Many of us dream of retiring early and enjoying life a bit more. Unfortunately, most of us don’t have the financial resources to make this a reality. The State Pension doesn’t kick in until we’re 66, and we can’t access other pensions until at least 55. This gives those of us wishing to retire earlier a major headache.
But it doesn’t have to be this way. If we clearly define our financial goals, then we can put a realistic plan in place to help us reach them. And the best way to reach our financial goals is to regularly invest in the stock market over a period of many years. This allows our investment returns to compound over time.
Making early retirement a reality
If we have a pension that we can access from 55, then to retire early at 50, we’d need to accumulate enough money to get us through the interim five years. Looking at it from the simplest viewpoint, if we spend £20k a year, then we would need £100k. The table below shows how quickly we could achieve that by investing either £250 or £500 per month.
|Investment period (years)||Investing £500 per month||Investing £250 per month|
|Assumes investment returns of 5.5% per year, the average real UK stock returns over last 50 years|
As the table shows, we can reach the £100k mark in just 12 years by investing £500 per month. This means that we wouldn’t even have to start our investment plan until age 38. I think most people would be quite surprised at how quickly that kind of wealth can be accumulated.
If £500 per month is too much, then we can still reach our goal with £250 per month. In this case, it would take 19 years to reach £100k. If we wanted to spend more than £20k a year, then we would have to increase the amount we invest. But it’s still possible for many of us, as long as we have a plan and stick to it. Rather than being a pipe dream, regular investing makes early retirement a realistic and achievable goal.
The table also demonstrates just how much wealth it’s possible to accumulate if we do this over longer periods. Investing regularly is a good habit to get into from a young age, the earlier the better. In fact, it’s feasible to accumulate far more than £100k and to retire even earlier than 50.
Retire early with mega-caps
To achieve the kind of returns shown above, we need to be investing in a number of different stocks. It’s important that we diversify our investments in order to reduce risk. I’d recommend holding a minimum of 10 stocks. The last thing we want is to be unable to retire early because we’ve taken on too much risk.
Again, to reduce risk, I’d stick to big FTSE 100 stocks. The kind that are household names and have a solid track record. If they pay a big dividend, then all the better. I’d also be sure to invest across a variety of different sectors and in companies that can perform well in different economic conditions.
If we do all this, then chances are we will be in a great position to make our dreams a reality and retire early!
The post This is how I’d retire early through buying FTSE 100 shares appeared first on The Motley Fool UK.
Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020
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