This week’s question comes from the ambitious Ashraf in Blackburn:
“I’m 24. If I want to retire at 30 with £1 million, how much do I need to save and invest?”
So let’s talk about this.
We’re going to start with a dose of philosophy.
At MoneyBlog, we don’t think retirement at 30 is a goal that anybody really wants. At thirty years old, you’re not even half way through your life. What will you do with all your time if you don’t work anymore? That much leisure time isn’t good for anybody.
So we wanted to begin by rewording the question. If we swap out the word ‘retirement’ and instead address reaching financial freedom by 30, that’s a much more useful goal.
Financial freedom is a good goal to have. And I think it’s likely what you meant by retirement is not having to do a day job in order to finance your lifestyle. At 24 you’re probably new into work and not really loving the daily grind. So, figuring out what job you’d LIKE to do for the next fifty years might be something to think about. And maybe consider a career change.
Something to think about.
However, back to your question.
The next problem is the million pound figure. How did you reach that?
Back when we we were enjoying savings rates of 5% and above, the interest on £1 million would have been enough to provide a pre-tax income of £50,000 a year which would be comfortable for most people.
For the time being, unfortunately, with savings rates substantially lower than that, £1 million is unlikely to cut it.
So how much would you need?
Well if you wanted to rely on savings interest alone, you’d need at least £5 million to deliver the same £50,000 a year.
And if we were to take a simple investment approach and buy high dividend stocks, we might be able to deliver an average of 5% return on investment for your whole portfolio. Which means you might be okay with £1 million.
So if you’re aiming to put away £1 million in savings by the age of 30, you have 6 years to save a million.
1,000,000/6 = £166,666 per year
Now, even if you’re in investment banking or the creator of the next big thing, I’m doubting you earn anywhere near that much at 24.
So, while an admirable goal, financial freedom by thirty might be just a bit too ambitious, unless you’re very good (and probably fairly lucky) at stock market investing. Or you happen to win the lottery next week.
The trick to reaching financial freedom earlier is to save as much as you can and get that money to make money for you. And that’s essentially what investing is. Start slow. Learn. Build. You’re still very young. Even if you only take baby steps right now, in ten years you’ll look back on this and realise how powerful those baby steps were.
But we don’t think retiring at thirty is either particularly practical or good for you. But we admire your ambition.
We hope this helps.
If you want to send us a question about any aspect of personal finance or money management, tweet hashtag #AskMoneyBlog, or fill in this form and we’ll get right on it! Follow us on Twitter at @MoneyBlog_UK.