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Retiring early is an ideal goal for many people – offering more opportunities to travel, volunteer or pursue other passions. Yet early retirement rarely just “happens”. Rather, it needs careful planning years in advance.
In this guide, our Burnley financial planners explain some of the forms that early retirement can take in the UK – including some ideas on how these can be achieved. We hope these insights are useful to you. Please get in touch to discuss your own retirement plans with an adviser.
What is early retirement?
In the UK, early retirement is commonly understood as the act of leaving the workforce before the State Pension age – relying on other assets and investments to provide income (e.g. personal and workplace pensions).
In 2023-24, the State Pension age is 66 for men and women. Someone is likely to be deemed an “early retiree” if they retire in their 40s, 50s or early 60s.
Early retirement takes many different forms, however. Some people may choose to cease all paid work (e.g. employment) and rely mostly/solely on non-salary income sources. Others might continue to engage in part-time work.
In one sense, it is possible for an individual to retire at any age. There is no UK law prohibiting a 30-year-old from retiring, for instance. Yet the tax system incentivises people to work throughout their lives, helping to provide government revenues.
For example, the Normal Minimum Pension Age (NMPA) forbids most people from taking their UK pension benefits before age 55. In 2028, this age is set to rise to 57.
If you want to retire earlier than this, you will need to consider non-pension income sources to support your lifestyle. These might include rental income from properties that you own, dividends from ISAs or interest payments from other investments (e.g. bonds).
How much do I need to retire early?
A key thing to remember is your State Pension age. Once you start claiming your State Pension, the income is guaranteed for the rest of your life – rising each year by at least 2.5% under the “triple lock system”.
In 2023-24, the full new State Pension offers £203.85 per week (£10,600.20 per year). To retire early, therefore, you need to consider whether you can support your lifestyle without your State Pension income until years later. This likely means building up more of your own savings.
To start getting an idea of the cost of early retirement, it might help to work backwards from the cost of a “typical retirement”.
One way to do this is to subtract a third from your pre-retirement earnings to get an idea of what your yearly retirement income needs are likely to be. For instance, if you earn £30,000 just before retirement, then you might need £20,000 per year to support your retirement lifestyle.
From here, you can multiply £20,000 by 30 (to represent 30 years that you might live in retirement after age 66). This gets you to £600,000.
This is a very basic calculation, however. It does not account for inflation, for instance. Nor does it factor in how different people might need more or less income, depending on their desired lifestyle and financial goals.
Nonetheless, the calculation does assume that the individual will receive some State Pension income (e.g. to offset the adverse effects of inflation). The challenge with early retirement, however, is that this occurs before the State Pension becomes available.
As such, the personal savings needed for an individual to retire early are likely to rise sharply with each year before the State Pension age.
For instance, if you plan to retire at age 60, then working out your required savings is not as simple as adding 6 years to the above calculation. You might need more to offset the effects of inflation and to compensate for the lack of State Pension income over those 6 years.
These calculations are very complex due to the long time periods involved. To gain the best picture of your early retirement potential, it is best to seek financial advice.
Some considerations for early retirement
It is generally a good idea to minimise or even eliminate debt if you plan to retire early. This keeps your costs down – leading to less pressure on your savings.
In particular, paying off your mortgage before retirement is often recommended by financial advisers. Of course, some people may wish to keep renting into old age (e.g. to maintain flexibility). In which case, you will need to factor a large extra monthly cost into your savings.
It can be helpful to try to separate your essential spending from your discretionary spending when working out what you might need for retirement.
The former – food, utilities and health – is more important than the latter (e.g. holidays and dining out) and is unlikely to change significantly over your retirement, although inflation will cause the costs of different goods to steadily rise.
The latter could change significantly as your interests/hobbies evolve over retirement, or as wider living costs and economic conditions fluctuate – leading to adjustments in spending.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
E: info@elmfieldfp.co.uk
