How to retire at 40

We like money because we can do things with it.  It's worthless otherwise.

It's all too common to think about what we can do with the money we have. But that's the wrong way round, the valuable thing isn't money, it's what we get from it. We need to turn this on its head and think about what we really want in life and how much money it would take to get us there. If we don't do this, all too often, our expenditure simply grows with our pay packet and what would have seemed like an endless amount of money when you were 20, is now easily used up on 'essentials'.

So take a step back, add up everything you would like to spend in an ideal life and see how much you need.

Here's mine:

12,000 rent/mortgage
600 for daily coffees in cafes
2000 eating out 2x a week
1000 on clothes
1000 on cycling equipment
1000 ski holiday
2000 for other holidays
200 on protein (or other dietary supplements)
360 on gym & pool membership
2500 on groceries
1000 on travel (commute - I always aim for my daily commute to be by bike)
300 for a takeaway each week
2000 for drinks out 2x a week (20 each night)
1500 on tech appliances (e.g. new laptop or phone)
100 on newspaper/magazine subscriptions
100 on phone bills
1500 on random purchases
1500 on car maintenance and insurance

This is clearly liberal as I've put down every possible luxury I could give myself and in reality it wouldn't be this much, but this is my ultimate luxury lifestyle.

The total?

£30,660

That's less than I expected. I could live the rest of my life with that post tax and be really happy and live a very luxurious lifestyle (see NB below for how having children affects the equation).

Let's add tax in. Here's what it looks like, as you can see, I'd have to be earning £43k a year to have a post-tax take home pay of £30,500

The UK average earnings for those in their 30s is 30420. If you look at the average for professionals with a degree e.g. lawyers, doctors, marketing/PR specialists, managers, senior police officers, IT directors, the average jumps to £41,000, and that's for all ages. So with the starting salaries for these jobs rarely breaching £30k, it's not unreasonable to assume that the salary you need to live your best possible lifestyle might be reached in your early thirties.

So that’s all well and good, but what we really want is to be able to do whatever we want in life i.e. retire. And I don't mean do nothing, I mean do what actually motivates you in life whether it be art, literature, music, or the job you were doing anyway, but less hours and more time to socialise.

A widely accepted rule of thumb of investing is to be able to draw off annual interest of 6% (FTSE100 index tracker returns 5.5% annual average over the last few decades, and FTSE250 11.5%). So a lump sum of 716k would enable you to draw off 43k a year (if it's in stocks, you'd need even less, because of the disparity between capital gains tax and income tax).

How soon could one reasonably acquire that amount?

To make it simple and widely applicable let's take private tuition at a £30/hour rate (which is fairly standard for a graduate) as our sample job. 23,867 hours gives you your 716k. Or 596 40 hour weeks, or 12.4 years with 4 weeks holiday. Obviously for those years you also want to be living your ideal lifestyle. 12.4 years of 30k is 372,000. So that's another 6 years.

So in total, 18 years of working 48 weeks a year, 40 hour weeks, earning 30GBP/hour gets you to the point where you could invest a lump sum and retire and do what you like.

So if you went straight into that, at 22, you're only 40 and you are living the dream life.

It's not that I envisage doing nothing with my time from this moment on, I'd almost certainly still work. It's just that from this moment on, you have the freedom to do what you want in life and you don't have to do work you don't want to do. You can holiday if you like, you can spend a month reading if you like, it's up to you.

In fact, here's a blog post I prepared earlier on the exact problem of what we should spend our time doing to live a meaningful life…
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For those of you wondering where children fit into all of this, right here is the answer. I'd want to add on perhaps 50 per week for petrol, groceries and general purchases, plus 4000 a year for each child to cover holidays, the higher rental costs (although my 1000 per month is already pretty generous unless I'm living in London), hobbies, school trips etc. So maybe 6500 per child per year. That’s another 108k on the lumpsum, so just another 3 years of work or so.

In all of this, I'm making the assumption that inflation and capital gains on investments cancel each other out more or less (in reality I would expect capital gains to actually be higher)