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Can I retire early?

January 4, 2022
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

Milestones are an important part of life. And as we get older, we start planning for the big one: retirement. Whatever your retirement plan looks like – be it travelling to places you’ve never been, making family memories, or enjoying a peaceful, comfortable life – it is important to explore your options. In this article we will take you through everything you need to consider when thinking about early retirement.

The biggest advantage of retiring early is having more time for the things you enjoy. Yet, deciding to wave goodbye to the 9 to 5 without a plan could impact you financially. You may find that the money you have coming in doesn’t cover the lifestyle you want to lead. Being as realistic as possible will stop you from making regretful life-changing decisions. The good news is, by planning in advance you will have a clear idea of when you can retire and how you can bring that date forward.

How do I know if I can afford to retire early?

Start by deciding on the type of lifestyle you want to lead and if there is anything you want to achieve or experience. A revealing report by Which? magazine analyses three different types of lifestyles from essential to luxury. This report delves into the average costs associated with each lifestyle both for single and two-person households, giving you an idea of the income you will need.

For example, to live a comfortable lifestyle at retirement, this report shows that a single person would need an income of £19,000 per year while a two-person household would need £26,000. It includes more details on how much you will need in your pension pot, as well as how much you will need to save each month if you’re not quite there yet. 

Assessing your income

Man holding tablet looking into early retirement pension options

State Pension

When calculating your retirement income, the first thing to look at is the State Pension. The State Pension helps millions of people throughout the UK by covering a proportion of their expenditure. But this kicks in from the age of 66, and the age is set to increase over the next couple of decades. So, if you retire before this age, you will need to rely on your personal pensions for the first few years while ensuring that doing so doesn’t leave you short in the future.

When you do reach State Pension age, how will it factor into the income you will need for your desired lifestyle? As of 2021, a couple claiming the full new State Pension will have an income of approximately £18,600 per year.1 Consider how this will influence your retirement plan and if you will need to top up this income with your personal pensions.  

Personal pensions

If you decide to retire early, you could start withdrawing your personal pensions. If you are in an eligible pension scheme, you can start withdrawing money from the age of 552. Be mindful, however, that the sooner you start taking money from your pension, the sooner it will deplete. This could cause difficulties in years to come if you are relying on your personal pension lasting the rest of your life.

Look into the type of pensions that you have. A final salary pension will give you a guaranteed income when you reach an agreed retirement age (usually early 60s). Having a final salary pension alongside a personal pension may mean you can use your personal pension to retire early. You will be safe in the knowledge that you will have a guaranteed income later on from both your final salary and State Pensions. You may even be able to boost the size of your pension pot by making a few changes.

Savings and other assets

Take into account any savings or assets you have. This includes things like ISAs and property. As you wait for the State Pension to kick in, you will need to rely on other forms of income to allow you to retire early. We have identified that this income could come from your personal pensions; you can also use any savings and assets you may have. 

As with withdrawing your personal pensions, it is important to consider whether using your savings and assets to retire early will leave you short when they run out. Will they last you until the State Pension kicks in or will you need to rely on a combination of these and your personal pension for an income? A recent Which? report states that a couple living an essential-only lifestyle will need an income of £18,000 per year.2 With a couple claiming the new full state pension receiving £18,600, it is likely that you will need to use your pension and other savings to top up your income to live a comfortable lifestyle.

Boosting your retirement pot

Not all pensions are the same. And if you are in a badly managed, high-charging scheme with a poor performance history, you can boost your retirement pot by switching to a better pension that is tailored to you. Start by having a chat with a regulated financial adviser.

We negotiate hugely reduced provider charges and the portfolios we recommend for our clients have consistently beaten the industry benchmark over the past 20 years.3 By switching to a better pension, it could significantly boost your pot giving you more flexibility around how and when you retire.

  • Making additional contributions

Making additional contributions to your pension will increase the amount of money you will have when you decide to retire. Pension schemes are more tax efficient than your regular savings account. So, if you’ve got a bit of spare cash, consider adding it to your pension rather than your savings.

Take advantage of the compound interest you gain on your pension. Compound interest means that not only do you earn interest on your savings, but you earn it on each previous year’s interest too. This can turn a small pot into a significant amount when left untouched for a long time.

Couple in the woods enjoying early retirement

So, it makes sense to make additional contributions sooner rather than later, because the longer you leave money in your pension, the more compound interest it will generate and the larger your pot could become.

  • Join a workplace pension

If you haven’t already, consider joining your workplace pension, even if you’ve only got a few years left. These schemes work by taking a small, regular contribution out of your wage and paying it into your pension fund. The great thing about these schemes is that every time you pay in, so does your employer, effectively giving you free money for when you retire.

If you are already a member of a workplace pension scheme, consider making larger contributions. Often when you do so, your employer contributes more too.

  • Postponing retirement

Another way to increase your retirement pot is by retiring later. While it does mean remaining in work a little longer, there can be some benefits to being patient. Retiring at a later age has shown to have a benefit on physical and mental wellbeing, as well as helping to boost your finances. All the while you are in work, both you and your employer will be making contributions to your pension. If staying in work full time isn’t for you, consider reducing your hours to give yourself more free time to begin enjoying things from your retirement plan.

Retiring early is all about sensible planning

Early retirement can be achieved with careful planning. If this is the option you want to pursue, start by deciding on the type of lifestyle you want. From here you will know how much it will cost and the sort of income you are likely to need. By looking at the retirement pot you have built up over the years you will know if retiring early is currently affordable for you. If so, great. You are on the right track and now just need to make sure you manage your money correctly. If your retirement fund is looking a little shy of what you will need, there are always things you can do to improve your situation. With careful planning, and realistic expectations, you still might be able to start the next chapter of your life sooner than you thought. 

3 Source: FE Analytics and Dimensional Return programme 2.0. When we talk about the benchmark, we are referring to an Investment Association average composition that matches the risk rating for the portfolios we recommend. It’s important to remember that past performance is no guarantee of future results.

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