How to Plan for Early Retirement
Early retirement is one of those fantasies which captures the imagination of almost everyone at some point in their career. To leave your job at an age where you’re fit and well enough to travel the world, pursue that pipe dream you’ve never had time to explore or just enjoy the freedom of unemployment with total financial security is a captivating idea, and it’s easy to see why so many are seduced by it.
The reality of early retirement though can be a very different thing, both in terms of planning for retirement and managing your finances during those extra years. This article will take a brief look at possible methods to ensure early retirement as a possible option.
What does Early Retirement Mean to You?
Early retirement can mean a lot of different things to different people, so the first thing you need to do is sit down and think about when you would ideally like to retire and what you will do with that extra decade or so. It’s very easy to under-estimate just how much pension you’ll need later in life, but it is important to remember that you’re making a financial plan which is supposed to last you for the rest of your life without chance of more income.
You’re planning for the future, and this future can be full of unpredictable events. You may have to structure a financial plan which will last you 20 years or more depending on when you want to retire and how long you live. What’s more, later in life you might encounter medical costs, costs of mobility aids and all the other fun paraphernalia that comes with getting older, which we’re very good at forgetting about when dreaming of our round the world trip. Another thing to consider is the day to day reality of early retirement.
As much as you’ll have freedom to do all sorts of fun and relaxing things, with too much time can come a sense of restlessness or boredom. So before you decide on planning for early retirement make sure it’s something you really want.
Your 40’s and 50’s: The Golden Ages
If you really want to retire early you need to start some serious financial planning by, latest, your forties if you haven’t done so already. This is normally the time of life where you’ll reach your peak in terms of earnings and should already have some significant savings.
It is during your forties that you need to make some key decisions as to how much you want to spend during retirement. If you want to maintain your current lifestyle it’s generally understood that you will need at least 80% of your current earnings. The extra 20% is estimated to be spent on work costs such as lunches, dry cleaning and transport, but if you’re engaging in hobbies or leisure activities during the time you would have been working then you’ll likely to make that 20% up quickly. If you want to travel or have a kitty to dedicate to your hobbies then you need to think about where this money will come from. In your forties you need to start dedicating a lot of savings into your pension. If you don’t have an ISA you should really start one up now or start making larger contributions into it and try to build up your tax-free savings.
During your early fifties you need to start maximizing your contribution to your pension and taking control of where your pension is being invested so it is congruent with your choice of retirement income. You also need to make sure your money isn’t at risk, and this means taking money out of risky equities and putting it into safer investments, as a sudden change in the stock market just before you retire could have a massive influence on how much money is available to you. In an interview with thisismoney.co.uk Martin Bamford, managing director of Informed Choiceadvised:
If you are likely to purchase an annuity when you retire, you should be phasing out volatility from your pension fund so there is less risk of a big dip in value a short time before you take benefits.’
This is also a good time to talk to a qualified financial advisor to ensure you’re making every penny of your money work in the best way possible. The key to early retirement planning isn’t much more than good financial planning, strict saving and budgeting, and a little bit of luck, but it’s certainly something that is achievable with the right saving habits and enough determination. An important point to remember is that early retirement isn’t an exclusive luxury for high fliers and high earners; rather anyone can retire early with the right advice and good financial attitude. So, if you’ve started dreaming of that perfect holiday or finally buying your dream vintage car then start planning today to get yourself on the road to early retirement.
- Want to Retire Early? Follow These 5 Steps (moneyning.com)
- 4 Things to Do Before Early Retirement (money.usnews.com)
- TurboTax – Tax Strategies for an Early Retirement (turbotax.intuit.com)