Wealth Check: 'I want to retire at 40. Am I deluded?'
Saturday 10 January 2009
Nick Eddy, 27, is originally from Victoria, Australia and has been living in London for less than a year. He is a civil engineer and has been working in construction management for the 2012 Olympic Games for the past four years. Nick doesn't have an investment portfolio, but has ambitious financial goals: he would like to retire by 40 and live off his investment interest. He aims to save at least £13,000 a year and earn a 15 per cent return from his portfolio. Are Nick's financial goals realistic?
Income: Nick earns £46,700 a year.
Monthly outgoings: £808 in tax, £2,000 in living expenses including rent. He spends £3,000 a year on holidays, which translates to £250 a month on average.
Savings: approximately £10,000; he saves an additional £1,300 pa.
Pension: £10,000 in an Australian pension plan.
Debt: A £10,000 government student loan.
Mortgage: none; currently renting in London.
Three independent financial advisers help Nick with his concerns: Alex Pegley of Calculis Limited, Dennis Hall of Yellowtail Financial Planning Limited, and Duncan Glassey of Wealthflow LLP.
The advisors all agree that Nick's dream to retire by 40 and live off investments is unrealistic – "pie in the sky", according to Glassey.
Nick would need a portfolio of between £600,000 and £800,000 to retire at 40 in today's terms. With inflation, assumed to be at 3 per cent, this would be nearer to £1.15m in 13 years' time. If Nick's salary rises at 3 per cent (the current rate of inflation) he would be earning £64,000 a year by the time he is 40. To amass £1.15m in 13 years he would need to save significantly more than £13,000 per annum: "In excess of £30,000 annually, ignoring taxes – so this isn't feasible," explains Hall.
What's more, even a high-risk approach to investments would struggle to yield 15 per cent growth over 13 years in developed markets. Realistically, Nick can expect an annual investment return of between 8 to 10 per cent with a mildly aggressive approach.
If Nick were to save £13,000 a year, and assuming an investment return of 7 per cent, he would have generated £250,762.89 by the age of 40, which would provide him with £7,500 a year. This is well short of Nick's goals. Glassey advises Nick to have a "reality check" regarding his long-term finances. The advisers also warn that Nick's current circumstances may change before he is 40. He could speculate on property, get married or have children, all of which would affect his ability to invest.
However, Nick can still create an effective high-risk investment portfolio. "Diversification should be Nick's watchword, so that not all of his eggs are in one basket," says Glassey. Pegley recommends a balance of high-risk investments in both developed and developing world economies, and believes that Nick is in a perfect position to take advantage of the recession: "By investing wisely now, he has the opportunity to buy quality assets at bargain prices." However, Pegley warns that many companies will not survive the recession, "so using the services of expert fund managers is more critical than ever". He advises against buying a tracker fund, because Nick would be buying bad companies as well as good.
Nick only intends to stay in the UK for the next three years and already has a pension plan in Australia. Glassey therefore advises against setting up a UK pension plan and encourages Nick to focus on building a large cash reserve while he works here. A pension plan in England could be a financial minefield, liable to taxation in both the UK and Australia, if it wasn't transferred correctly.
One way Nick could retire at 40 would be to buy and sell a business, says Glassey. He thinks that retirement by 40 is unlikely for a paid employee without share options or an equity stake in their employer. However, he warns against the rose-tinted expectations of retirement: "For most people, an enjoyable leisure-filled retirement is at worst a dangerous illusion." Instead, he encourages Nick to find a job that he can enjoy beyond the age of 40, perhaps one at which he can work flexible hours or part-time, "allowing him to enjoy life beyond work".
Nick should make use of his annual ISA allowance while in the UK. He can invest £3,600 per tax year in a Cash ISA and a further £3,600 in a Stocks and Shares ISA. Before returning to Australia, he should take advice so he is not taxed on profits.
It could also help Nick to reduce his monthly outgoings. As Glassey says: "It is not how much Nick earns but how much he manages to keep that will determine his financial future".
Nick's only debt is his student loan, which he should avoid repaying early and should regard as "a low-cost government loan in the short term," says Glassey.
For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS; or email firstname.lastname@example.org
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Hilary Mantel 'should be investigated by police' over Margaret Thatcher assassination story, says Lord Bell
- 2 Rihanna 'nude pictures' claims emerge on 4Chan as hacking scandal continues
- 3 Kim Kardashian 'nude photos' leaked on 4chan weeks after Jennifer Lawrence scandal
- 4 'F*ck it, I quit': KTVA reporter Charlo Greene quits live on air in spectacular fashion
- 5 Hitler’s former food taster reveals the horrors of the Wolf’s Lair
Scotland could still declare independence – even without referendum, says Alex Salmond
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Hilary Mantel 'should be investigated by police' over Margaret Thatcher assassination story, says Lord Bell
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Plebgate MP Andrew Mitchell called officer a 'little s**t', claim court documents 'exposing ex-Chief Whip's 'record of abusing police'
Archbishop of Canterbury admits doubts about existence of God
iJobs Money & Business
£65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...
£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...
£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...
£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...
Day In a Page
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green