Since I’ve started reading financial independence blogs, I’ve had this question on my mind: if I were to retire early, what is my retirement goal? What is the amount of money that I need to have in order to live comfortably.
There are many factors that come into play while calculating this number, and I don’t yet know some of them. The ones I can think of:
- What is my required monthly income?
- Which is the target tax level?
- The kind of retirement portfolio am I planning to build: Dividend-based? High-growth stocks? High-growth ETFs?
- What is the annual income from my portfolio?
What is my required income?
This is highly correlated to 1) the location I am planning to retire in, and 2) the lifestyle I am aiming for.
As I’m 27, and retirement is potentially far away. I could always think of a “I’ll move to Thailand and live in a bungalow” scenario, however I prefer a pragmatic approach.
Right now I am living in London, which is one of the most expensive cities in the world. I know for a fact that I would not retire in the United Kingdom, as I love sunny warm weather, and … yes.
Also, on my current lifestyle, while I do not go out much, I live alone in a reasonably new and big flat, and I like to travel a lot.
If I were to retire in my current situation, a superficial calculation tells me I need about £3.000/month, after tax. At the current income tax levels, this translates to around £50.000 per year, before tax.
Which is my target tax level?
Again, this is highly-dependent on location, and of the type of investment. This can take into account:
- the citizenships I may have at the time of the retirement
- whether my investments are wrapped in a tax-free account, such as an ISA
- whether my non-tax-free investments have a “UK reporting status” or not (meaning, do they require Capital Gains tax, or Income tax)
- or if my investments are held under a company, or under my own name
For now, I’ll go with the worst case scenario, which is UK income tax – treating all my potential income as a salary.
What kind of retirement portfolio am I building?
This is an even tougher question. Half of the bloggers I am following are going for real estate – traditional “buy and rent”. The other half seems to like dividends a lot.
As my parents have been involved in real estate, and property is part of their retirement portfolio, I can immediately see the issues that come with that. As a landlord, while you are enjoying a 3-4% yield in London, 5-6% in the UK-outside-London, or 6-7% in other cities in Europe, you are still supposed to invest in the property, carry out repairs, pay lettings agents, and chase tenants for late rents. Neither of these prospects sounds appealing to me.
A dividend portfolio sounds a bit more hands-off, however the yield is usually lower – 3-4% on a safe investment. This yield can only go up towards 10% in one of two ways: risky stocks, or leveraged portfolio (details at the bottom of this article).
Alternatively, a mix of high-growth funds/ETFs and a less risky dividend portfolio can provide both income and piece of mind. I am intentionally vague, as I almost know that my opinion expressed in the current post will change very soon, as I start better planning my investments.
What is the annual income from my portfolio?
This is the 4th but the most important question on the list. As I do not know how long I will live for, planning to “eat” from the portfolio for a number of years is not a good plan. Instead, I should design the portfolio to generate passive income at a rate which gives me a comfortable life.
The most popular rule I have read about is the “Safe withdrawal rate”. It is mentioned on pretty much every other FIRE-related blog, and suggests 4% as the magic number. What this means is that my required annual income should be 4% of the portfolio size. This also means, in an ideal world, that the portfolio will generate at least 4% per year, to sustain my lifestyle.
With the £50.000 yearly income target that we’ve set, multiplying it by 25 will yield £1.250.000.
This means, I need a portfolio of £1.250.000 in order to retire and life safely off passive income. Oh, my!
As I currently aim to save about £1.000 every month, this means:
- If my investments grow by 20% yearly, I can retire in 16 years, by the age of 43
- If they grow by 15% yearly, I can retire in 19 years, by 46
- Or if they grow by 10% yearly, I can retire in 25 years, by 52
This is quite hard to read, write, and digest. But I guess it’s also motivating, and showing that it is possible. Next, need to find a way to either 1) save more money, 2) invest better or 3) both.
I’ll try to add a progress tracker to the sidebar of this blog, as a nice reminder every time I visit it.
Leveraged portfolio: I am looking at a ETN instrument issued by UBS, which seems to be paying between 10 and 15% in dividends, per year. As I suspected, this instrument is leveraged, and highly volatile, so carries a degree of risk. If you are interested, you can read about it here.