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?

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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.

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