It’s not easy to make enough money to retire early, but with a strict savings and investing plan, you can meet this ambitious goal. There are many tools available that can help you to build your early retirement nest egg.
A Stocks and Shares ISA
One of the best is a Stocks and Shares ISA. The great thing about this instrument is that any capital gains or income earned on assets inside the wrapper are tax-free.
You don’t even need to declare the gains or income on your tax return. You can invest up to £20,000 a year in a Stocks and Shares ISA without incurring any additional tax penalties.
When you’ve opened one, the next step is to invest your money. The best way to grow your wealth quickly is to invest in the FTSE 250. The reason why this one could be better than any other index, such as the FTSE 100, or FTSE All-Share, is its focus on mid-cap stocks.
These companies tend to produce better growth rates than their large-cap peers. This means better returns for shareholders. Indeed, over the past three-and-a-half decades, the FTSE 250 has produced a total return of around 12% per annum. Meanwhile, the FTSE 100 has yielded a total return of just 9% over the same period.
A return of 12% per annum would be enough to double your investment every six years. It would take eight years, or more than 33% longer, to do the same with the FTSE 100, based on the above figures.
Keep costs low
If you’re going to buy the FTSE 250 to get rich and retire early, it’s also essential to keep costs low. Today, some low-cost FTSE 250 tracker funds charge as little as 0.1% per annum in management fees. However, you can pay as much as 1% or even more.
The impact this can have on your returns over the long term cannot be understated. For example, an investment of £1,000 in the FTSE 250 at inception would be worth £52,800, without fees. An investor who was unlucky enough to pay an annual charge of 1% would have paid out £14,226 in fees. Their share of the final pot would be just £38,575.
Meanwhile, an investor who picked the low-cost option, and paid just 0.1% per annum, would have paid only £1,627 in fees. The final pot would be worth £51,173.
Get rich and retire early
Using the numbers above it’s possible to estimate how much you’d need to put away to get rich and retire early. Assuming an initial investment of £10k and regular monthly contributions of £500, it would take around three decades of saving to build a £1.5m savings pot (including fees). That’s assuming an average annual return of 12% from the FTSE 250.
Saving for 25 years would give you a nest egg of £854k.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.