8 - Dream of retiring early? Here's how to find your magic number.

Knowing Your Number, or to be more specific, the amount of assets (things you own, money you have in investments, pension etc.) to have your dream life is crucial, and to start, fairly simple. Being able to build your dream life will come down to having financial clarity and enough assets to sustain it. I can guarantee that no one would add “stressing about money” to their dream life scenario!

Not only do I dream of retiring early (which to me means having financial freedom to travel the world and live a comfortable life doing the things I absolutely love with those I love), but I have a plan to do so too. I find it very exciting each time I add to my asset pot as it means I am getting closer to my goal. 

When it comes to Knowing Your Number the situation we want to aim for is where you can comfortably live off the gains (interest) of your assets, without ever reducing the overall pot. 

The steps and formula are fairly simple so stick with it, and you will get to a good estimation of your magic number. Note that the average return rate of the S&P 500 over the past 20 years is 8.2% so this is what I have used below.

The Steps:

Step 1 - Calculate all your outgoings in your life today

Step 2 - Apply the calculation:

Your average yearly spend, divided by 8.2 and then multiplied by 100. 

Example 1: If my lifestyle currently costs £2,500 per month or £30,000 per year. To live my current lifestyle and get a return of £30,000 from my investments, I would need to have £366,000 of assets (calculated as £30,000 divided by 8.2 and multiplied by 100). 

The return from £366,000 at 8.2% would give me the £30,000 per year I am after and I wouldn’t be reducing the size of my pot.

"But what about inflation” I hear you cry! It is very important to consider inflation when planning your retirement, underestimate its effects, and you may find that you don’t have enough money to fund your dream lifestyle. In this article, I want you to give you a simple way to find the number to get you started, focused and most of all excited.

Since the early 1990s, annual inflation has been around 2.5% or lower so for simplicity, I am going to remove it from my average return rate of 8.2% giving me a new average return of 5.7%. This means that my assets have less power, and I need more of them to give me my target return.

For example 1: £30,000 divided by new adjusted rate of 5.7 multiplied by 100 would be £526,000 - A difference of £160k! A much bigger pot is needed, demonstrating how significant the impact of inflation is.

But don't worry about how big this number may seem to you today, the important thing to focus on is actually having a target. We all need something to aim for and when you have a target everything you do can move you toward it with purpose!

Example 2: If your monthly outgoings are £5,000 per month or £60,000 per year, at the same inflation adjusted rate of 5.7% you would need £1,053,000 of assets to give you an estimated return of £60,000 each year. (60,000/5.7 X 100).

Whatever your number, it will serve as a target for you to aim for in order to sustain your lifestyle. Many people I come across don't like the term "retire" but what it actually means is freedom. 

Freedom can give you choice, and may include doing things that will enable you to top up your asset pot such as starting your own business, selling products from your passion (such as art), or doing a job that gets you very excited rather than just paying the bills.

If you've reached this point then well done, talking money, numbers and calculations is not for everyone - but it is important for everyone. If you need help then seek it, don't keep putting it off. The earlier you start, the better.

Next week I will take you through a few other scenario's that could get you there faster, or taking a bit longer to build and sustain your dream life (all bells and whistles included).

Take some time to calculate your asset number today. If you want further support then please reach out at [email protected] or book free discovery call with me today. 

Always with love, 

Elsa x