Are you among the millions of Brits who won’t retire until their 70s?
According to a recent survey, a quarter of British adults has no savings, and one in ten typically spends more than they earn each month. In fact, we Brits are among the world’s biggest spendthrifts, with the household savings ratio having fallen to just 4.9% in 2017 – the lowest since record began!
This falls way short of the 20% savings ratio recommended by many personal finance practitioners. And it is worlds away from the kind of savings rate someone needs to achieve if they’re to free themselves from relying on their job for a regular income and become financially independent.
When can you retire?
But how long would it take for someone saving at the average rate to reach financial independence? Luckily, there is a very useful website we can use to calculate this. Assuming a 7% growth rate for their investments, someone starting from scratch and saving 5% of their after-tax income each year would take 52 years to reach financial independence (assuming a 4% withdrawal rate once retirement is reached).
There’s no wonder that people often quip that they won’t be retiring until their 70s – because, for most people, it’s probably true!
As for those achieving a 20% savings rate – which is recommended by most personal finance ‘professionals’ – retirement would become an option after 31 years of graft. That’s more akin to what most people would see as a ‘normal’ working life.
But if you’re reading this site, there’s a good chance that you don’t fit into the category: most people. If you’re going to run the Millionaire Marathon, a savings rate of 50%+ is what you should be aiming for. Yes, that’s ten times the average savings rate in the UK, but by making sacrifices earlier on you’ll be ensuring that you massively decrease the time it takes to reach financial independence and retirement.
Referring back to the Networthify site, someone achieving a 50% savings rate could reach financial independence in 15 years from scratch. If you can turn yourself into a savings ninja and reach a 75% savings rate, the time it takes to reach financial independence falls to just seven years! (Of course, there are plenty out there who claim to have achieved financial independence even quicker than that; but for most people, saving 50% of their income will probably be enough of a stretch.)
How to measure your savings rate
savings rate = annual savings / annual after-tax income
Your savings rate is your annual savings divided by your annual after-tax income. There is some debate as to whether your savings should include the portion of your mortgage payments that reduces the capital balance (i.e. annual mortgage payments minus interest), or whether pension contributions should be considered.
Of course, this really depends on personal circumstances, but for my part, I don’t include mortgage payments. As I live in my house, it doesn’t generate an income for me (at least not right now, as I don’t have lodgers) – and therefore it doesn’t count towards my early retirement funds. Neither do I include my pension contributions as I intend to retire well before the earliest retirement age available to those with a private pension (55, rising to 57).
What’s your savings rate? When will you retire? Have a play around with Networthify and it may just inspire you to up your game.