‘At 25, can I save enough money to re­tire at 40?’

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Can this reader put away enough to buy a prop­erty in Lon­don and stop work­ing within 15 years? Laura Suter finds out

There is a grow­ing move­ment of peo­ple who wish to re­tire early and en­joy a bet­ter work-life bal­ance. An­drew Alinda is one. The 25-year-old e-com­merce man­ager wants to semi-re­tire at the age of 40 to pur­sue his dream of foot­ball coach­ing. He aims to have £36,000 a year to live off.

“My goal is to get to a point where I do some work. I re­ally en­joy coach­ing kids at foot­ball but it doesn’t pay well,” he said.

Cur­rently earn­ing around £45,000, Mr Alinda is care­ful with his cash and saves about £1,600 a month. He set up a fi­nan­cial videoblog­ging web­site for mil­len­ni­als, called Money Tree Man, and is keen to learn more about per­sonal fi­nance.

His ag­gres­sive sav­ing was ini­tially to pay off £25,000 in debt he had ac­quired from his mas­ter’s de­gree. That is now cleared, and he wants to look to save for the fu­ture.

He cur­rently rents in Lon­don, cost­ing £650 a month, and wants to buy a prop­erty with his girl­friend – which will take up his ex­ist­ing near-£12,000 sav­ings. His girl­friend has saved a sim­i­lar amount. They plan to buy in Bromley, south-east Lon­don, and he es­ti­mates a prop­erty will cost around £350,000.

“I want to have enough for the de­posit, which be­tween us will be about £32,000, and then I want about £10,000 to fall back on so I’m not start­ing again from zero,” he said.

His money is spread be­tween cash Isas, a Life­time Isa, some in­vest­ments and £1,300 in peer-to-peer lend­ing. He is not en­gaged with his pen­sion, but con­trib­utes 3pc of his salary, which his em­ployer matches. av­o­ca­dos and craft beers. He should be ap­plauded for pay­ing off his stu­dent debt and proac­tively ex­plor­ing dif­fer­ent in­vest­ment op­tions.

How­ever, I’m con­cerned his piece­meal ap­proach to in­vest­ments and peer-to-peer lend­ing is tak­ing his eye off his ac­tual goals.

Mr Alinda should fo­cus on sav­ing his de­posit and given his short time frame I’d rec­om­mend he keep this en­tirely in cash.

With £11,600 al­ready banked and sav­ing £1,600 per month this should take less than two years. You can save up to £4,000 into a Life­time Isa per year so I’d rec­om­mend he makes sure he is do­ing this to get the max­i­mum Gov­ern­ment bonus of £1,000 per year.

Once Mr Alinda is on the prop­erty lad­der, he can start in­vest­ing again. His goal of semi-re­tir­ing at 40 sounds am­bi­tious and I think would be re­liant on Mr Alinda in­vest­ing ag­gres­sively. I would see this as a mix­ture of pen­sion, stocks and shares Isas and con­sid­er­ing Ven­ture Cap­i­tal Trusts ( VCTs).

Mr Alinda ad­mits that he isn’t very en­gaged with his pen­sion, but ul­ti­mately if he wants to en­sure long-term fi­nan­cial se­cu­rity then he would do well to fa­mil­iarise him­self with pen­sions. Given his young age I’d en­cour­age him to in­vest into a higher risk strat­egy, as he has plenty of time for this money to grow.

As pen­sions are only ac­ces­si­ble from age 55, Mr Alinda will need other ve­hi­cles to save and could direct his ex­cess monthly in­come to a stocks and shares Isa. I’d dis­cour­age him from pick­ing stocks him­self and in­stead sug­gest he looks for ei­ther a low-cost multi-as­set fund or a riskrated port­fo­lio of ei­ther tracker or ac­tive funds.

Once Mr Alinda has built a good chunk in stocks and shares Isas he might want to con­sider VCTs. Th­ese have the at­trac­tion of of­fer­ing in­come tax re­lief of 30pc on the money you in­vest into smaller Bri­tish com­pa­nies. Div­i­dends are tax free and there is no cap­i­tal gains tax on the growth. They have the po­ten­tial for high growth but they are high risk and in or­der to get the in­come tax re­lief you must hold the in­vest­ment for five years. To re­tire from any job at the age of 40 is a ma­jor ask. For­tu­nately, Mr Alinda has al­ready de­vel­oped a sav­ings men­tal­ity, which will do won­ders. But I fear that 15 years is not long enough.

For an in­come of £36,000, you would need a to­tal pot of around £720,000, as­sum­ing with­drawals of 5pc per year.

Over 15 years on monthly sav­ings of £1,600 you would need an­nu­alised in­vest­ment growth of around 11pc. No in­vest­ment ex­ists that guar­an­tees such a high rate.

In 15 years’ time, a monthly sav­ing of £1,500 and in­vest­ment growth at 4pc a year would gen­er­ate a fund of around £346,000 – on this Mr Alinda could en­joy a monthly with­drawal of nearly half of his tar­get. The re­main­ing bal­ance could come from his foot­ball coach­ing.

To get favourable mort­gage rates a de­posit of at least 10pc would be re­quired. For a mort­gage of £315,000 over 25 years you are look­ing at a monthly re­pay­ment of around £1,300.

It is vi­tal to con­sider all ex­pen­di­ture when plan­ning to buy your first prop­erty. That would in­clude es­sen­tial

costs such as coun­cil tax and util­ity bills. House­hold items could be bought on in­ter­est-free credit. For ex­am­ple, fur­ni­ture and car­pets could be pur­chased for a monthly in­ter­est­free cost over sev­eral years.

Mr Alinda and his girl­friend should buy the prop­erty as ten­ants in com­mon, with a writ­ten plan of ac­tion in the case of sep­a­ra­tion, how­ever un­likely that might sound.

An­other area to con­sider is mort­gage and in­come pro­tec­tion in­sur­ance, which would cover the cost of the mort­gage in the event of crit­i­cal ill­ness or death. They should each get their own pol­icy as this pro­vides true in­de­pen­dence.

If you are sav­ing for a de­posit needed in the short term, it is not at all sen­si­ble to buy stocks and shares. The longer you hold shares that are volatile, the less risky they be­come over­all as shown by past per­for­mance data.

I would rec­om­mend all the share-based in­vest­ments are im­me­di­ately con­verted to cash.

That in­cludes the peer-to-peer gam­ble, which should not form part of an in­vest­ment strat­egy, es­pe­cially for a begin­ner.

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