Keith Weiss is a 34-year-old software developer who moved from the USA to London last year. Although he has amassed a good level of savings and pension investments for someone of his age, he has ambitious plans to retire in his early forties and wants to know how best to achieve them.
Unlike many of his British friends, Keith has opted to put most of his savings to date into the equity markets and is happy to continue renting a property rather than buying one. He's already saving quite aggressively, but he's concerned that he may need to be saving even more if he's going to achieve his goal of early retirement.
Keith Weiss, 34, IT software developer, London
Income: Keith earns about £52,000 a year, in addition to the dividends from his share portfolio.
Monthly spending: £1,000 a month rent; £1,200 a month on travel, food and going out; £2,000 a year on holidays.
Savings: £15,000 in savings accounts, £55,000 in a portfolio of equity investments. Also saving an additional £300 a month.
Pension: £75,000 in a pension, and contributing £325 a month before tax.
Property: None, and no plans to buy.
We asked three financial advisers to take a look at his situation: Anna Sofat of Addidi Wealth; Ian Hudson of Hudson Green Associates; and Mike Prendergast of Zen Financial Services.
Keith has been saving between 10 and 15 per cent of his salary into a pension every month, and has built up a fund worth about £75,000. Sofat says that, while Keith is in a much better financial position than most people his age, he will need to step up his saving considerably to achieve his aim of retiring between 40 and 45. Furthermore, she points out that he won't be able to touch any money in his pension fund until he is 55 (under UK law), so he will need to make some of his additional savings into a regular equity investment plan, making sure to use up his £7,200 annual ISA allowance first.
Prendergast agrees, but adds that the downside of saving into non-pension investment products is that Keith won't get the 40 per cent tax relief, which means he will need to put even more money aside.
Hudson estimates that Keith needs to amass a savings pot, outside of his pension, of about £300,000 to cover the first 10 years of his retirement, between 45 and 55, when he cannot contribute to his pension. To achieve this, he says Keith would need to be putting about £1,600 a month aside for the next 11 years, which would be difficult with his current overheads. To fund his retirement beyond 55, Keith would then need to continue contributing at least 10 per cent of his salary into a pension, and should target a pension fund of £600,000.
"Keith needs to consider that he is attempting to retire a little over 10 years from now, expecting his funds to see him through the rest of his life," he says. "This could be another 55 years. Thus he needs to be aware that his ability to retire early is likely to be constrained by his ability to save enough. It is possible, but it is likely to make Jack a very dull boy."
Hudson says that if Keith can settle for retiring just a few years later, it may make the challenge of saving enough much easier.
Keith has a portfolio of shares worth more than £50,000, and describes his appetite for investment risk as moderate to aggressive. However, Prendergast suggests that Keith may want to take a formal risk assessment with a financial adviser to be sure.
"Many clients claim to be aggressive investors until the markets fall, and then suddenly become risk averse," he says. "A decent IFA will run through a risk assessment process to look at exactly which funds to invest in and what split of funds to use. These should be monitored and reviewed at least annually."
Sofat suggests Keith consider buying a property. Using the £50,000 he has in shares as a deposit, he could buy something worth about £250,000. The payments on his £200,000 mortgage would be little more than the £1,000 a month he now pays in rent.
Hudson acknowledges that property markets in the UK and US are currently depressed and may not have hit the bottom. But he too suggests Keith consider buying a property once the market has settled down, benefiting from lower prices. Hudson adds that Keith will need somewhere to live in retirement, which is why this would be a good investment.
Keith has no dependents, so has no real need for life insurance, but the advisers agree he should consider an income protection policy. While he has £15,000 in savings, built up to cover emergencies, Sofat says he could buy income protection that would pay £2,500 a month if he was unable to work, for just £25 a month.
Finally, the advisers also agree that Keith should consider writing a will, so that his assets are passed on in accordance with his wishes should he die. "Dying intestate does not help your loved ones to cope any easier with your loss," Hudson says.
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