A recent report has found that two-thirds of those who opt for early retirement experience an overall increase in happiness. However, nearly half are detrimentally affected financially and, of those who later return to work, 24% do so for financial reasons.
Seeking professional financial advice means asking the right questions, building a long-term plan that allows you to retire when and how you want.
If you’re looking to retire at 60, here are seven key steps to making early retirement a reality.
1. Save little and often, and start early
The best way to prepare for early retirement is to start making pension contributions as soon as possible.
Long-term investing provides the best opportunity for investment growth. Compounding will further increase the size of your pot over time.
If you have children or grandchildren, encourage them to save as early as possible too and remember that, even if you have left it late, there is always time to start contributing. Even payments made at age 50 will have a full decade of investment returns to boost your wealth in retirement.
2. Make the most of your workplace pension
Your workplace pension is an easy and tax-efficient way to build your retirement pot. Auto-enrolment has made the process even easier. Under current rules for 2021/22, you pay 5% of your pensionable earnings into your workplace pension and receive a 3% contribution from your employer.
You might find that the 8% minimum contribution won’t provide a large enough pot to allow retirement at your desired age. If so, consider increasing your contributions.
Not only does that mean you’ll pay more into your pot, but the associated tax benefits for employers mean that some might up their contribution when you increase yours.
If you’ve had several jobs during your career, be sure to keep track of them. Retain the paperwork for each provider and consider whether high charges or poor performance might make a transfer, or the consolidation of all your plans into one pot, a viable option.
You can read more about the pros and cons of pension consolidation in our blog from April 2021.
3. Pay your future self first
Paying your future self first is a great budgeting strategy, whether you’re contributing to a pension for the first time or looking to build your pot through your 50s.
Be sure to pay money into your pensions, savings, and investments products on payday each month and then budget with what remains. When you receive a pay rise or work bonus, try to pay this straight into your pension too.
You won’t miss the extra money but it will have the chance to compound and grow.
4. Plan to enter retirement debt-free
If you want to retire early, you’ll need to be sure your pension pot will last. Think carefully about the type of retirement you want, how long your retirement might last, and how much it will cost.
While managing pension withdrawals and successfully budgeting with your non-pension income will be crucial, another factor could also make a massive difference.
Taking debt into retirement – especially high-interest debt like loans or a mortgage – means that some of your hard-earned pension will be eaten up.
Working hard to pay this debt off in the decade or so before you retire means that all of your pension income can go on providing you with your dream retirement lifestyle.
5. Make the most of a defined benefit (DB) scheme if you have one
DB, or “final salary” schemes, are often thought of as the gold standard in pensions. Rather than making contributions to build a pot from which your retirement income is purchased, DB pensions are occupational schemes that pay a regular income based on your salary and years of service.
They will often be more generous than defined contribution (DC) schemes and have additional benefits like a spouse’s pension or income that increases each year to combat inflation.
Your pension options might be fewer, and less flexible, but incorporating regular payments from a DB scheme into your retirement plans can free up disposable income to use flexibly elsewhere.
6. Don’t forget your State Pension
The full new State Pension entitlement is around £179 per week (£9,339 a year), rising to £185.20 a week (or £9,630.40 a year) in 2022/23.
You’ll need 35 “qualifying years” to receive your full entitlement and, if you have less than 10 qualifying years, you won’t receive the State Pension at all.
Check your National Insurance record to look for gaps. You might be able to make top-ups to increase the amount you receive.
The State Pension is currently available from age 66. This means that you could have at least six years in which your private pensions and investments are your only means of support. Help to take the pressure off these income streams by ensuring that you receive your full State Pension entitlement, whenever it kicks in.
7. Consider phased retirement
You might have your heart set on retirement at age 60 but a lot can happen between now and your 60th birthday.
The retirement plan we put in place for you will give you the best chance of meeting your retirement goals but your wishes can change.
The traditional cliff-edge retirement is no longer your only option and there are many reasons why it might not be right for you. Read three reasons to consider phased retirement and see the difference it could make to your plans.
Get in touch!
If you would like to discuss retiring early or any aspect of your long-term financial plans, please get in touch and find out how our team of expert planners can help.
Our team of expert planners will help you answer your questions and gain clarity over your options.
- Get help looking at your current finances
- Review your pension pots
- Review your savings and investments
- Help you make sense of all the facts and figures
Please note
The value of your investments (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.