Here’s how I plan to retire early using the FTSE 100

Rupert Hargreaves explains how he plans to make £500,000 in two decades with the FTSE 100.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Being able to retire early might seem like an impossible dream, but I believe it is possible if you have a strict savings and investment plan in place.

Stage one

The first stage of this process is to work out how much you will need to retire on.

A simple calculation any investor can use to arrive at this figure is to use the ‘multiply by 25’ rule. If you take the amount of money you think you will need to live on every year in retirement, and multiply it by 25, you’ll get a rough estimate of how much you will need to have saved by the time you decide to quit the rat race.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

For this article I’m going to assume a desired annual income of £20,000 in retirement. Using the rule above, my figures tell me that a saver will need £500,000 put away at the time of retirement to meet this desired income level.

The best way to build this savings pot is to invest your money. Over the past decade, the FTSE 100 has produced an average annual return for investors in the region of 7%. That’s a significantly higher return than any cash interest account offers at the moment.

Investing for growth

So, assuming that all of the savings are invested in the FTSE 100, how much would you need to save every month to build a pension pot worth £500,000?

The answer to this question depends entirely upon how much time you have left until you want to give up work.

For example, it is relatively straightforward to accumulate this level of savings over 50 years. Indeed, according to my calculations, a saver would need to put away just £100 a month over five decades to accumulate savings worth half a million pounds, that’s assuming an average annual rate of return of 7%.

If you want to hit this target within three decades, my numbers tell me that a monthly deposit of £430 is required assuming an average annual rate of return of 7%. That is excluding any tax benefits or fees accrued over the time frame.

Pension savers are entitled to tax relief at their marginal tax rate on any contributions up to a limit of £40,000 a year. So, if you are targeting savings of £430 a month, you only need to put away £344, and the government will add an extra 20% (for a basic rate taxpayer).

To hit the £500,000 target in just 20 years, my numbers tell me that a saver will need to put away £1,000 a month, or £800 a month before tax benefits.

The bottom line

That’s how I plan to retire early using nothing but the Footsie 100 and a regular savings plan.

As my figures above show, it is straightforward to hit this target if you have a regular savings plan in place and use a low-cost FTSE 100 passive tracker fund.

You might be able to generate higher returns by picking stocks yourself, but this also opens up the risk of a possible capital impairment (or loss), which could set your savings back months or even years. In my opinion, it is better to stick with the FTSE 100.

Is this a top choice for growing wealth now?

Before deciding, we think this pick is another must-see.

Discover ‘One Top Growth Stock from The Motley Fool’ absolutely FREE.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent double-digit revenue growth. ‘Return on capital’ - a key measure of business quality - is a colossal 57%. That’s almost 6 times higher than the UK average!

Best of all, it has a cult-like following. Customers who’re raving fans, potentially spending more money, more often - whatever the economy.

In our experience, discoveries like this are extremely rare.

So please, don’t leave without seeing, ‘One Top Growth Stock from The Motley Fool’, which includes both the Risks and opportunities.

Claim your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »

Investing Articles

2 stocks that could help investors earn £2,516 of passive income per year from a £20k ISA

Our writer selects two high-yield UK dividend shares for investors to consider that could turbocharge a passive income portfolio.

Read more »