some thoughts on some of the financial steps which can be taken to achieve this aim.
Early retirement is a true lifestyle decision but being able to achieve it usually comes down to whether or not your finances are in good enough shape. If you’re still working there are some useful points to bear in mind which can help you if you’re keen to retire early.
Pay off any high interest debt
Before you start retirement planning (and even before you begin building an investment portfolio) you should review any outstanding debts. If they are carrying a high interest rate you might find that they could derail your plans for financial freedom. If this is the case it’s usually better to repay these as soon as you can, before beginning to invest for the future.
Create a strong financial plan
Once you’re confident that any debts are under control and others, such as a mortgage, are working for you rather than against you as a wealth accumulation tool it’s time to consider your investment portfolio. The aim of creating a solid portfolio and pension is to help fund your retirement years.
In general, research suggests that you need an investment portfolio of around 25 times your initial income requirement, according to sources at Morningstar. Therefore a GBP1m portfolio would create a GBP40,000 income every year during retirement, allowing for an annual increase in inflation and based on 30 years of retirement. Of course the amount you save and the growth rate, together with your preference over the income you need in retirement will determine when you can actually take that final decision about when is the right time to retire.
Start as early as you can
Knowing that a GBP1m portfolio is what’s needed to provide GBP40,000 a year in retirement can be a daunting prospect. However, the key step is to start saving as soon as possible and allow yourself to benefit from an investment by-product known as compounding. Compounding is where you receive growth on both the capital you originally invested and its subsequent growth, rather than just that static pot of starting capital. It was once even referred to as the eighth wonder of the world by Albert Einstein! Getting your money invested as soon as possible allows it to work harder for you, with the ability to generate more growth over time. For example if you save GBP5,000 a month into cash it could take 17 years to accumulate a pot of GBP1m. Investing the same amount, and achieving an 8% net return on average would mean that GBP1 million could be accumulated in just 11 years. Simply put investing and the benefit of compound growth could allow you to retire seven years earlier.
Consider a diversified portfolio
When building a portfolio to rely on in retirement you need to consider your own attitude to risk, and how far you’re prepared to go in the quest for an earlier retirement. Some people are happier taking more risk early on in life, before opting for more conservative decisions as retirement approaches. Investing in different assets and geographic regions can help reduce risk in your portfolio. You may also have other income-producing assets including rental property and pensions which could support your plans to retire earlier.
Review your plans regularly
The ebb and flow of life will mean there will be inevitable challenges along the way; family changes, job moves and economic and stock market fluctuations all have the potential to knock your planning off course. The aim is to stick to long term goals where possible, and a good financial adviser can help you do just that. Building in buffers, and keeping that long-term attitude in mind, can help even if you hit some challenges along the way.
Consider your retirement location and spending
Be realistic about what you’d like your retirement to look like. For some retirement is a chance to relax, and take things easy after a busy career and hectic lifestyle, with spending less of a factor. For others retirement offers the time to travel, and even live in a new country. If you are looking to retire overseas, or spend much of your time away from your usual home, it’s important to choose a country in which your finances can support a comfortable standard of living. Although a very personal decision it’s an important factor in your retirement plan.
Retirement is a very individual decision, and when you want to retire, and what your plans look like will be unique to you. Our aim is to help clients achieve financial freedom – whatever that looks like. To discuss your financial plans or wishes for early retirement with one of our team, please contact your nearest office.