Quitting Contracting – How much will I need to pack in IT Contracting

Quitting Contracting

How much do you need before quitting Contracting?

Most IT Contractors would like the opportunity to get out if they can.

It‘s the reason they got into IT contracting.

Furthermore, few contractors get into it planning to be still in it when they retire at 65.

Quitting Contracting Altogether

So, that raises the question of how much they need to get out altogether.

The last thing they want is to get out and then find their nest egg shrinking as they spend it.

Furthermore, they want the nest egg to continue to grow at least as much as inflation while they spend it.

They also don‘t want to have a lesser lifestyle than they had before quitting contracting.

Average Contract Rate

So, let‘s take the average contractor rate as £400 a day.

Of course, they‘ll pay tax on that but we‘ll ignore that as they would have to pay tax on investment income too which would balance it out.

So, contractors need to earn £2,000 a week or £100,000 a year to maintain their lifestyles.

Investment in Stock Market

Figures came out a few weeks ago showing that over the long term stocks and shares earn you 9% a year on average on the main market.

However, if you invested in small cap shares that came out at a 12% average rise a year.

So, let‘s say on your spread of investments it is 10%.

Replacing Your Contracting Income

That means that you would have to have a million to earn £100,000 a year to replace your contracting income after quitting contracting.

However, that million would stay static while inflation eats away at it and you would be on that £400 a day forever whilst contractor rates rose.

So, we‘ll have toad a bit extra to that.

Dealing with Inflation

Inflation is a bit lower at the moment but inflation has averaged 2% in recent years.

So, you would have to earn effectively another £20,000 a year to make sure your nest egg wasn‘t being eaten away by inflation.

As you are making 10% a year on your money on the Stock Exchange that means that you have to have an extra £200,000 to earn that £20,000 a year extra to keep pace with inflation.

You could stop there and say that £1.2m is the figure that contractors need to pack it all in.

Contractor Lifestyle

However, if you want your lifestyle to rise to keep pace with future increases in contractor rates you would need more.

Therefore, I would suggest that you might want to have your lifestyle to increase by 2% a year above inflation.

So, that‘s another £20,000 a year you need to earn from another £200,000 saved.

That would mean that the figure to be able to pack it all in and never work again is now £1.4m.

So, contractors need a nest egg of £1.4m saved in order to retire and think of quitting contracting.

Contractor Earnings

So, how long would that take?

If they are earning £2,000 a week tax of 15% average would bring that to £1,700 a week.

If we allow, therefore, the contractor to spend £700 a week then he or she has £1,000 a week left making £50,000 a year.

We are going to allow the contractor to make 10% on his money a year so let‘s see how long it would take.

If a contractor earns 100K in a year he or she will be investing it as it is earned.

However, as they will have zero of the 50K saved at the start of the year and 50K at the end we are going to average that out as 10% of £25,000.

End of Year 1

£50,000

For safety, nothing invested in the first year.

Year 2

£100,000 saved plus 5K made on the first year‘s income and 2.5K in the current year.

Total £107,500

Year 3

£50,000 earned
£107,500 carried forward
£10,750 earned on previous income
£2,500 earned from this year‘s income
£170,750 Total

Year 4

£50,000 earned
£170,750 carried forward
£17,075 earned on previous income
£2,500 earned from this year‘s income
£238,825 Total

Year 5

£50,000 earned
£238,825 carried forward
£23,883 earned on previous income
£2,500 earned from this year‘s income
£316,308 Total

Year 6

£50,000 earned

£316,308 carried forward
£31,631 earned on previous income
£2,500 earned from this year‘s income
£400,439 Total

Year 7

£50,000 earned
£400,439 carried forward
£40,044 earned on previous income
£2,500 earned from this year‘s income
£492,983 Total

Year 8

£50,000 earned
£492,983 carried forward
£49,298 earned on previous income
£2,500 earned from this year‘s income
£594,781 Total

You‘re saving as much from your investments now as from your contracting income.

Year 9

£50,000 earned
£594,781 carried forward
£59,478 earned on previous income
£2,500 earned from this year‘s income
£706,759 Total

You are more than half the way there now.

Year 10

£50,000 earned
£706,759 carried forward
£70,676 earned on previous income
£2,500 earned from this year‘s income
£827,935 Total

Year 11

£50,000 earned
£827,935 carried forward
£82,794 earned on previous income
£2,500 earned from this year‘s income

£961,229 Total

Year 12

£50,000 earned
£961,229 carried forward
£96,123 earned on previous income
£2,500 earned from this year‘s income
£1,109,852 Total

You, therefore, became a millionaire in just over 11 years of contracting.

Year 13

£50,000 earned
£1,109,852 carried forward
£110,983 earned on previous income
£2,500 earned from this year‘s income
£1,273,335 Total

Year 14

£50,000 earned
£1,273,335 carried forward
£127,334 earned on previous income
£2,500 earned from this year‘s income
£1,453,169 Total

Made Your Money

There you are, you‘ve finally done it.

It has taken you slightly under 14 years to get to the £1,400,000 mark which will enable you to get out completely, be able to get a nicely rising income and nest egg and not have it eroded by inflation.

Of course, if you earn more than £400 a day or you are able to save more than £1,000 a week then you will get there quicker.

Bench Time

Also, it doesn‘t take into account that you may spend some time on the bench.

IT Contractors tend to work for 45 weeks a year rather than the 50 weeks we used here.

However, that can be compensated for by saving more than the £1,000 a week.

You would have to save £1,111 a week rather than £1,000 for 45 weeks a year giving yourself a break from paying for the other 7 weeks a year you are off.

You may be lucky and get into the stock market when it is low or you may be unlucky and get in when it is high.

However, over 14 years it should balance out OK.

Conclusion

So, there it is.

Add 14 years now to your age and that is when the normal contractor can pack in IT contracting.

Of course, if you already have some money you can make it out quicker.

We are assuming you had no money at all.

If you are better than average on the Stock Market you can make it out quicker too.

If you invest only in small cap shares then your income will rise by more than 10%, i.e. by 12% on average.

Previous Contractor Assets

I reckon contractors could get out in about 10 years with a good start and with some income behind them already.

If contractors already had total assets of £238,000 then that would take them up to the end of Year 4 and cut their time to less than 10 years to make their pile and get out.

Count up your assets now and see how much of a start you could get and what year you would be joining in at and subtract that from the total of about 13 years and 9 months.

So, get cracking now on your get-out plan – and remember to keep working even if you have to tale a lower rate.

So, the sooner you start the sooner you can think of quitting Contracting.

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