Is It All About Spending Less
Will you be spending less in retirement?
Don’t kid yourself into thinking that you'll be cutting your spending in retirement. That somehow, spending is going to “naturally” decline when you retire.
I promise you, it won’t.
Instead, when you retire, you are likely to have more time to spend more money and it's easy to fall into that spending 'trap'.
What is the amount you need for early retirement?
First, start with a simple question . . .
If you stopped working today, without spending less, and continue to live at your current standard of living, how long will you last?
If your answer is two months, then you have wealth for two months. If you can last for two years, then you are wealthy for two years.
Some people may answer this question as follows:
I need £3,600 a month to live on, to pay all the bills, etc, etc. I have £432,000 in cash savings. So, I am wealthy for 120 months. I can survive for 10 years (432.000 devided by 3.600).
However, that's not how I would look at it. What if your £432,000 generates a tax-free income - a near guaranteed income that you would receive without having to work for it? Without spending less, even!
What if you would generate at least 10 per cent tax-free income (even increasing annually above inflation) from investing in certain stocks and shares using your £432,000?
Lets do the maths, here . . .
Ten per cent of your £432,000 is £43,200, so, if you generate a return of 10 per cent your £432,000 will give you £43,200 in tax-free income per annum, or £3,600 per month.
When your tax free returns are greater than your expenses, you don't need to work any longer. Your capital is doing all the work for you.
Once you reach this stage, you would never have to work again as long as your capital generates at least ten per cent growing annually above inflation. You would just use the income your £432,000 generate and retire early and happy.
Have I gone mad, do I live in a fantasy world?
People have been 'brainwashed to think that they need retirement pots of "millions" in order to be able to retire early or to retire comfortably. I don't think this is true.
All you need to do is:
- spending less money during your wealth building phase
- calculate how much money you require in order to live comfortably every month
- find ways to generate the same or more amount of money every month from investments that work for you rather than you working for money.
Of course, you may say that this is unrealistic - where would you get the £432,000 in the first place and secondly where would you find 10 per cent tax-free return?
You simply have to know where to look and how to do it. There are UK shares which pay dividends of 10 per cent and more based on your original purchase price, in time.
When your money is working for you in a stocks and shares ISA, the returns don't get taxed - the money you take out is tax free. Instead, when you work for money your earnings are taxed.
Calculate your monthly expenses
If you already calculate your personal and household expenses on a regular basis than this will be a simple exercise.
If you don't, you're in trouble . . .
Calculate your monthly expenses. Don't forget anything! Keep in mind that your figures should be based on actual spending. Per month, per annum.
Collect all your bank withdrawals over the last 24 months and divide the total by 24 and presto you will have calculated your average monthly total bank withdrawals i.e. expenses, over the last 24 months.
Use the Excel spreadsheet on your computer, or similar.
Once you are finished, you should have a clear overview of your expenses. Perhaps you immediately notice items you could be spending less on?
Be honest about how you want to live in retirement and how much it will cost.
These calculations are important when you use one of our retirement calculators in order to find out how much money you will need in order to live in comfort during your retirement.
Now the difficult bit: take a close look at your current expenses, and then estimate how they will change in retirement. You may be spending less on certain items, and more on others.
For example, your mortgage might be paid off by then - and you won't have commuting costs. Then again, your health care costs are likely to rise at some stage.
Most people don’t really know how much they spend every month. Spending less is not an option for them as they don't really know what they are spending their money on in the first place.
For them, calculating, even trying to estimate, their expenses in retirement, and, the amount they need to retire on, is a sheer impossible task. As a result, they'll not be able to use any of our retirement calculators with any accuracy.
Finally . . .
Just keep track of the retirement amount you have calculated. Then use one of our retirement calculators to find out the amount of money you need at retirement in order to live thereafter in relative comfort.
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