Early retirement has long been an aspiration for many, but following the announcement in December that young workers will be expected to work until the age of 70 before receiving a state pension, it is now a hot topic once again. It may seem like an impossible dream, but with the right saving and investing strategies, retiring early could be within your reach.
Why retire early?
The reasons why some people want to retire early are many and varied. It could be that you don’t enjoy your job, want a change of pace or lifestyle, or think your health will benefit if you stop working. Another common situation is that a company has to cut jobs, and older workers decide to take early retirement rather than redundancy - for themselves or their colleagues. It is a decision that shouldn’t be taken lightly, and only you will be able to decide what is right for you - while the idea of never working again is exciting for some, it fills others with dread!
Of course, as well as a lifestyle decision, early retirement is fundamentally a financial one. It is important to remember that, although you can start drawing a personal or workplace pension from the age of 55, you won’t be able to receive any of your state pension until you reach state pension age. You should also note that, if you take early retirement instead of redundancy, you won’t receive any redundancy package. However, depending on the situation, some employers may offer incentives for early retirement such as a lump sum payment into your defined contribution pension, or pension benefits calculated as if you had worked to the normal retirement age.
If retirement is still a few decades away, it’s time to start planning now to achieve the retirement date and lifestyle you want - especially if you want to retire early. The key is to start saving as soon as you can. Your first job is unlikely to leave you with much spare cash once your living costs are met, but it’s a good idea to start saving a portion of your wages as soon as you can - you should consider using your cash ISA allowance to reduce the impact of tax on your savings. As you get older, you may want to consider investing some of your savings for the potential of higher returns - it is a good idea to keep your investment portfolio diverse, in order to spread your risk. If your company offers a pension scheme, it is usually a good idea to take advantage of it - pension contributions qualify for tax relief, which is essentially free money from the government for your pension fund.
Your earnings will typically start to peak around your 40s. At this point you should consider increasing your pension contributions, and look into consolidating any old pension schemes you may have into a single pot.
It can also be a good idea to start trying to pay off your mortgage; once you retire your income will be more or less fixed, and reducing your mortgage and other debts before retiring can help your money go further.
However you choose to save, early preparation is the key to getting the retirement date and lifestyle you want.