How to retire early and the 4% rule...
It's no secret that almost everyone has thought about winning the lottery, walking up to their boss with the biggest smile on their face and handing over that envelope containing the resignation letter that reads something like this; "Dear HR / Management,
Thank you for the experience you have gave me at (insert your company name here) but i am handing in my notice with immediate effect.
You then pick up your things, still smiling, and walk out of the office. You're free to do whatever you want. All of your bills will be paid and you're in control of what you do. At this moment in time, you probably think that it's impossible and a silly idea. It's not.
Wait.. You're telling me i can retire early?
Yes. I am.
Let's take a salary of £20,000 ($27,935) which will pay out per month, after tax, around £1400 ($2000) which for most people with a humble lifestyle is enough to survive on. It will pay the mortgage, the bills, food plus transport. Now take this salary and multiply it by 25 which gives you the magic number of £500,000.
This is how much you would need in your retirement account to retire. It is assumed that your retirement account will have a return of around 7% and after inflation is deducted (around 3%) leaving you with a real return of 4%.
This 4% is the safe amount you can withdraw from your retirement account each year without running out of money. This means that you will be able to survive off of that amount of money - £20,000 per year - theoretically for about 30 years or so.
What's the catch?
Well, first. You need to get to your goal number. (Don't panic! The number doesn't look as bad when it's broken down)
Then you can't just lump £500k into any old savings account and draw down from it every year. You need to make sure that you are placing your money into an established low fee fund that will invest your money sensibly.
You would also have to be flexbible with the amount you withdraw. A good your could see you getting more to spend. A bad year might mean that you would have to tighten up expenses.
Every year you get £20,000 paid into a bank account and you can set it to pay your salary every single month. Why would you not want to find out how to get started!