Early retirement is a dream and aspiration for millions. An escape from the grind. Freedom.
And now, a programme on Channel 4 purports to hold the key. How to Retire at 40 aired last week and promised to reveal the secrets of those lucky people who had made the leap.
And it looked so effortless. Take Barney Whiter, the 47 year-old who waved work goodbye at 43 and now lives a happily retired lifestyle with his wife and three children in their six-bedroom home in Farnham, Surrey (where the average house price – let alone a six-bedroom pile – is £580,000).
Sound too good to be true? Well, as most viewers no doubt quickly concluded, for most of us it is.
But the programme – coming at a time when wage growth is low, living costs are high, and top earners face penal tax on savings and pensions – touches on serious issues.
Mr Whiter’s “secret” is saving. By saving 50pc of your salary – but ideally 75pc – you can go from broke to retirement-ready in as little as seven years, he claimed.
Mr Whiter bought his first London home in 1996 when he was in his mid-20s. The low price he paid, coupled with the subsequent fall in interest rates and boom in house prices, doubtless played a part in his miraculous retirement.
For today’s 26 year-old to afford a London home, then clear any associated mortgage over the next 14 years, presents a different order of challenge. And that would be before any money was saved toward investments supposed to see you through decades of non-earning.
Alistair Cunningham, a director at Wingate Financial Planning, undertook some analysis for Telegraph Money. “Let’s say a couple are earning a good salary of £40,000 each averaged out over the years 21 to 40,” he said.
“If you are planning to retire at 40, you need to think that you are going to need to make provision to save up to finance what might be a further 60 years of life.
“The average male of 21 will live to 88, but they have a one-in-four chance of living to 98. If you have only worked for 20 years and spent 40 years relaxing, I would guess you will be closer to the latter.”
What to budget?
Mr Cunningham said a manageable budget for two people would be around £2,000 a month (rent would need to be paid from this, if the couple didn’t own property outright – see below).
With their joint earnings coming to around £65,000 after tax, they could just about save £40,000 per year.
If that was the case they would reach 40 with inflation-adjusted savings of £670,000 – assuming the money was invested and delivered an average 5.5pc per year.
If this were the case, they should indeed be able to draw down the same £2,000 per month from age 40 to age 96, when the funds would be ultimately depleted, based on the same assumptions of investment returns.
But, as Mr Cunningham admits, life would be far from easy. The parsimony and discipline demanded of them in their 20s and 30s would need to prevail throughout their lives. There would be no lavish holidays, carefree spending – or indeed children, as they would be far too costly to allow for early retirement.
The property dilemma
There is also the question of a property to live in.
“These numbers assume the couple already own a home outright, which is a big assumption,” said Mr Cunningham. Running the same scenario but accounting for a £200,000 house purchase somewhere along the way effectively breaks the model.
The couple will then reach 40 with only £450,000 in their “pension fund”, and this will run dry by the time they are in their 60s, even if they religiously adhere to their modest spending. They would, of course, have whatever state pension is available to fall back upon.
The figure of £200,000 for a house purchase is optimistically low.
“Retiring at 40 isn’t impossible,” said Mr Cunningham. “People who go and work in highly paid professions could be putting away £40-50,000 a year. For most of us the house is the issue. But there are a few places in this country where you can get a nice house for £150,000 to £200,000 and downsizing somewhere like that could allow you to retire early.”
He added: “The big variables are: what you are earning, what you want to spend in retirement and whether you own, or want to own, your home.
“I have clients at the moment who haven’t got children and earn good six-figure salaries. But if they stop working now they won’t be able to achieve what they want to achieve.”
Is it really possible?
So is the premise of Channel 4’s aspirational documentary fatally flawed?
Mr Cunningham said it would be very tough. Older generations, including those in their 40s such as Mr Whiter, have benefited from surging house prices and – certainly in recent years – benign stock markets.
“The past 20 years have been quite favourable for owners of most types of assets,” Mr Cunningham concluded.
“The first decade included a property bubble where values went up in a way I don’t think will be repeated. The past 10 years have seen assets values rise across the board.”
In terms of Mr Whiter’s investments – he claimed to put all of his savings in cheap tracker funds offered by Vanguard, the American investment company – this could technically be replicated by a saver today. But no investor could “expect” returns of 12pc a year. Long-term historic data suggests returns of 7pc, before inflation, are more realistic.
Without substantial earnings, inheritances or other windfalls, retirement at 40 looks unlikely for anyone who hopes for more than a very constrained existence.