The last twelve months have been tough for many individuals and businesses. Your business may have been forced to furlough staff, you may have suddenly found yourself working from home, or, worse, you may have been made redundant.
Whatever has happened, your perspective on your life and career is probably substantially different to a year ago.
One of the questions going through your mind in the current climate might be: “Can I retire early?”
There are many reasons why you might want to retire early: to reduce stress and live a more balanced lifestyle, to spend more time with your family, to indulge your hobbies, to set up a business, or because of health reasons.
There is also perhaps, another reason: you have been forced to retire early due to the ongoing coronavirus pandemic, which has reshaped the retirement landscape and has caused people to reassess their priorities in life.
According to research by insurer LV=, more than 154,000 people in the UK aged between 55 and 64 have decided upon early retirement because of redundancy, a reduced income, and a desire to reduce their risk of exposure to Covid-19.
Clive Bolton, managing director of savings and retirement at LV= says: “Early retirement is a dream for many people, but it can become a financial nightmare if it is forced on people without them having time to prepare.”
Preparation is the key to success
Retiring is not a question of waking up one morning and deciding that you are going to stop working. It’s far from an easy option and requires careful planning.
A few questions you might want to ask yourself before you even consider retiring early are:
• What do I want to do when I retire?
• Do I want to stop working completely?
• How will I spend my time?
• Does my partner share the same ambitions/dreams for their retirement?
Only when you’re clear about what you want the next stage of your like to look like can you start to think about whether you have the resources to retire early.
In this guide, you’ll find loads of useful tips and advice that will get you really thinking about your goals, aspirations, and hopes for the next two, three, or even four decades.
Establish how much you will need to do the things you want
The amount of money you will need to retire on depends on the type of lifestyle you want to achieve in retirement.
Do you want to be the type of retiree that enjoys regular luxury holidays? Or are you a retiree that is perfectly happy glamping in the UK?
Do you have plans for your immediate family? Do you simply want to spend more time with your grandchildren, or are you planning to gift money to your children to help them with university fees or to buy their first home?
How good is your health? If you’re fit and well, it may influence how long you need your savings to last.
If you’re thinking of retiring early, you need to consider all these different scenarios and possibilities when planning the next stage in your life.
So, where do you begin?
Once you’ve decided what you plan to do in retirement, it’s time to work out what level of income you need to find this lifestyle. Break this down into two parts:
• Basic – how much do you need for the essentials such as food, bills and heating?
• Discretionary – how much do you need for “luxuries” such as holidays, a new car or philanthropy?
According to the Pension and Lifetime Savings Association (PLSA), 77% of people in the UK don’t know how much they will need in retirement.
To plug this knowledge gap, the PLSA have created “Retirement Living Standards” which indicate how much money you might need for the type of retirement you want to achieve. These standards are pitched at three levels: minimum, moderate, and comfortable.
They believe a single person needs approximately £10,200 to live on, assuming there is no mortgage, rent or social care costs. For a moderate lifestyle, a single person will need £20,200 a year and, for a comfortable retirement, a single person will need £33,000 a year.
In relation to a couple, these figures rise to £15,700 a year (minimum), £29,100 (moderate) and £47,500 (comfortable).
Of course, your figures and required income will be unique to you based on your desired lifestyle.
Establish your current provision
So, you know what you want to do in retirement, and how much that lifestyle might cost. If you want to retire early, the next step is to then look at the provision you have already made. This should include all of your assets, savings, investments and pensions (plus any other resources you have available to you).
No matter how you intend to fund your retirement, a key proportion of your income is likely to come from the pensions you have contributed to.
If you’ve held a “job for life”, then this may simply be one pension. However, it’s more likely you’ve accumulated a range of different pensions as you moved employers during your career. You may also have private provision from periods of self-employment.
At this stage, you need to establish current values and future projections for each of your existing pensions. You should also obtain projections for your planned retirement date if you want to retire early.
There is a pension tracing service to help you find any pension details you may have lost track of.
As well as values and projections for your planned retirement date, you should also check the full details of the type of arrangements you have. Do they offer flexible access? What funds are available? What charges are you currently incurring? Are there any potential safeguarded benefits?
Don’t forget that, in time, your State Pension will also play a role in your planning. In 2021 you can draw this when you are age 66 – this is set to rise to 67 later this decade – so get a State Pension forecast to see what you are entitled to.
Time to work towards your plan
Of course, based on your desired lifestyle and your existing provision, there may be a shortfall. You may not have saved quite enough for the retirement you want.
That means the next few years are crucial in getting you to where you need to be.
Again, this is where a plan is important. Between now and your preferred retirement date it’s crucial to maximise the financial and tax planning opportunities that are available to you. This might include:
• Maximising your pension contributions to ensure you benefit from the generous tax relief on offer
• Maximise your tax-efficient savings in an ISA
• Plan as a couple to balance your assets and income so you’re not paying more tax than you should
• Utilising all your tax allowances and exemptions, such as your Capital Gains Tax allowance, Dividend Allowance, and Inheritance Tax annual exemption
• Making use of Venture Capital Trusts and Enterprise Investment Schemes where appropriate to offset Income Tax.
We can help you to create a plan and devise a strategy for making the most of your remaining years in work.
Professional advice can give you clarity and the confidence to take the next step
These days, financial advice isn’t just about us selling you a pension or investing your money. As Chartered financial planners, we’re here to help you to reach your life goals and to ensure you get the life you want with the money you have.
We’ll normally begin by asking you about your retirement expectations and helping you to answer some of the questions above. When do you want to retire? What do you plan to do? How much income do you need to live your desired lifestyle?
We’ll then begin the process of reviewing your finances. For example: do you still have a mortgage on the family home? How may pension pots do you have? What investments do you have – savings accounts, ISAs, a self-invested personal pension (SIPP), a buy-to-let property, or an overseas property, perhaps?
Once we have all the relevant information, from the smallest asset to the most detailed expenditure, we use sophisticated cashflow modelling tools to look at specific scenarios related to your retirement.
Using accurate information such as up-to-date pension projections, values of assets, the specific income you need in retirement, your planned (early) retirement age, and realistic assumptions about things like investment growth and inflation, we can give you a visual representation of what your financial future looks like.
Seeing your financial future in front of you can be genuinely life changing. Knowing that you can retire early and live the life you want without running out of money gives you the confidence to take the next step.
The beauty of modelling scenarios is that we can also stress-test your plan. What if stock markets were to fall? What if you were to suffer ill health? What if you were to live longer than expected? What if your spending was more than anticipated?
We can model these scenarios and provide robust answers to each of these questions.
We can also answer your other questions. Can I afford to gift a lump sum to my children and grandchildren? Do I have to downsize? Can I go on the round-the-world holiday I’ve been dreaming about for years?
Managing your income in retirement
From a financial point of view, reaching the day of your retirement is, in many ways, the easy bit. You’ve accumulated savings over your lifetime which now need to last you for 20, 30 or even 40 years.
Managing your finances in retirement does take careful planning. You have to balance enjoying the lifestyle you want with ensuring your withdrawals are sustainable, and that you’re not going to run out of money in later life.
This is an area in which we excel. Using cashflow modelling we can help you to determine the most tax-efficient and sustainable way of drawing income.
For example, it may be that we take income from your investments in the early years, giving your pensions the best opportunity to grow in their tax-efficient wrapper.
We can also help you to plan as a couple, to minimise any tax. As another example, it’s often beneficial for a couple to earn £35,000 each than it is for one party to earn £65,000 and one party £5,000. We can help balance assets to ensure your income is sustainable and tax efficient.
Our aim is always to make sure your retirement is shock-proof. This means that ideally:
• Your basic expenditure is backed by guaranteed, inflation-linked income that won’t be affected by external factors such as market volatility. The right wills and Lasting Powers of Attorney will help to ensure your wishes are carried out.
• Discretionary spending comes from drawdown, investments, or other sources. Here, you might be prepared to accept some risk to generate returns over the medium to long term.
Finally, regularly reviewing your plan is crucial. From new grandchildren to ill health, from stock market volatility to a global pandemic, we know things can change. That’s why it’s vital we sit down and regularly review your plan to ensure you always remain on track.
So, can I retire early?
To answer the question asked at the start: yes, you can retire early.
However, it will require planning and focus to do so.
You’ll need to know what you want to do when you stop work and how much it will cost. You’ll need to have a plan for how you intend to make up any shortfall in your savings during the rest of your working life. And you’ll need to think carefully about how you draw your income, so you don’t run out of money in later life.
Our job is to help you formulate a plan, create a shock-proof strategy for your retirement, and to regularly review your plan to make sure you’re on track. We can give you the confidence to step forward into the next stage of your life.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.