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.
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.
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.
On the road to a million
Reaching the magic £1m in savings mark is a goal few investors achieve but by following just a few key steps you can greatly improve your chances of hitting this milestone.
The report is a collection of Foolish wisdom, which should help you improve your investment returns and avoid needlessly losing too many more profits. Click here to download your copy today.
Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.
Dream retirement destinations
Dream retirement destinations
A study by MGM Advantage discovered that Portugal is the 10th most popular dream retirement destination among Brits.
You get the attractions of the sun, a more relaxed way of life, lower living costs and cheaper property. You can also benefit from pension arrangements that mean your pension rises with inflation.
And if you choose to, you can spend your time with the enormous expat population, feeling like you never left.
In the tradition of the Best Exotic Marigold Hotel, there’s a large number of people keen to move to India, partly in order to enjoy a much higher standard of living than they would be able to afford in the UK.
If course it’s important to consider that your state pension will not rise in line with inflation - so will halve in real terms during your retirement.
This part of Europe offers a great combination of some of the lowest living and housing costs on the continent, along with a more forgiving climate than the UK.
For that reason Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Greece and Turkey are a big draw for retirees.
However, state pension provision varies across the region, so you will need to check whether retiring to these locations will mean your pension continues to rise in line with increases in the UK, or will be frozen when you move overseas.
Italy is a country of contrasts, so anyone planing a retirement there needs to think carefully about whether they want to call a bustling city home, or whether they would be happiest in the mountains or by the sea.
Housing tends to cost less than in the UK, and in some regions it's incredibly cheap. Living costs are also lower than in Britain, and your pension will rise in line with increases in the UK.
Canada is a big draw for British expats of all ages. This spectacular country is known for being welcoming to people from all over the world, and in many cases has no language barrier for Brits. The quality of life is high, and the cost of housing lower than in the UK.
However, you will need to factor in the fact that your UK state pension will be frozen on the day you leave, and you will need some health insurance if you want to replicate the sorts of things that are available for free on the NHS.
As with India, the Far East offers an exciting and dramatic change from life in the UK, with much lower costs, which can buy you a higher standard of living (although bear in mind your state pension will be frozen).
You will need to consider the cultural and practical differences associated with the move, but you will have the opportunity to live in one of the most exciting places in the world.
The weather, lifestyle, space, and lower cost of living means that British expats of all ages are keen to move to Australia.
Property can be a bit of a stumbling block in some areas, as prices have gone up so much. The currency is also strong, which has posed some issues for those who receive their income in pounds, and there’s the fact that the UK state pension will be frozen if you move. However, if you can overcome these things, then a new life in the sun awaits.
The US offers much more affordable housing, and in many respects a lower cost of living than in the UK.
It appeals to those who don’t want to live with a language barrier, but want more space, possibly more sun, and an American Dream of their own.
There are some important things to factor in before you move, such as the additional cost of healthcare, and the exchange rate. However, one bonus is that your state pension will rise at the same rate it does in the UK.
France is close to home, and yet offers cheaper accommodation than the UK, a lower cost of living, and in many regions there’s better weather too.
Your pension will rise at the same rate it would in the UK, and at any time friends and family are just a short boat or plane ride away. It’s no wonder France is the second most popular dream destination for retirees.
It will come as little surprise that Spain tops the list - largely because it’s already the most common overseas retirement destination for Brits.
Millions of us have experienced the delights of the sun, sea, and the lower cost of living while we were on holiday in the country, so it’s hardly a shock that so many want to experience it on a full-time basis in retirement.
Huge falls in the price of property has made this a cheap place to buy, and the fact that your state pension will keep pace with rises in the UK means you’ll be able to maintain your standard of living throughout your retirement.