Dreams of retiring before the age of 65 are fairly commonplace. However, for many people it starts and ends as just an idea, with a relatively small proportion of workers being able to fulfil their ambition.
The reality though, is that retiring before the age of 65 is relatively straightforward in theory. It can be achieved without a significant financial sacrifice, nor does it need a superb investment strategy. As such, it should be more than just a dream for the vast majority of working individuals.
£5 per day
Investing £5 per day may not sound like much. It works out as £152 per month, or £1,825 per year and this could mean that it is a realistic amount for a wide range of individuals to put to one side per month. Certainly, the cost of living is becoming increasingly challenging, with house prices and rents representing a high proportion of after-tax income. But for most people, finding £5 per day to invest so they can retire at 65 or younger could be a realistic aim.
Investment potential
Investing £5 per day in a tracker fund is a simple and straightforward process. An individual would simply need to open an account with a low-cost online broker, set up a direct debit each month for the required amount and invest it in one of a number of tracker funds. They charge relatively low fees and while they do not track the index perfectly, their tracking error is generally relatively low.
Over the last 10 years, the FTSE 100 has risen by 32%. That’s an annualised return of 2.9%, and with dividends added it works out as a total annual return of around 7%. However, the FTSE 250 has recorded a much higher return during the same time period. It has delivered annualised returns of 8.2%, and when dividends are added, this equates to a total annual return of over 10%.
Retiring early
Assuming an investor begins making their £5 per day work for them at age 18 in the FTSE 250, by the age of 65 they would have a portfolio worth almost £1.6m. That may sound like an unrealistic rate of return, but the reality is that there has been a major financial crisis, a vote to leave the EU and political uncertainty during the last decade. Yet still the FTSE 250 has generated double-digit returns. As such, similar returns could be achievable over the long-term.
Clearly, not all individuals will be able to start investing at age 18. However, even investing what may seem like a small amount on a regular basis can lead to a surprisingly large nest egg in the long run. And for those investors who can beat the market’s returns, retiring at an even lower age than 65 may prove to be a more desirable target.
