Early retirement may look very appealing, particularly since the recent pulling forward of the rise in state pension age, but are you really doing enough to make it happen? Insurance company Prudential says you almost certainly aren’t.
In their Intergenerational Retirement Study report, Prudential found that most workers in the UK hope to retire well before the state pension age of 68, with respondents on average targeting retirement by 61 years and 8 months of age. However, with one in ten people yet to start saving into a pension at all, it looks like many of us could be sorely disappointed.
Are you saving enough?
If you, like so many of us, dream of retiring early, it could cost you more than you think. The average retirement now lasts around 20 years or more, meaning you need to save that little bit extra to compensate for your potential longevity. You’ll also need to think about inflation, as although 53 per cent of workers in the Prudential study said they would be happy with £17,700 or less per year, in real terms this is going to be worth much less than it is now, and possibly not enough to live well.
So how much do you need to save if you want to retire early? According to Which? you’ll need between £370,000 and £1 million in order to live comfortably, depending on your lifestyle, pension options and marital status. This might sound like a big hill to climb, but it can be done if you get your priorities right from the start.
Top tips on making early retirement a reality
Retiring early usually means having a bigger pension pot. Imagine if you retire at 65; you’ll have worked for over 40 years and will be retired for around 20. However, if you retire at 55, you’ll have worked for only 30ish years, and will be retired for potentially another 30 years. To help you tackle this issue, here are some tips which could help you reach retirement earlier and with more money in the bank:
- Do it gradually: Don’t feel you’ve got to quit work entirely right away. Consider if you could work part time, at least for a couple of years. Spending less money on commuting and work related expenses could mean you can live off your part time income, leaving your pension pot untouched for longer.
- Make small but regular increases: If you bumped up your pension contributions by just 4 or 5 per cent this year, would you notice the missing money? Probably not, but you might end up with a lot more in your pot as a result. Look at projections for saving just that little bit more, and try to increase your contribution by just a little every year.
- Speak to an adviser early: If you have a target date for retirement, take professional financial advice and find out how to make it work. An adviser will be able to look at your savings, your investments and your situation, and offer solutions to get you to where you want to be.
- Use tax breaks to your advantage: Did you know, that whenever you pay into your pension, the tax man pays in too? In fact, the taxman pays around £35bn to pension savers, and if you’re on the higher rate tax band you’ll get even more. When it comes time to withdraw your pension, use income from ISAs to accompany your pension to avoid giving a big slice back.
- Change your lifestyle: When it’s time to retire, making small changes to your lifestyle could help you stretch your pension pot even further. Moving to a cheaper region, downsizing your property or releasing equity from your home could help you make up any shortfall and give you the retirement you desire.
Alongside all this, be aware of the new pension freedoms and the flexibility this offers you to use your pension pot in the most suitable way for you. Choosing to drawdown instead of buying an annuity, or to invest in different streams, could be the answer to making your money go further at retirement time. Talk to us for more information, and to find out how to make early retirement happen for you.