You will encounter certain milestones throughout life, and none as key as your retirement. As the years go by, you will consider your retirement more and begin planning for its arrival.
Retiring early is an aspiration many people have. However, what you want to do in your retirement and what it will cost, can influence when you retire. This article aims to give you an insight into what to consider if you want to retire early.
Advantage of early retirement.
A significant advantage of early retirement is that you have more time to do the things you want. Of course, you need to develop a financial plan to do these things. It’s one thing to retire early, but if you don’t have the income to sustain your lifestyle, what is the point?
Therefore, you should be realistic about either your lifestyle aspirations or how early you can retire. Doing so will help you avoid making any rash, life-changing decisions. However, good planning will give you a reasonable indication of how early you can retire and what you need to do to bring it forward.
Can you retire early?
When deciding if you can retire early, you first need to decide on the lifestyle you want to have in retirement and any goals you want to achieve. A recent study by Which? magazine analysed the amount of money you might need in retirement based on three lifestyle levels.
The report concluded that a single person could have a comfortable retirement on £19,000 per year. For a two-person household, that amount would rise to £26,000 for the same lifestyle. Given these figures, you can estimate how much you’ll need in your pension pot and what top-up payments to make to achieve this.
Potential retirement income streams.
If you have several retirement income streams, you may be able to retire earlier. Let’s look at some of the potential retirement income streams you might have.
The State Pension.
Although it is unlikely to sustain your retirement on its own, the State Pension is an excellent supplement to your retirement. However, the qualifying age for the State Pension is the mid-60s, which is planned to rise over the next few decades.
Therefore, if you plan to retire early, you cannot rely upon your State Pension. Early retirement means you have to rely on other sources of income and bridge the gap until you reach State Pension qualifying age.
Personal and workplace pensions.
Personal and workplace pensions provide the backbone of most people’s retirement income. Thanks to pension freedom, you may be able to access your pension funds from age 551, depending on the type of scheme.
Although receiving a tax-free lump sum might seem appealing, you should be mindful of taking too much cash from your pension pot. Depleting your pension too much could leave you short of income later.
Savings, investments, and assets.
Other forms of retirement income might include savings, investments, and other assets. If you are considering early retirement, you may have to consider cashing these in to bridge the gap until you qualify for your state pension.
How to boost your retirement funds.
If your retirement fund is not sufficient to provide the lifestyle you aspire to, there are certain things you can do.
Check your pension’s performance.
Different pensions perform at different levels, and some have higher fees than others. If you are paying too much in charges and your pension is not performing well, you have options to change this. For instance, you can switch your pension to a better-performing scheme. Consulting an independent financial advisor can help you in this area. Check out Portafina.
Make top-up payments.
Top-up payments can considerably increase the amount of money in your retirement fund. Your pension contributions, up to a certain level, are tax exempt. Therefore, even small amounts of top-up payments will make a difference in retirement.
Also, they benefit from compound interest growth. This means that you receive interest not just on the money you have contributed but also on the previous years’ interest. Over time, compound interest can produce significant growth, even on small pension pots. The longer your pension benefits from compound interest growth, the larger your retirement fund will be.
Join your workplace pension.
If you are not yet part of your workplace pension scheme, you should join immediately. Even if you are in your last few years of employment, a workplace pension will benefit you in retirement. A significant benefit of a workplace pension is that your employer pays into it alongside your contributions. If you’re not part of the workplace pension scheme, you will not receive this additional money.
Postponing your retirement.
An obvious way of increasing your retirement fund is to work a bit longer. Although this might not fit in with your plans for early retirement, retiring later has benefits financially, physically, and for your mental well-being.
While you are working, you will be contributing to your workplace pension fund, as will your employer. Therefore, postponing your retirement should be a consideration. If you don’t want to continue working full time, reducing your hours will also help.
You can achieve early retirement with some careful planning. Your starting point is to decide upon the lifestyle you want in retirement. Once you understand this, you can determine how much it will cost and whether your retirement fund matches that.