Tuesday, 20 September 2016

How much should I save and what is a good retirement age?

This is a question I have been thinking about alot lately.

Particularly as this year I decided to leave ‘the rat race’ and go freelance. It was a very tough decision, as a regular job allows security and holidays, bonuses and approval from others, training etc. I decided that I had been working so hard for so long that if I did not make a change now, I may never do so. I had also been thinking, it’s my only way to control my own earnings, so that I can decide when and how to retire.

You may or may not have heard the term Early Retirement Extreme (ERE for short) but it’s a website and a lifestyle that I have become increasingly interested in. It started with me hearing about a site called Mr Money Mustache, and once I read his site from start to finish, I was hooked. 

The simple premise to financial success is: Spend less than you earn, save and invest the difference, retire early.

Sounds simple, but many of us have thought to save 10% of our income is normal, and ‘what everyone else does’ I consider myself ‘good with money’ and I have never considered that if I were to save 50% of my income, and make this a solid goal, I could have a ‘real’ life after work, and before I am too old and wrinkly to enjoy it. 

After all, what’s the point of working your fingers to the bone and then having arthritis on that long promised cruise, or on hike up the dreamed of Peru trek?

So with this in mind, and after several years of focus on Junior, this year has been the career-changing, finance analysing big full stop, with a view to starting a new clear sentence. 
(I get the feeling that for a while it may well feel like a prison sentence...)

From June this year I knew my income would change, and I knew this freelance work was a stepping stone to the lifestyle change and early retirement we want to achieve.

With this in mind, I shaved costs and have done things like:

  • Selling items on ebay - 2 old phones which unexpectedly yielded £180, and they are  over 2 years old and not of the fruit brand variety, so I was pleasantly surprised.
  • Cutting down on groceries and wastage - we were spending close to £300 per month for 2 adults and one 5 year old, this is now close to £220 and healthful, with much less waste as I am home more to plan meals & think (thinking time is the hardest part of meal planning, isn’t it?)
  • Calling British Gas and requesting a smart meter be installed in October, hopefully this will help us save money
  • Increasing our savings and retirement amounts - a permanent Christmas standing order is in place now, at £60 per month until Dec. Then in Jan will be £20 per month until June, and start increasing then. Our retirement standing orders are higher too now, and need to go out before everything else, we simply live on the difference.
  • Reduced some of our emergency savings to be ‘enough’ and invested the extra, especially as Santander have announced they will reduce their interest rate, which will decrease in October.
  • Reviewed pension funds fees, and swapped where needed to less expensive index funds, which I have read alot about recently and seem to make more sense given that I am not an active investor, and that I don’t want a fund manager taking large chunks of my cash for their bonus. Some of my funds are still ‘rockstar’ fund manager ones, but less so.
  • Continuing to overpay on the mortgage, I know what we need to pay per month to pay it off in 10 years, so this is my target. Sometimes we hit it, sometimes not, but on average it’s been a shade under the right amount every month which I am really happy with and over the coming 3 months we’ll hopefully smash it for 2016.

One key expression I read in one of many financial books recently (thanks to the "Miracle Morning" routine by Hal Elrod, but I will get to that in another post) sometime) was ‘Mind the Gap’ in terms of how much comes in, how much goes out, and keep trying to grow that gap and invest it. 
This is what changes someone to having no power to having the power to change jobs, feeling freedom and make decisions they may not have made. I know for us just having an emergency fund in place has always been helpful, I’m the sort of person that really dislikes not being able to pay for unexpected bills.

So we are now finding what ‘our’ preferred savings rate is - which by the way many early retirement websites disagree on how to calculate this - personally I divide savings into our income for the month. Right now we are hovering around the 20% rate, which I hope to increase, probably more in early 2017, as Christmas is looming (yes, I did say that). 

Mr Money Moustache has this interesting 4% annual withdrawal article. If you have never done so, spend these Winter months reading his blog from start to finish, he's an inspiration.

As to the ‘ideal’ retirement date, for me this is moveable as I want to bring it forward. I suppose I would like to be financially neutral first (ie investments & savings = the amount we still owe on the mortgage).  Then retire by 55 at the latest.

I do NOT want to be 67 when I retire. Moving towards a gradual retirement at some point would be fantastic, where we have ‘enough’ and spend ‘enough’ but don’t over-consume.

What is your ideal retirement date and how much would be enough for you? Would you continue to work, or do you have other plans? I love to hear what people’s dreams are, as for all this hard work, there should be something to look forward to at the end of it... 

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