FIRE UK | 4% RULE BROKEN? | How To Retire In 10 Years Starting With £0
This video provides a step by step guide to the numbers you need to retire in 10 years, starting with £0, and all you need to know about the FIRE 4 percent rule. Ready to FIRE UK?!
The FIRE Movement (Financially Independent Retired Early) started to gain more prominence in recent years when the mainstream press began printing more stories about the people retiring in their 30's.
But is it really achievable, what do you actually need to do to achieve it and do some FIRE advocates just take it a little bit too far?
A central theme of FIRE is what's called the '4% Rule', which stems from a study of safe market withdrawal rates originally published by a group of professors in 1998 called the Trinity Study.
The research suggested that based on historic stock market data, 4% as an annual rate of withdrawal from a stock market portfolio would have a very high rate of success when drawn over a 30 year period. By high rate of success, they mean that your capital would be unlikely to run out, even when increasing the withdrawal every year to account for inflation.
The Trinity Study was updated by the Financial Blogger 'The Poor Swiss' at the start of 2020, taking stock market returns all the way back from 1871 up to the end of 2019 (https://thepoorswiss.com/updated-trinity-study/).
This study went into detail on more withdrawal rates and longer withdrawal periods, which is useful because a 30 year withdrawal period would be insufficient for people retiring in their 30's or 40's.
The results pretty much corroborated the findings of the original study, but there was a leaning towards the fact that if you are withdrawing for longer periods, a 3 - 3.5% withdrawal rate would be a much better target.
So if you decided that £30,000 was a sufficient amount of income for you to live on comfortably and you wanted to achieve that in 10 years' time from a standing start, what would you have to save?
Well, if we assumed that 3% was a very safe long term withdrawal rate, you would need to do the following:
Multiply the target income (£30,000) by 33.
That would give approximately £1,000,000, which would be the amount of capital you'd need to build in order to achieve that level of income at a 3% withdrawal rate.
To build £1,000,000, assuming you invested in a low cost stock market index tracker and received and received the average inflation adjusted long term average return of approx. 7% a year, you would need to save £5,847 a month (£70,000 a year).
If you can live on £30,000, that would mean you'd have to earn £100,000 a year net of deductions and save 70% of your income.
Earning £100,000 net would mean earning around £177,500 gross as an employed individual, which is clearly more than most people earn in a year. Most people who get to this stage believe this goal would be impossible for them and give up on the idea.
It might well be impossible to achieve from your current position if you do nothing, but that means you can do two things:
1. Earn more money
2. Spend less money
Earning more money may be a case of getting a higher paid job, increasing your output from your existing job, starting a side hustle, renting one or more of your spare rooms at home, renting out storage space in your home, selling stuff you don't need anymore, selling advertising space on your car, or any number of other things!
When you really think about, there are probably lots of ways you can earn more and spend less, and many people find they can actually generate an extra £1,000 a month at least when they really put their mind to it.
So, going back to the previous example, if you decided that 10 years was perhaps a bit ambitious, but 15 years would still be acceptable to you, and you decided that you would actually be happy to still do a bit of part time work at that stage to bring in maybe £1,000 a month, the numbers start to change drastically:
You'd now be aiming for an additional £18,000 a year, which multiplied by 33 would mean you're now aiming for £600,000.
At the same growth rate over the slightly longer period of years, you would now only need to save £1,929 a month.
That's the magic of compound growth for you, and that target all of sudden may seem a lot more achievable.
The important thing is though to still live your life now and cut out ABSOLUTELY EVERYTHING you enjoy as that's no way to live!
You do have to prioritise what makes you happy, but also accept that some action will need to be taken to make your early retirement goal realistic.
Also remember that stock market investments will go down as well as up, but it's always important to carry on investing through those periods!
Useful sites:
Money Advice Service Savings Calculator:
https://www.moneyadviceservice.org.uk/en/tools/savings-calculator
Money Saving Expert Tax Calculator:
https://www.moneysavingexpert.com/tax-calculator/
Visit:
www.virtualfinancialclinic.co.uk
Queries:
Chris@virtualfinancialclinic.co.uk
Видео FIRE UK | 4% RULE BROKEN? | How To Retire In 10 Years Starting With £0 канала Chris Bourne - Tax Free Investing Expert
The FIRE Movement (Financially Independent Retired Early) started to gain more prominence in recent years when the mainstream press began printing more stories about the people retiring in their 30's.
But is it really achievable, what do you actually need to do to achieve it and do some FIRE advocates just take it a little bit too far?
A central theme of FIRE is what's called the '4% Rule', which stems from a study of safe market withdrawal rates originally published by a group of professors in 1998 called the Trinity Study.
The research suggested that based on historic stock market data, 4% as an annual rate of withdrawal from a stock market portfolio would have a very high rate of success when drawn over a 30 year period. By high rate of success, they mean that your capital would be unlikely to run out, even when increasing the withdrawal every year to account for inflation.
The Trinity Study was updated by the Financial Blogger 'The Poor Swiss' at the start of 2020, taking stock market returns all the way back from 1871 up to the end of 2019 (https://thepoorswiss.com/updated-trinity-study/).
This study went into detail on more withdrawal rates and longer withdrawal periods, which is useful because a 30 year withdrawal period would be insufficient for people retiring in their 30's or 40's.
The results pretty much corroborated the findings of the original study, but there was a leaning towards the fact that if you are withdrawing for longer periods, a 3 - 3.5% withdrawal rate would be a much better target.
So if you decided that £30,000 was a sufficient amount of income for you to live on comfortably and you wanted to achieve that in 10 years' time from a standing start, what would you have to save?
Well, if we assumed that 3% was a very safe long term withdrawal rate, you would need to do the following:
Multiply the target income (£30,000) by 33.
That would give approximately £1,000,000, which would be the amount of capital you'd need to build in order to achieve that level of income at a 3% withdrawal rate.
To build £1,000,000, assuming you invested in a low cost stock market index tracker and received and received the average inflation adjusted long term average return of approx. 7% a year, you would need to save £5,847 a month (£70,000 a year).
If you can live on £30,000, that would mean you'd have to earn £100,000 a year net of deductions and save 70% of your income.
Earning £100,000 net would mean earning around £177,500 gross as an employed individual, which is clearly more than most people earn in a year. Most people who get to this stage believe this goal would be impossible for them and give up on the idea.
It might well be impossible to achieve from your current position if you do nothing, but that means you can do two things:
1. Earn more money
2. Spend less money
Earning more money may be a case of getting a higher paid job, increasing your output from your existing job, starting a side hustle, renting one or more of your spare rooms at home, renting out storage space in your home, selling stuff you don't need anymore, selling advertising space on your car, or any number of other things!
When you really think about, there are probably lots of ways you can earn more and spend less, and many people find they can actually generate an extra £1,000 a month at least when they really put their mind to it.
So, going back to the previous example, if you decided that 10 years was perhaps a bit ambitious, but 15 years would still be acceptable to you, and you decided that you would actually be happy to still do a bit of part time work at that stage to bring in maybe £1,000 a month, the numbers start to change drastically:
You'd now be aiming for an additional £18,000 a year, which multiplied by 33 would mean you're now aiming for £600,000.
At the same growth rate over the slightly longer period of years, you would now only need to save £1,929 a month.
That's the magic of compound growth for you, and that target all of sudden may seem a lot more achievable.
The important thing is though to still live your life now and cut out ABSOLUTELY EVERYTHING you enjoy as that's no way to live!
You do have to prioritise what makes you happy, but also accept that some action will need to be taken to make your early retirement goal realistic.
Also remember that stock market investments will go down as well as up, but it's always important to carry on investing through those periods!
Useful sites:
Money Advice Service Savings Calculator:
https://www.moneyadviceservice.org.uk/en/tools/savings-calculator
Money Saving Expert Tax Calculator:
https://www.moneysavingexpert.com/tax-calculator/
Visit:
www.virtualfinancialclinic.co.uk
Queries:
Chris@virtualfinancialclinic.co.uk
Видео FIRE UK | 4% RULE BROKEN? | How To Retire In 10 Years Starting With £0 канала Chris Bourne - Tax Free Investing Expert
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26 августа 2020 г. 20:30:00
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