Can you really afford to retire seriously early?

Forget 66 or so: for the FIRE crowd, early retirement means retiring in your 40s or 50s. The problem: what to live off before your pension kicks in?

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.

A Black father and daughter having breakfast at hotel restaurant

Image source: Getty Images

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.

On an investing discussion board that I frequent, an interesting thread has been running for the last few weeks. Namely, what to do with all the free time that you’ll have, having pursued financial independence, and retired early.
 
On both sides of the Atlantic, the ‘financial independence, retire early’ (FIRE) crowd are pretty zealous. Live frugally, save money, invest it, and accumulate enough wealth to retire at 50 or so. They live it, dream it — and strive hard to do it.
 
Some aim to retire in their early 40s. And of course, it’s easier if you’re in a highly paid profession, or one where hefty bonuses are a feature of the remuneration package.

So, the discussion about what to do with all the free time that you’ll have is certainly relevant, and certainly piqued my interest.

Don’t leave it too late

How to fill your days after retiring early is a nice problem to have, to be sure. Suggestions from early retirees abounded, and being forced to return to work through boredom didn’t seem to be much of an issue.

And — as with most FIRE-related material one reads — the inspirational impact is strong. In the last few months, I’ve had two conversations about FIRE with a couple of twenty-somethings that I know.

Unlike many older investors, they’re in with a decent chance of actually fulfilling the FIRE dream. Getting the FIRE bug in later life calls either for retiring not particularly early — 60, say — or settling for a lower standard of living than might be ideal if you’re aiming to fill your days with a whole raft of pleasurable hobbies and pastimes.

But 20s, 30s, 40s — there’s enough time to make a meaningful dent in your retirement age.

Your pension isn’t the answer

But don’t imagine that you’ll necessarily make that meaningful dent in your retirement age by stuffing spare cash in your pension. That won’t let you retire early. Or at least, not all that early.
 
How so? Because personal pensions — SIPPs and stakeholder pensions and so on — lock your money away until you’re well into your 50s. The minimum age for accessing personal pensions right now is 55, for instance, and it’s due to rise to 57 in 2028.
 
And the state pension, obviously, won’t kick in until you’re 66, with plans afoot to raise that to 67.
 
So you’ll need some other form of savings to tide you over from — say — 50, until you can access pension savings, and the state pension.
 
A normal brokerage account is one option, of course. But a better plan, in my book, is putting your stock market investments in an ISA wrapper. What’s more, the income you take from the ISA, when you do, is tax-free — at least, under present HMRC rules.

£45,000 a year

Can you build a decent retirement income in an ISA?
 
Ask private investor investment platform Hargreaves Lansdown, the UK’s largest such platform, with £123 billion under administration for over 1.7 million clients.

According to a press release I received recently from the firm, Hargreaves Lansdown boasts 572 ISA millionaires — that is, investors with over one million pounds’ worth of investments in their ISA. £1 million earning an average dividend income of, say, 4.5%, brings in £45,000 a year. That’ll tide you over until the pension kicks in.

Investment platform Interactive Investor, the UK’s second‑largest investment platform for private investors, also boasts ISA millionaires. 852 of them, to be exact.
 
In both cases, the firms point to ISA millionaires’ disciplined saving and investment habits over decades — Interactive Investor, for instance, reckons that most of its ISA millionaires will have started out with PEPs, the forerunner of ISAs.

Stay the course

In short, if you’re serious about it, FIRE is attainable, if you stay the course.
 
And in my book, an ISA stuffed with decent dividend-paying investments is a sensible way to aspire to a tax-free income in retirement.
 
Happy dreaming!

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.

The Motley Fool UK has recommended Hargreaves Lansdown Plc. 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 Collective

Investing Articles

Could popular index trackers derail your retirement?

Betting your retirement plans on the Magnificent Seven is fine if that’s what you want to do — but don’t…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Could Labour actually be good for your wealth?

It’s early days, granted, but the signs are positive. A FTSE 100 re-rating — upwards — could be on the…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

What makes for a good investor?

Good investing isn’t so much about brilliance, as discipline.

Read more »

Investing Articles

The tax-free route to millionaire portfolios

• Although annual ISA subscriptions are capped, ISAs are an undoubtedly serious wealth-building tool: you can build serious wealth.

Read more »

Investing Articles

Will a longer-term mortgage jeopardise your retirement?

Monthly stock market investments, over the long term, can build up a portfolio designed to pay off those mortgages on…

Read more »

Investing Articles

3 FTSE 100 takeover targets

The FTSE 100 is on a tear, and so is takeover activity. Here are three Footsie firms where premium bids…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The investing question that many don’t ask

Being diversified means looking at different sectors, and different countries: London is just 3% of the global equity market.

Read more »

Young Caucasian girl showing and pointing up with fingers number three against yellow background
Investing Articles

3 FTSE stocks I wouldn’t ‘Sell in May’

If the strategy had any merit in the past, I see no compelling evidence it's a smart idea today. Here…

Read more »