Step 2 of 5 : Know how much money you really need to have financial independence

Do you know how much money you really need to have financial independence? In many ways we may as well ask each other how long a piece of string is! Every person will have different expectations of what their life will look like in retirement.

  • Will £1m be enough?
  • Or £2m?
  • Or is Suze Orman right that you’d need $20m*?
* Thankfully for most of us, no is the answer. However if you intend to undertake some form of space travel or purchase a a super yacht, you may fall into this category and need $20m+.

Recent research by the Pensions and Lifetime Savings Association (PLSA) in the UK showed only 16% of people know how much they need to save to achieve their desired standard of living in retirement.

Perhaps the only thing that we can agree on at the outset is that it will most likely be a larger number than we want it to be. And it will almost certainly take sacrifices to reach it.

Most people don’t even know what they have saved for retirement

know how much money you really need to have financial independence
This young lady has a great life, but a nagging doubt always hangs over her. Just how big is her pension pot?

Both in the UK and US most people simply don’t prioritise building a pension. People know what’s in their current account. They know what they have left before the next pay day. But they don’t have a clue what progress they have made to saving for pensions.

This was me six months ago. Thankfully I always did pay into my work pensions, but I never checked them out. And I certainly didn’t have a clue what I might need to save for my retirement. Consider these statics from LV=,

  • 51% of respondents aged 45-54 didn’t think about their retirement at all last year.
  • For those that did, they spent an average of three hours and 42 minutes.
  • So for an average person aged 45-54, they spent one hour and 49 minutes thinking about their pension.

Less than two hours on average! Over a whole year.

Let’s consider some of the things people prioritise over thinking about their retirement:

  • Watching TV. 3 hours and 52 minutes per day. Per day. Yep – on average in the UK people spend twice as long per day watching TV as they do EVERY YEAR thinking about their pension.
  • Not even properly watching TV. 2 hours and 41 minutes per week. On average in the US people spend just under three hours every week just flicking through channels looking for something to watch. Not even watching anything!

This is crazy! And yet perhaps not so surprising. TV is like a drug that we can switch off and watch. But when you think about your pension? You realise you are falling short.

But ignoring the problem is not the answer! Sorting it out is. It might be that that ‘sorting it out’ doesn’t mean that you can retire early. But it will mean you can retire with a better standard of life than you could have otherwise.

And this lack of desire to consider retirement, for whatever reason, has a natural result…

Most people haven’t got a big enough pension pot

It is probably not a surprise following in from the last point. But most people don’t have enough saved for the the life they might want. This table pulls together some key statistics,

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* This seems a bit low to me

There are lots of extra statistics by age that we could drill into, but there is no need. The evidence is clear. Most of us don’t have enough saved.

Most of us have a pension gap. A gap between what we need for retirement, and what we will actually have.

And every year we decide to retire earlier, the bigger that gap gets.

But don’t despair! The very fact you are reading this article will give you a head start. Whatever position you are in, you can make changes to improve the outlook of your retirement.

So the aim of this question (the 2nd of the 5 steps) is to work what the gap in our pension funding is.

What key questions help us to answer “How much money you really need to have financial independence?”

Underneath this one question of how much we need to retire, are several smaller ones. And the only way to know how much we will need is to work through these lifestyle questions. You don’t need a crystal ball and 20 20 vision of what life will be like when you retire or slow down…

But you need an idea. You need a rough feel.

So roll your sleeves up, lets have look at the questions.

1. What standard of life do you want when you retire.

retire early with a big purchase
What point is there in retiring without a yacht? Do you think I’m an animal!?! I demand a certain standard of life.

For most of us, this single question will be the biggest factor in how much we need. It is common sense that the better life you want, the more it will cost.

There are some useful guides that show how much the average person spends in retirement. A common rule of thumb is also that you’ll need 70% of your income when you retire. For more information check out this useful article that runs through the various scenarios to help you work out what you’ll need each year.

The most accurate way to work out how much you’ll need is to actually itemise everything. For each area of spend work out how much you will spend. You can then use this to work out how large your fund will need to be, or how much an annuity will cost. Free hint – the annuity will cost a lot more

2. Will you want to make a large one-off spend when you retire?

Make a big purchase when you retire early
Yes someone did purchase William Shatner’s (aka Captain Kirk) kidney stone for $25k. It is not known if this was purchased as part of a retirement plan.

If you want to make a big splurge on something when you retire, then you need the cash for it. A new car, a holiday home, or William Shatner’s kidney stone (a snip at $25k)? They all cost money.

This is much easier to work out than living expenses. Just add up the costs of the retirement bounty you have planned. And make sure you have saved that on top of what you need for your lifestyle expenses.

3. Will you earn any income during your early retirement?

What? Earn when I retire? The whole point of retiring is to stop work isn’t it?!?

Maybe if you’re retiring at 70 not working is okay. But if you’re retiring early you are likely to have a transitional phase.

Firstly, when you crunch the numbers you’re likely to realise you won’t be able to retire as soon as you want. So what would be better for you? Ten years of doing something you love to earn a bit income to help support you, or 6 years of your current life?

Financial Independence is not about stopping work but being able to live the life you want. How you want.

Secondly there is the simple fact that as humans we are made to work. Maybe not 80 hours stuck in a cubicle tapping on a keyboard. But we need to be productive. We need to do something in our society.

The impact of earning something in our early retirement has an absolutely huge impact on your investments and savings, as you can see in this article.

4. What kind of inheritance do you want to leave?

make sure you get what you want when you retire early - including a rat
93% of people want to leave a legacy to rats with long hair, but allow family pressures to force them to leave it their biological children.

Do you have a brood of adorable children that you want to bless with an abundant inheritance? Or does your local long-haired rat sanctuary deserve a boost to their coffers?
If so, then you’ll probably want to have a big enough retirement fund so that you can just live off the fund growth and dividends. This way you’ll have left pretty much the same in your investments when you die as when you retire.

This is also a good approach if you are more risk averse, it gives you more wriggle room for any uncertainties.

If you want to take this approach you will need to save more. But you will massively reduce the risk that you run out of money to pay for your retirement.

There are then some other questions that might not impact how much money you need to retire, but will definitely affect how easy it is to get there.

5. What age do you want to retire?

Every year you want to retire earlier, you ramp up the difficulty of having enough saved. When you earn you invest, and over time your investments grow. When you retire, you live off of these investments.

6. How much is your pension pot now?

pension pot
Cicero had a lot of pensions pots. Sadly for his children they were all made out of clay.

We’ve already seen most people don’t know what they are worth. So if you can complete this step you’ll be well ahead of the curve. Don’t worry if it doesn’t paint a pretty picture!  At least then you will be able to start putting things in place to bring you back on track.

Here we are looking to find out what we have built up so far that will fund our retirement. At the same time it makes sense to understand out net worth. Our net worth is basically the sum total of everything you own, less everything you owe.

If you complete this step and find out you are already worth $5m then congratulations, you are probably already where you need to be!

This article ‘coming soon’ walks you through working out your net worth. It is the perfect place to start, and will guide you through your various assets and debts.

So how much do you really need to to have financial independence and retire early

Wow, that is a lot of questions! And as we dig further others will crop up too.

That’s a daunting list… I need to lie down.

Don’t be put off immediately but such a long list… you don’t need to answer them all at once with 100% clarity.

On the flip side though, you do need to put in a bit of work to retire early.

  • You need to know your personal finances.
  • And you need to know what your financial target is.

Working through these questions can really help you to work out what you want from life. It doesn’t matter if you’re not sure about everything, but the more you can consider your options and desires the better prepared you can be.

Right now if someone came up to you on the street and asked ‘do you know how much I’d need to retire early?*’ you might not be able to give them answer…

* I have no idea in what context this question might crop up randomly on the street. And frankly, I have no desire to start asking you about what you get up to on the street, so I suggest we leave this line of thought now.

… but you could say a couple of things…

  • It depends! Is true but not that helpful
  • More than you have! Again, true. Again, probably not that helpful.

But you could help them work through exactly what they need to consider to work it out for themselves.

So you know your target. What next?

Not surprisingly, now we need to put a plan into place to be able to reach the target we have set ourselves. Whether you need an extra £100k or £1m of savings, the process is the same.

The third of the five steps to financial freedom looks at the how you can either start or increase the savings you can put towards your goal of early retirement.


Any information provided is not personal advice. You are responsible for your investment decisions and all tools provided are for illustrative purposes only. If you’re not sure whether an investment is right for you, contact a financial adviser. All investments can fall as well as rise in value, so you could get back less than you put in. Please remember, past performance is not a guide to future returns and that income is variable, not guaranteed.

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