Did you know that 1 in 4 millennials are aiming to retire early in Europe? That’s a huge chunk of our workforce! But it’s incredibly difficult to chase early retirement without either a huge inheritance, or a six-figure salary.
Contrary to what traditional media might have you believe, you don’t need to be earning top dollar in order to shave off a decade or two of your working life. In fact, financial independence is becoming more available than ever. So just how are so many of us managing to square away the funds to quit working and take back our financial freedom? Find out, as we discuss how to retire early as a European.
Achieving ‘Financial Independence Retire Early’ in Europe
‘Financial independence, retire early’ (FIRE) has grown into a huge collective movement since it’s first mention during the mid-1990’s. Originally viewed as an ‘extreme’ strategy to achieve early retirement, Google searches for ‘Financial Independence, Retire Early’ have increased by 94% over the past 5 years.
But what actually is it?
FIRE simply means that you have enough money to live sustainably without working another day in your life.
Sounds a bit wishy-washy, doesn’t it?
FIRE promotes retiring before the state pension retirement age, and building a healthy pension pot for the rest of your life expectancy.
Luckily, many have tried before (to varying levels of success), which means there’s actually a pretty reliable standard around what it is to be financially independent. It’s called the 4% rule.
The 4% rule gives you an understanding of just how much you’ll need to save before you can sit back and put your feet up. The formula states that you should save 25 times your annual income prior to retirement. Then, withdraw 4% of the total each year to live sustainably for the rest of your life.
For example, imagine you’re comfortable living on €30,000 per year (bear in mind, you won’t be paying as much tax when retired).
25 x 30,000 = €750,000 required savings and investments before you retire. Withdrawing 4% of this total per year will allow you an annual income of €30,000, which means your lifestyle can remain the same.
Let’s face it, €750,000 is a LOT of money. It’s easy to use your FIRE number as an excuse to not put in the work. But FIRE isn’t supposed to be a walk in the park, you have to be consistent and smart about your money. This is how it’s done:
- Emergency Fund
- Pay off Debt
- Frugal Lifestyle
- Save and Invest
An emergency fund is a pot of money that is worth 3-6 months of your typical living expenses. This is the first step towards financial independence as it acts like insurance- you have substantial savings in case of an unexpected change in circumstances. It’s almost a prerequisite, as it means that you can continue to work towards financial independence even while extra bills and costs occur.
So, how much should you aim to save in an emergency fund?
Imagine you spend €1500 per month on your mortgage or rent, utilities, groceries, car payments etc. You’d require an emergency fund of between €4500 and €9000 in order to move onto the next steps towards early retirement.
An emergency fund should be kept for just that: emergencies. No sneaky dipping in for new clothes, event tickets or holidays- this pot is for emergencies only. It’s there if you suddenly lose your job and have no other forms of income, or if your car breaks down and you don’t have the budget to afford repairs, for example.
Pay Off Debt
The next step to achieving FIRE is paying off all of your debt. Luckily, most of us Europeans don’t have heavy student loans like those in the US, but there are other types of debt that you might be subjected to. Whether you’re tied into a mortgage, have taken out consumer loans or find yourself in another type of debt, it’s easy to get overwhelmed.
Paying off debt first allows you to focus on saving the majority of your salary and income on savings and investments for retirement. It also means you’ll retire without liabilities, which come with their own stress.
Two of the most popular forms of debt repayment are the snowball and avalanche methods. The snowball method involves focusing all of your repayment on your smallest debt first, and building momentum as you move through to higher amounts. Alternatively, the avalanche method promotes making minimum payments on all your accounts, and then using any leftover funds to target the highest interest debt.
Living as cheaply as possible is the next step in being able to retire early. In fact, most FIRE subscribers save and invest between 25-50% of their salary every single month. Many of us struggle at this step, since it often means sacrificing life’s luxuries in order to stash away our money. However, there are several moves you can make to ease the process.
In general, European living expenses can be some of the highest in the world- especially if you’re in somewhere like Switzerland or Monaco. We can all cut down on going for meals out and parties, but sometimes it’s just not enough.
For this reason, geolocation is one of the most important aspects of your living expenses. If you can work remotely, consider moving to a more affordable part of Europe. There are a number of brilliant remote-working communities in places like Bansko (Bulgaria) or Portugal, where living expenses can be much cheaper.
As stated, FIRE subscribers will aim to invest as much as they can each month in order to allow the money to compound and grow over time. But investments can decrease in value, as well as go up. As such, it’s important to diversify your investment portfolio in order to spread your savings and reduce risk.
Alternative investment options include assets such as:
These are separated from the more traditional forms of investment which you’ll find on the stock market, and can provide higher returns in exchange for your cash. However, it is your responsibility to check
In Europe, pension ages differ from country to country (annoying, we know!). For example, in Germany you are only eligible to access your pension after 65 years of age, whereas Italians may have to wait until they are 71 years old to access pension funds. It is important for you to know the exact requirements for where you are retiring, not the country you have worked in.
If you’d like to learn more about how to retire early in Europe, we run a podcast with weekly episodes about how to achieve FIRE. Subscribe here to get notifications straight to your inbox!