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How much do I need to quit work forever?

| Uncategorized | April 10, 2012

The big question is whether you intend to run down your lump sum or not. If you do then there is less need to make your money perform, savers who shift cash around the best savings accounts should be able to get a return of the going rate of inflation plus 2%.

Assuming a 2% return above inflation on your money, in order to quit work for good on an income of £15,000 per annum until the grand old age of 90, you would need the following, if you ran down the lump sum:

• £521,500 to fund 60 years (retire at age 30)
• £471,500 to fund 50 years (retire at age 40)
• £410,500 to fund 40 years (retire at age 50)
• £293,000 to fund 25 years (retire at age 65)

But if you want to stop working and have more money to enjoy yourself, say on an income of £25,000 a year – roughly the national average wage, the price goes up significantly. Again assuming a 2% return above inflation on your money you would need the following, running down the lump sum:

• £869,000 to fund 60 years (retire at age 30)
• £785,500 to fund 50 years (retire at age 40)
• £684,000 to fund 40 years (retire at age 50)
• £488,000 to fund 25 years (retire at age 65)

It is important to remember that these cash flows include no allowance for unexpected longevity, so if you live one day ‘too long’ then the money has run out. And there is another important factor to bear in mind: protection. You will need to share the cash out over accounts in order to stay within the £50,000 individually licensed institution savings compensation limit.

If you want to maintain your lump sum, life becomes harder and you will either need a larger lump sum, or investments likely to deliver a better rate of return than 2% above inflation, such as income funds or equities, which come with risk, unlike a savings account.

For an income of £25,000 in perpetuity, using a 2% real return you would need a fund of £1,250,000. If you think you could get a return of 4% per year above inflation on a maintained lump sum, you would need £625,000.

But let’s look in more detail about what else you can do and what you need to consider.

What do you need to live on?

First Great Western train

Expensive: Commuting to work can cost a small fortune

Daily expenses when working add-up, and then some. For example, commuting charges in the UK are noted for being some of the most expensive in the world.

An individual, commuting between zones two and one in London via a train or tube can expect to pay around £1,200 a year for the privilege. Go further afield and the price tag rises steeply, train season tickets can cost £2,500-plus per year and if you spend £30 per week on petrol getting to work that comes to just under £1,400 in a 46 working week year.

However, while not working will save you money, there will be other costs you do not want to cut. What about holidays? How many do you want to take a year? And what are your monthly household bills for food, fuel and council tax.

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