Many of us dream of retiring early to have more time to do the things we enjoy. At this time of year in particular, when the alarm clock goes off on cold, dark mornings, it’s easy to fantasise about leaving the employment treadmill behind and gaining control over our time at last.
For many, early retirement means stopping full time work in your mid to late 50s – or around ten years before the age at which you can claim your state pension.
But even if it’s just a few years you’d like to shave off a long career, you’ll need to do some meticulous planning.
Fail to and you run a real risk of running out of money during retirement – or even having to return to work again. While you can access pension savings at the age of 55 – or 57 from 2028 – that money has got to last you for years – and likely decades if you stop work early.
Luckily there are tricks to help you get the early retirement of your dreams – without risking poverty in older age.
Here, Wealth & Personal Finance explores how you can make it a reality.
For many, early retirement means stopping full time work in your mid to late 50s – or around ten years before the age at which you can claim your state pension
1. Don’t let your living standards sneak up
No one likes to rein in their spending, but there are ways to do it to make it comparatively painless. And a tighter budget while you’re working will translate to greater flexibility over when you can retire.
One option is to keep your lifestyle unchanged even when your circumstances improve. Most of us succumb to so-called lifestyle creep, whereby the more we earn the more we spend. But if you can keep your spending in check and save more instead, it’ll pay off in the long run.
For example, whenever you get a pay rise, increase your pension contributions before you get used to having the extra money.
Should you ever receive a windfall, such as an inheritance, unexpected refund or compensation payment, put it straight into your retirement pot – or at least a good chunk of it.
2. Get ideas from the FIRE community
Fire, standing for Financial Independence Retirement Early, is a movement that advocates frugality now in the hope of being able to give up work sooner.
There are social media groups and threads, such as on YouTube, Reddit, and Facebook, where supporters of FIRE share their experiences and ideas.
This will not be a good source of investment advice – if that is what you need you will be better off opting for regulated advice and guidance from more robust sources. However, you may find good suggestions on budgeting and inspiration from the FIRE community.
If you’re surrounded by conspicuous consumption and friends spending more extravagantly than you, it may also help to tap into a network to make you feel that you are not alone in trying to live more simply – and that you’re doing it to reap the rewards later on.
3. Do cashflow forecasting
Before you hand in your notice, do a cashflow forecast to calculate how much money you are likely to need during your retirement.
Of course, there is no way to know precisely as circumstances change – especially if you have a long retirement. But by plugging in your income and expenses you can project forward how much your plans are likely to cost you – and therefore how much money you will need in total.
Andy Bolden, financial planning director from 7IM investment management, recommends using cashflow modelling.
A financial adviser can do this for you, or you can buy software that does it. One Option is Pocketsmith (pocketsmith.com). This allows you to project your bank balance up to 60 years into the future depending on your expected spending. You can also test different life scenarios to see how they would affect your financial future.
‘If you are unsure how to forecast, a financial adviser should include financial modelling in the service they offer,’ adds Bolden.
Nucleus retirement expert Andrew Tully says it is important to understand what spending could look like as you get older if you’re planning early retirement.
Your housing situation will be one of the biggest things to consider, according to Tully.
‘Will you still be paying a mortgage or rent – people who see themselves renting in retirement have much lower retirement confidence than homeowners,’ he says.
If you’re dreaming of early retirement, but can’t make the numbers stack up, it may be a new role, challenge or different hours could give you what you’re looking for instead, writes Rosie Murray-West
4. Max out your state pension
The state pension forms the bedrock of most people’s retirement incomes. Make sure that you will not jeopardise yours by retiring early.
You need to have 35 years of contributions to receive a full new state pension.
Every year that you miss lobs 1/35 off the amount that you receive.
You may have accrued entitlement even in years that you were not working, for example if you were a carer or took time out to have children.
Check how much you are likely to receive at gov.uk/check-state-pension. If you have years that you are entitled to and have not been credited for, you can query this.
You may also be able to ‘buy’ extra years of state pension to top up your entitlement if you have not got a complete national insurance record.
Go to gov.uk/voluntary-national-insurance-contributions.
5. Save an extra £180,000
If you want to retire ten years early, you will need a pension pot that is £180,000 larger than you would need if you retired at 67, according to calculations for Wealth & Personal Finance by adviser Nucleus Financial.
At the age of 67, you would need £570,000 to achieve an annual income of £31,300 a year. According to industry body the Pensions and Lifetime Savings Association (PLSA) this would give you a moderate lifestyle in retirement, with a small car replaced every ten years, one holiday abroad to the Mediterranean each year as well as a UK weekend break.
The income would be a combination of your state pension and turning your pension savings into an annuity that would pay out an income for life.
Some retirees prefer to keep their pension pot invested and to draw from it as and when they need the income, rather than opting for an annuity. The advantage of an annuity is that you remove the risk of running out of money in later life as it should pay out for your whole lifetime – and that of your spouse if you opt for a joint annuity.
Some annuities have built in protection against inflation, which can help reduce the risk that your income is eroded over time. In the Nucleus Financial example, the annuity increases at 3 per cent a year.
6. Start saving as early as you can
Building a pension pot of £750,000 by the age of 57 is an intimidating thought. But, if you start early you’re much more likely to achieve it.
You would need to put aside £590 a month from the age of 21 to save this amount. But remember that you won’t have to pay all of that. If you work for an employer, they should pay towards your pension.
The minimum they must pay is the equivalent of 3 per cent of your salary, while you must pay at least 5 per cent under auto-enrolment rules. However, some are considerably more generous.
You will also benefit from tax relief, which means that for every £80 that you put into your pension, the taxman will pay in £20. If you are a higher-rate taxpayer, you need pay in only £60 and the taxman will top up with £40 for a total contribution of £100.
So, for example, if you earn £40,000 and pay 8.5 per cent of your salary into your pension – and your employer matches it, you would be putting £566 into your pension every month – but you would only have to stump up £283 of that.
Jonathan Halberda, specialist financial adviser at Wesleyan stresses that making the most of employer contributions and starting as early as possible is the key to building a pot of this size.
‘These contributions are essentially ‘free money’ and can significantly boost your retirement savings,’ he says.
7. Check on your investments
Make sure that every penny you are stashing away for your retirement is working hard. That means checking that you’re not paying needlessly high fees – and moving your pension or changing your funds if so.
It also means taking on the right level of risk so that you are getting the highest level of returns you can for the level of risk that you feel comfortable with.
Check both your current pension and any old ones that you are no longer paying into. Savers have more than £31 billion in unclaimed pensions that they have lost track of. Check that yours are all accounted for and consider consolidating some of them if it makes it easier to manage them.
8. Have a last-minute pension sprint
If you’ve missed the boat on starting pension contributions early, you can still make up for it with a sprint later in life. Of course earlier contributions have longer to grow, but it can be much easier to really turboboost your pension later on when you are likely to have a higher income.
You may also find it’s easier to save more later on when you may have managed to pay off your mortgage, received an inheritance or your children have left home. You can pay money into your pension and benefit from tax relief until the age of 75.
Restrictions do kick in when you start to take money from your pension though, so you have to be careful. Increasing your contributions in those last few years before early retirement can really make a difference – especially if you are a higher or additional rate taxpayer and therefore benefit from pension tax relief at 40 or 45 per cent respectively.
9. Make plans for a modest retirement
At a certain point you may have to weigh up whether you want an earlier but more modest retirement, or a later but wealthier one.
If you’re happy with the former, there may be no need to target an income of £31,300 a year as we have modelled in the calculations above.
The Nucleus calculations are based on PLSA research into retirement living standards, which suggests that a single person needs to have £31,300 for a moderate retirement or £43,100 a year to retire in comfort.
Everyone has a different idea of what a comfortable retirement looks like, so you may be happy retiring earlier with a smaller pot.
As part of a couple, you would need to spend slightly less each – £43,100 a year – for a couple to retire to a moderate lifestyle or £59,000 a year to retire in comfort.
A ‘comfortable’ retirement includes streaming services like Netflix as well as several minibreaks in the UK each year, while even with a moderate retirement income you could eat out a few times a month. You could also choose a ‘minimum’ retirement, at £14,400 a year for a single person or £22,400 for a couple, which would allow you to eat out once a month and do some cheap leisure activities.
10. Are you sure you want to retire early?
Of course it’s easy to see the appeal of retiring early, but the reality may not be quite as dreamy as you fantasise about as you head off for another long shift. You may even find you miss it.
‘Working can be good for your wellbeing. It can provide mental stimulation, and opportunities to meet and interact with people and enjoy the social benefits of being at work,’ Tully says. ‘Those looking towards retirement may be worried about feeling lonely or isolated when they retire.
‘People need to work out what they will do in life.
‘That could include learning a new skill or going back to university as a mature student, volunteering in an area that you are passionate about, or easing into retirement by working part-time.’
If you’re dreaming of early retirement, but can’t make the numbers stack up, it may be a new role, challenge or different hours could give you what you’re looking for instead.
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