WHILE the age at which we can take our state pensions moves inexorably upward, the dream of retiring early refuses to die. A study from Prudential found that six in ten people retiring in 2017 did so before reaching their state pension age, with many willing to take a cut in income to escape the rat race.
What’s more, many of those that have taken the retirement plunge report being fitter and healthier than before, a third claim to be more adventurous than they were when at work, and nine out of ten say that retiring has met their expectations.
It’s an enticing prospect. But if you want to throw in the towel before your government money comes through, you are going to have to think your finances through very carefully.
Do some early retirement calculations
It can be difficult to know where to start when devising an early retirement plan, but average life expectancy should give a good guide to the task that faces you. The majority of us are living longer than ever, so if you plan to give up work at 50, you will likely have to support yourself for many years.
According to government figures, the average 65-year-old man today will live to 83-and-a-half, while women will live even longer, to almost 86. That may rise further by the time you hit 65 but, even if it stayed the same, you would have more than 30 years of life to fund without a monthly pay packet.
Scott Gallacher, financial adviser at Rowley Turton, advises you to do some sums. ‘Work backwards and calculate how much you’ll need in retirement and when you want to retire. This will enable you or your adviser to calculate how much you need to save or invest,’ he says.
Figures from investment manager group Old Mutual Wealth suggest that the average annual retirement income is a little more than £20,000. However, you will need to consider inflation, which means that £20,000 will buy less and less every passing year. Even without inflation, though, you’d need around £700,000 to last the course.
Building a retirement fund
Such a figure might well feel way beyond your reach, but government tax breaks, shrewd investing and a holistic approach to your finances could help you to hit your target.
Making the most of your pension is one really important factor, especially if your employer makes contributions. Pensions come with valuable tax breaks, which are even more attractive if you pay tax at the higher rate, but you can’t usually get the money out until the age of 55 — and this may rise in the future.
So it is vital to have a plan to cover the period up until then if you are planning to stop work beforehand.
‘It’s important to consider what savings or investments people can use to bridge the gap until their pensions kick in,’ says Alan Chan, chartered financial planner at IFS Wealth & Pensions in London.
A blogger called The Firestarter, who runs a website dedicated to retiring early and is planning to retire before the age of 40 himself, suggests using ISAs as well as pensions to ensure you have some money you can withdraw early. The Firestarter, who (for rather obvious reasons) doesn’t want his employer to know his real identity, recommends low-cost index-tracker funds within ISAs to create a healthy pot of money without expensive charges.
‘Do not try to beat the market by dabbling with individual stocks and shares, and certainly don’t pay someone else for the privilege of doing that with your money,’ he says. ‘Buy a globally diversified index tracker such as the Vanguard LifeStrategy Fund. If you’re new to investing this is your best way to capture the returns of the stock market while paying very little in fees.’
Starting as early as possible with retirement savings is key. You will also need to consider what you want to do to make the money last once you hit retirement. You no longer need to buy an annuity, an insurance policy with a guaranteed lifetime income, and so can leave your pension pot invested and withdraw as needed, or take it all out at once. This increases your flexibility — but also the risk that it may run dry.
Thinking laterally about retirement
Considering other sources of income for your retirement could help to make it financially viable. Old Mutual Wealth’s study of retirement income reveals that most upcoming retirees will use income from a variety of different sources to fund their later years. As well as expected sources like pensions, ISAs and other investments, these include downsizing a property to release equity or releasing equity from a home that is still being lived in using an equity-release scheme. And one third of pre-retirees were planning to continue to work part-time, expecting to earn more than a quarter of their income from this source.
If you’ve a skill that you enjoy using, it’s worth considering whether this might give you an income stream in retirement. Dog-walking, cat-sitting, becoming a tutor or a driving instructor — along with setting yourself up as a consultant — are all popular ways to supplement retirement income without overly compromising the retired lifestyle.
If you’ve plenty of time before your hoped-for retirement date, it might even be worth considering a career change to achieve your dream. Soldiers (like our case study Samantha, next page), police officers and firemen are all able to retire well before state pension age — although the rules have changed in recent years.
Getting professional help
The rules surrounding pensions and retirement can be complex, and it can be helpful to discuss your plans with a professional. Financial advisers will charge for their time, but many will offer you a free initial consultation, so you can decide whether it might be useful taking things further. To find someone in your area, have a look at unbiased.co.uk.
‘I was a pensioner before I was 40’
SAMANTHA BROOKS, a former army officer, retired with a pension before the age of 40, thanks to a generous early retirement programme from the British military.
‘People do think it is funny that I am a pensioner,’ she says. ‘But it’s given me the freedom to think about what I want to do, and to spend time with my children.’
Samantha’s kids Phoebe and Toby are now aged four and three, and the family live near Bristol where her husband Dave, 35, remains in the army as an engineering officer.
‘I enjoyed my career,’ says Samantha, 42, a former education and training officer. ‘But although I loved my job there was a lot of moving around, and the possibility of being deployed. Retiring allowed me to give the children more stability.’
The lump sum and the pension that Samantha received having served in the army for more than 16 years, gave her the freedom to start up a business as well as volunteer and spend more time with her children. ‘The pension gave me security,’ she says.
Samantha now runs coaching firm rightpathcoaching.co.uk. This brings in some income, but the family have to budget carefully to get by with this and the pension. ‘With me not having a full-time job, we don’t go on glam holidays and we didn’t change our car last year when we might have done otherwise,’ she says. ‘But we still have a good quality of life… that’s important.
‘I think we’re programmed to define ourselves by the job we do, so if you retire early that can be difficult to start with. I had to realise that it is OK to do what you want — it really doesn’t matter what other people think.’