Explore the four important steps for you to take to retire early. This is important because if you get it wrong or change your mind, it may be difficult to re-enter the workplace at a level equal to your expectations.
When it comes to attitudes to working life, people fall into one of two camps: those who live to work and those who work to live. For the first group, work is a passion, their calling in life, giving them structure and purpose. The idea of not working fills them with dread - what else would they do?
For the second group, the complete opposite applies. Work is a necessary evil for paying bills and funding the life they lead outside work. For many people in this group, the idea of retiring early is an ultimate ambition; a dream keeping them going through the long commute. It bolsters them as they battle the tedium and stress of the working day.
Retiring early isn't easy to manage unless you happen to be a high earner, escaping the rat race before retirement age takes planning, dedication, discipline, and sacrifice.
That’s not to say it can’t happen. It’s just something you need to plan carefully for. Here are four key factors to focus on as you get started.
1. Work out your magic number
“I want to retire by 50” is something we hear from people setting out their retirement ambitions. In practical terms, this means an extra 15 years or so before you reach retirement age. You have to find the means to finance these years when you don’t have a regular income.
Before you start considering pension plans, investments, and savings, the key question is - how much will I need in retirement? Your magic number is how much on average you will need to live off each year.
Then, you can multiply this number by how many years you expect to live in retirement. A rule of thumb is to aim for 25 to 30 times your annual expenses saved up before retirement. If you want £40,000 a year, then your savings and pensions need to be worth £1 million. Knowing this gives you a goal to work towards in terms of the assets you need at your target retirement age. Or, it provides a clear sense of when you might be able to give up work in comfort.
The good news is, people have a tendency to magnify how much they will need in retirement. Living costs often decrease as you get older. You spend less on your children now they are grown up, or you no longer need to run two cars when you and your partner don’t drive to work. Such things have a big effect on expenditure. The bad news is, there’s no exact science to working out your magic number. It's a case of educated guesswork, and there are obvious risks involved.
Speaking to a financial planner will apply some rigour and logic to your guesstimating. This blog, Great ways to calculate when you can afford to retire, may help.
2. Get the most from savings and investments
Once you retire, you will be reliant on existing assets to fund your living costs as there will be no more earned income. These assets may take different forms: a pension, personal savings, investments.
Making these options work as hard as possible for you is important. Make the effort to choose pension and investment plans that deliver the best returns for you. If you have a pension, here's a question - do you know how it is performing? If you don't have an online portal, or you lack the flexibility to adjust investment choices as you go along, it is worth considering other options. Speak to your financial planner for guidance. This blog about your pension options will be helpful.
Whatever your savings choice, there is one golden rule to follow - act now. The longer you give your savings and investments to grow, the better your situation will be. Compound interest, meaning reinvesting any gains from assets rather than withdrawing them, will lead to accelerated growth over time. Compare it to a snowball rolling down a hill - the bigger it gets, the more snow it picks up, the faster it grows.
3. Clear your debts
One activity you don’t want to be doing when you hit retirement age is paying off debts. Interest means that debt can be a huge drain on your financial resources. The opposite of compound interest is true: the longer you take to pay off your debts, the deeper they eat into your assets.
The big debt to focus on before retirement is your mortgage. Working out a way to pay off your mortgage is the key to being able to retire. Not only does it reduce your living costs, but it also gives you the option to downsize and put any profit you make towards funding your retirement.
4. Live within your means
If you have your heart set on abandoning working life, there is no substitute for living within your means. It’s a great habit to get into for life post-income. If you can lead a happy and fulfilled life by cutting back on the odd extravagance, you will make the transition much easier.
The less you spend, the more you can save. It comes back to boosting your savings and investments. Keep increasing what you save even by a few pounds a month. By the time you retire, you will be counting the difference in thousands of pounds.
Do you need help to calculate your magic number? Speak to one of our chartered financial planners today.