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Early retirement is a deeply-held dream for many people. Yet in 2023, the rising cost of living has brought that ambition into question. After all, higher inflation means that the spending power of your pension savings may not stretch as far. How can you ensure that retiring early will not lead to running out of money in old age? In this article, our financial planners explain why early retirement is still a noble goal for certain people, despite today’s gloomy headlines.
We also include some key factors to consider when building an early retirement plan. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
What is “early retirement”?
It is important to recognise that retirement does not necessarily always fit the “traditional” model anymore. A few decades ago, a UK worker would typically work for one employer throughout his or her lifetime. At the end of their career (e.g. in their 60s), they would fully retire and receive a regular income from their State Pension, an annuity and perhaps from a former employer (via a “final salary” pension). Yet today, in 2023, many people do not wish to wait so long to retire. Perhaps they are ready to stop work in their 50s or even sooner. Maybe an individual is looking to retire “gradually” by reducing their working hours in later life, slowly leaning more and more on their pension savings.
Luckily, the Pension Freedoms introduced in 2015 made this more possible for many people. Now, you are no longer required to buy an annuity with your pension savings. Rather, you have the option to gradually make withdrawals from the age of 55 (with up to 25% of your pot able to be taken without income tax). You could even combine this with other income to support your retirement lifestyle – such as rental income from buy to lets, a part-time salary and income from ISA savings (e.g. dividends).
Why early retirement is getting harder
Early retirement is arguably becoming more difficult for many to achieve. This is partly due to the rising cost of living. Prior to 2022, the Bank of England (BoE) did remarkably well in largely keeping the UK’s inflation rate close to its 2% target. However, prices started to rise towards the end of 2021, with CPI inflation standing at 5.4% in December. Today, inflation stands at 11.1%; a 40-year high and with few signs of this rate “cooling” significantly any time soon. For employees, higher inflation means that their salaries do not stretch as far as before. For those wanting to retire, it could entail a re-evaluation of whether their pension savings are still sustainable over, say, 30+ years of retirement. In addition to this, the UK government is likely to raise the normal minimum pension age (NMPA) to 57 in 2028, which would delay savers from accessing pension funds for another two years.
Ideas to achieve an early retirement
A good starting point is to ask yourself when you want to retire. Are you currently 35 and wish to retire at 57, for instance? If so, then you have 22 years to build towards a savings target (on top of what you might have already set aside, for instance, in a pension). With these parameters in place, you can start to ask yourself whether early retirement is realistic for you. Specifically, how much might you need to save?
Here, it might help to look at how much income you might need each year for “essentials” and how much for “discretionary” spending, such as overseas holidays. Estimates vary depending on your goals and circumstances, but the Pensions and Lifetime Savings Association (PLSA) judges that an individual might currently need £20,800 per year for a “moderate” retirement. A “comfortable” retirement, however, could cost closer to £33,600. If you multiply these figures by 30 (to represent a potential 30-year retirement), then you might need over £600,000 for early retirement. This is a very simple estimation, however, as it excludes factors such as paying for care and inflation – which could boost your income requirements by 2% or more each year.
Owning your home outright can be a huge boost to your early retirement goals, as this removes one of your largest monthly expenses (your mortgage) and frees up more income to save into your pension. Investing in your State Pension is also likely to be helpful. Although the income will not become available until you reach your State Pension age (currently 66 in 2022-23), it will eventually provide a guaranteed lifetime income in retirement. Under the “triple lock” system, the income rises each year by at least 2.5% and helps to take away some of the responsibility to cover all of your retirement costs from your own savings.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk