Saturday, November 03, 2007

Early retirement - how soon (1)?

After reading these inspirational posts from The Digerati Life and My Wealth Builder, I took a long hard look at my progress towards my retirement goals.

The starting point was my goal of retiring at 50 with assets that generated sufficient passive income to support our desired lifestyle (i) with a reasonable margin for error and (ii) without having to rely on draw down of capital to meet expenses.

Both 2006 and 2007 (year to date) have seen my income and savings both reach levels that were well above both budget and expectation. My periodic reviews of progress towards my goal using various retirement calculators has shown the required rate of return to achieve retirement at 50 steadily declining. It currently stands at 5.4-5.7% pa (depending on which calculator I use).

Today I looked at the numbers from a very different perspective: how soon can I retire?

If I use a 7% rate of return on investments, the answer is that I can retire at age 47 - three years ahead of schedule and less than six years away.

Why 7%? This was selected for two reasons:

(i) 7% is the aggregate of (a) the net yield after outgoings and tax on residential property and (ii) the rate of inflation. It seems to be a reasonable assumption that capital values and rents will appreciate at roughly the rate of inflation; and

(ii) 7 % is less than the long run average return on equities in most markets and also seems to be a reasonable assumption.

(To be more precise a return on investments of 6.7% pa will enable me to retire at 47.)

Of course, all this optimism is a good indicator that I am getting ahead of myself. Still, it is nice to think that retirement is less than six years away.

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