I’ve been dipping in and out of the FI/RE (Financial Independence, Retiring Early) space for some years now, primarily fueled by a longstanding desire to have the freedom to do what I want, without having to spend five days per week at work.
Now, I don’t think many would expect a £100/month investment to allow them to retire early, but, could it?
Below I’ll go through a few scenarios and maths the hell out of this, so buckle up!
- £20,000 annual expenditure in today’s money
- Also investing in a pension which will cover expenditure from age ~57
- The pension age will be 57-60, depending on the government..
- 3% inflation devaluing the purchasing power of my money
- The pot of money won’t be touched until retirement
- Upon retirement, the lot is withdrawn and no further gains are made (just to reduce complexity so I’m not maths-ing the cr@p out of this all day)
- Average annual 8% return doesn’t change
Scenario 1: Myself, 30, investing £100/month, S&P 500 average returns.
The average S&P 500 returns were 8% over the last 60 years (source), or 0.67% per month, so if we use this as a benchmark, I would expect to see a return of £8 profit for every £100 invested after 12 months.
I’m investing this into my ISA on Freetrade (join and you’ll get a free share worth up to £200 when you use my link), investing in a range of ETFs and equities.
In the first month, I would start off with £100.
In month two, I would have the original £100, 0.67% of that in growth (or, £0.67) and this month’s £100.
In month three, I would have the prior two months worth of £100 deposits (£200), 0.67% of that in growth (or £1.33), the prior month’s growth (£0.67) and this month’s £100.
I won’t go on, but you can see from the below that I might expect to make 67p profit in month two, £2 in total by month three, £4 by month four and so on, resulting in a growth/profit of £44.99 by the end of the first twelve months:
After ten years of following this method, I would expect month 120 to return a total of £18,294.60, or growth/profit of £6,294.60, from a £12,000 investment.
Hardly enough to even bring my retirement age forward by half a year.
However, double it, because after the 20th year my £24,000 investment will be worth £58,902.04, meaning growth/profit of £34,902.04.
Now that could actually bring forward my retirement age by one, maybe even two years!
Alas, inflation… at 3% annually for 20 years, the £35,000 growth would be equivalent to £20,000 today, so one year off is more likely.
In fact, investing £100/month from age 30, it would take until I am 57 for my ISA to produce 1.5 years worth of living expenses as growth, which is roughly the year that I should be able to take my workplace pension, so this may still only allow me to retire 1-2 years early!
Let’s say I did this for my (theoretical) child who is ten at the start of the project (obviously they would take on the investment once they earn the money..):
Scenario 2: My (theoretical) child, 10, S&P 500 average returns
Investing £100/month for 30 years would mean that by age 40, my (theoretical) child would have made £301,000 in growth/profit from a £48,000 investment:
At this scale, inflation will really hit that figure quite hard.
If we estimate an average 3% inflation for the next 30 years (hopefully it’s not so high), that £301,000 will be roughly equivalent to £124,000 today, which may only equate to chopping around six years off of my (theoretical) son’s retirement age by that point.
However, just ten years later and this happens:
When you consider 3% inflation for 40 years, that £733,000 growth/profit is equivalent to £225,000 today, which could chop 11 years off of the retirement age of someone with £20,000 annual expenditure (in today’s money).
By this point, if my (theoretical) son was ten years old at the start of investing (where, obviously, as a parent I would need to start them off) and they would now be 50 years old, and with more than enough in this pot to retire – in fact, they may have been able to retire in the prior 2-3 years!
Obviously this is of almost no use to anyone who either isn’t ten years old, or who can’t/won’t put £100/month towards a ten year old’s ISA.
What these two scenarios show is that starting early is essential to retiring early. Because I have started investing so late (is 30 actually late when most people never do it anyway?), I will obviously not be able to rely solely on my £100 Every Month project to allow me to retire early, unless my investments beat the average of the stock market by a considerable degree – this remains to be seen.
But I would consider that £100/month is the absolute minimum that you should invest from age 30 in order to see any impact on your retirement age.
Scenario 3: Myself, 30, £100/month year increasing by £100/month every 2 years up to max £1,000/month
Rather than looking at a straight £1k/month investment which isn’t realistic for most people, this scenario increases the monthly investment by £100 every 24 months – hopefully more achievable.
Starting at age 30, this would mean you hit £1,000/month being invested when you reach 50 years old, where 8% annual return would give you growth/profit of £101,000 just after you turn 50.
At age 52, the amount invested and the growth/profit would be more or less the same, about £138,000. This £138k would be the equivalent to £72,000 in today’s money, or worth just over 3.5 years of expenditure. Considering we would have invested the same amount, there should be enough money in the pot for us to retire around six-seven years early.
Now, the investment here is more than double that of scenario 2 and will likely chop off about half of the impact on the retirement age – even massively increasing our investment doesn’t outperform starting earlier.
Conclusion: Start ’em young!
Investing early makes more of a difference than investing late, even if you massively increase the amount you invest.
If you can only afford to invest £100 Every Month, that is better than waiting a number of years before investing 2x,5x or 10x that amount, because the interest you gain this year will gain it’s own interest next year, and so on (gotta love compound interest).
Heck, if you can afford to only deposit £25 every month into your ISA, that is far better than waiting ten years; I could have done this 10 years ago when I was 20 and by now it would have grown by 50%, for a tasty £1,500 growth/profit.
Investing is not just for people who have £1,000+/month to put away. It’s for everyone.