For most investors, early retirement is the dream. Unfortunately for many, the dream of early retirement remains just that, a dream, as investment returns fail to live up to expectations.
However, if you give up on the idea, you’ll certainly never achieve your goal so here are three tips on how you can improve your chances of being able to retire early.
Regular savings
Most investors fail to understand how important a regular savings plan is for wealth creation. Granted, equity markets can help accelerate savings growth, but unless you have a monthly savings plan in place to begin with, investing alone won’t be able to make up the difference.
For example, if you started off with £1,000 invested in equities with no regular savings contribution, assuming a return of around 7% per annum (4% from dividends and 3% earnings growth) over the space of 10 years your savings pot will have grown to £1,967, up 97%. If you make just a small monthly savings contribution, this final figure changes dramatically.
Using the same principle figure and annual return of 7%, if you contribute £20 a month at the end of the 10 year period, the savings pot will be worth £5,407 nearly twice the figure for no contributions.
Invest for growth
Along with a regular savings plan, to help you retire early you need to invest your cash.
Investing may seem daunting at first, but it is critical to helping you achieve real (inflation-adjusted) returns. According to figures from pension provider Royal London, over the past 10 years, money in cash ISAs has lost 9% of its purchasing power. More recent data shows that savers using cash ISA accounts this year are set to lose £4bn in real terms over the next 12 months thanks to the deadly combination of high inflation and low interest rates.
Even a simple, cheap FTSE 100 tracker fund or blue-chip stock such as GlaxoSmithKline would be a far superior investment.
Savings buffer
If you are saving regularly and investing your savings, you are on the right track to early retirement. However, your progress can be undermined if you are forced to dip into your savings for an emergency.
This is where a savings buffer can come in handy. Having two different savings accounts may seem like unneeded complexity, but it helps segregate your wealth. By having a day-to-day savings account, that you can dip into in times of emergency, as well as a longer term savings/investment account, which you cannot touch until retirement, will ensure your long-term savings goals are not disrupted by some silly mistake or unforeseen issue.
The bottom line
Saving for early retirement may seem like a daunting task at first, but by following the three steps above, you can significantly improve your chances of building a healthy savings pot, allowing you to leave the rat race early.