The Salary Calculator

Weighing up early retirement

by Madaline Dunn

When it comes to thoughts about retirement, many can’t wait to clock out for the last time, willing it to come as fast as possible. A third of people, for example, want to retire by the age of 60.

That said, very few believe they’ll actually achieve this. Research from Hargreaves Lansdown found that adults aged 34 and under expect to retire when they’re 63, on average, while only one in eight believes in the feasibility of retiring by age 55. For those further on in their lives, for example, those aged 55 and over expect to retire much later, 68 years old on average, and as many as one in five believe they’ll have to wait until 70 years old to retire.

Research from Canada Life has, however, found that more than two in five UK adults aged 55-66 years old have taken early retirement since the beginning of the pandemic in March 2020. Still, it’s important to note that new research finds little evidence for the so-called ‘Great Retirement’ and instead cites long-term illness as the reason for large swathes of older workers leaving the workforce.

In this week’s article, we’ll explore the following:

• The motivations behind people pursuing early retirement,
• What’s required to retire early and how to plan for it,
• The risks associated with early retirement.

The motivations for early retirement

While many view retirement as the end of one’s working life, for many, it can actually be an opportunity to pursue a new career, look into consulting, volunteering, or even get back into education and study. Others see it as an opportunity to spend more time with their family and get back in touch with themselves and their passions.

Of course, not all are looking to leave the workforce solely to enjoy their golden years. According to Dr Afik Gal, co-founder of Assured Allies, age discrimination can play a part in pushing people into early retirement. Likewise, layoffs can also be a reason for early retirement, as can declining health.

What’s required to retire early and how to plan for it

When considering taking early retirement, there are a few things that will be required to ensure the process is as smooth and sustainable as possible. To begin with, it’s worth asking yourself some questions to ensure that you’re both emotionally and financially ready to retire. Some of these questions include:

• Have I got any debts I need to pay off? When looking to retire early, it’s important to ensure that you pay off debt and avoid accumulating further debt, as far as possible. Long-term and short-term loans come with interest and divert money away from savings.
• Do I need to pay off my mortgage? If you can afford it, making overpayments on your mortgage can help you pay it off sooner rather than later, and you’ll pay less overall. That said, be sure to check whether you’ll be faced with any repayment penalties before doing this. Some advisors also warn that you might risk depleting your liquidity, so make sure to check whether it’s the right move for you.
• How much money will I spend each month, and do I have enough for daily expenses? Having a clear idea of where you are financially will help you make this decision much more easily and work out a budget for basic day-to-day living. It’s also worth noting that the figure you come to will likely increase yearly with inflation.
• How much do I require for my discretionary funds? While you may have the basics covered, it’s important to factor in the money you’ll want to spend on leisure activities, treats and holidays. If you’re in a situation where you’re just scraping by each month, you’re unlikely to enjoy your early retirement.
• Have I planned for unexpected events and emergency savings? For most, life is rarely straightforward, and whether it’s a medical emergency, a burst pipe, or, say… a pandemic, you’ll likely face a few curveballs in the years to come. It’s a good idea to have an emergency savings fund to prepare for these unforeseen events.
• What are my plans for after I retire? Experts say that it’s key to make plans post-retirement for fulfilment and mental stimulation. Do you plan to pursue a new hobby, volunteer, or study?

When you’ve weighed up whether or not an early retirement is for you, there are a few actionable ways you can plan ahead.

Once you’ve figured out the sum of what you’ll need to survive and thrive in retirement, it is key to make an inventory of all of your assets, so you can determine where your retirement income will be derived.

You’ll need to review your pension options, too. You won’t be able to access your state pension until you reach state pension age, and if you retire early, you might be entitled to less. Likewise, it’s important to check the rules around your personal or company pension – in some cases, you may not be able to access it early, but on the other hand, if you retire due to circumstances out of your control, such as illness, you might be able to access an enhanced pension. The details will also be different regarding defined contribution pension schemes, so be sure to get your ducks in a row.

Once you’ve looked into your pension pots, also assess any investments you have, how much your property is worth, and whether downsizing could be an option. Equally, you may decide on a phased retirement or decide to take up part-time work to supplement your retirement income.

After that, experts advise you to make a savings and investment plan, and if you follow the FIRE movement to retire early, set aside 25% and 50% of your monthly income.

It’s also worth speaking to a financial advisor, who will be able to guide you through the process and help you weigh up your options.

What are the risks associated with early retirement?

Early retirement is not without its risks. From a financial perspective, it’s important to note that economic recession, inflation and unexpected medical expenses can leave you in a position you may not have prepared for.

Right now, for example, inflation is at a 40-year high, and the cost of living is rising sharply. Likewise, if your pension doesn’t stretch as far as you thought it might, you may have to re-enter the workforce, which could come with challenges, especially with an employment gap. It’s also worth bearing in mind that you might live longer than you’d expected and so, it’s a good idea to make sure you can pay for the cost of care in later life.

Aside from the financial side of things, it’s also key to note that some research suggests that early retirement can be bad for the brain. Some research, for example, has found that those in retirement have a 38% faster rate of verbal and memory loss than those still working. Likewise, the National Institute of Health estimates that a third of individuals in retirement have symptoms of depression.

Tags: early retirement, Jobs, retirement, savings