Planning for early retirement
With the age of retirement and the cost of living going up, it seems that working well into older age is on the horizon for most of us. However, if you’re financially prepared and disciplined enough, you might be able to plan ahead and reap the rewards later down the road.
What is early retirement?
It’s when you leave your job or employment before state pension age. From 2019 that age will rise to 66 for both men and woman, and eventually to 67 between 2026 and 2028. You can enter into early retirement by choice if you have enough financial resources, although sometimes a redundancy close to retirement might make it more necessary.
How to retire early
There are a number of steps you can take to make early retirement more of a possibility. It’s also never too early to start. Even if you’ve just entered into full or part-time employment, you can start thinking about the long-term future.
- Building up your savings
Putting aside money from any spare disposable income into a savings account or product is an important part of safeguarding your future, but it’s not the only way to save. Paying more into your pension pot when you’re younger will help you get a bigger pension when you retire.
For example, if you want to retire at 55 on a yearly pension of £25,000 – from the age of 30 you would need to make a personal contribution of £1,269 a month for 25 years.
If you think you’ll need a larger amount to live on once you stop working then you’ll have to increase your contributions. While this may affect how much you take home every month, you should receive a larger pension in the long run and potentially get to enjoy retirement earlier.
- Budgeting for retirement
Whatever you’ve got your heart set on doing when you retire, you should calculate how much you’re likely to spend and what your income will be. From living abroad for part of the year, to paying off your mortgage or investing in a new venture, you can plan out your retirement years while you’re still working. Take into account any income from products like Individual Savings Accounts (ISAs) you may have, and estimate your private, state and workplace pensions. This will help you work out how much will be coming in on a monthly or weekly basis.
- Going into semi-retirement
Retirement can open many doors and possibilities. You may be thinking about seeing the world or starting your own business, but unsure if you’re ready to plunge into the deep end just yet. Semi-retirement can allow you to experience a different lifestyle without completely giving up work.
By working part-time, you can ease your workload and your employer can still benefit from your expertise while finding the time to train your eventual replacement. Either way, semi-retirement gives you the option to change your mind if you want to, and a realistic perspective into what retired life will look like.
- Changing careers
A switch of jobs can ease you into retirement if you still want to be part of a workforce. If, for instance, you’re retiring after years of driving local buses, you might be able to use the same skills to become a driving instructor. That way you can live off your existing pension, while still generating extra income from your new career.
- Downsizing your home
If you’ve got children who have grown up and moved out, you may want to downsize your property. Even if you don’t have kids, selling your home is one way to increase your cash flow and possibly kick start your retirement. Downsizing doesn’t have to end with where you live – from cars to other assets you may own, you can scale down on everything without massively changing your standard of living.
- Using pension tax breaks
A quarter of your pension pot can be withdrawn tax-free, but after that it’s subject to income tax. Combining income from a pension with tax-free income from an ISA, could help you make the most of your personal allowances and basic-rate income tax band. Whatever decisions you make about investing your pension, you should always look to get independent financial advice, before committing to any financial products.
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