How to retire early

by John Fitzsimons on 12 December 2011  |  10 comments
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We'd all like to be able to retire at an age when we can enjoy the free time. But is it still possible to retire in your 50s?

Last week, in the Autumn Statement, the government confirmed it is to raise the age at which we can claim the State Pension to 67 in April 2026, a full decade earlier than previously planned. And it won’t stop there – a new report from PricewaterhouseCoopers suggests that those born in 2010 will have to wait until the age of 74 before they can jack work in and put their feet up.

As someone with a 10-month-old son, it’s somewhat troubling to think of the extended life of work ahead of him.

So is it still possible to retire early? And just what does early even mean now? And what should my son do to ensure that, if he really does work into his 70s, he will at least have a healthy pot to retire with?

Retiring early

In order to work out if you can retire early, you first need to work out how much cash you need to see you through the rest of your life. According to pension experts you should aim for an income of around two-thirds of your salary in retirement, though in truth that strikes me as a bit ambitious. Personally, I’d have thought a pot of half your salary should be sufficient.

So, let’s use the example of a 25-year-old male, with no pension savings in place yet, and an annual salary of £25,000. So he should be aiming for a pension income of around £12,500.

As things stand our young man will be able to claim his State Pension from the age of 68. In order to have a pension pot which will give him an income of that level, he will need to pay in £240 a month into his pension pot, pretty steep straight off the bat. How much will he have to pay in order to pack in work a bit earlier?

Source: Hargreaves Lansdown pension calculator*

As you can see, while shaving a year or two off the final retirement date is not that much of a stretch (relatively, anyway) in order to achieve the dream of retiring in his fifties, our example would need to be putting aside a quarter of his pre-tax salary each month. Hardly realistic.

Your pension NEST-egg

However, the calculations above are based on our young man being the only person contributing to his pension pot, which ignores one incoming boost to pension saving – the introduction of auto-enrolment. From next year, there will be a phased introduction of the scheme which obligates employers to either offer their own pension scheme, or at least enrol their staff in the government-backed National Employment Savings Trust (or NEST). What’s more, employers will need to pay the equivalent of at least 3% of the employee’s gross salary into their pension.

With that in mind, let’s see how much our 25-year-old man would need to pay in to retire at each age, assuming the employer contributes 3% towards the pension pot.

While still a tough ask, shaving a few years off your retirement age suddenly seems a little more attainable.

Competing priorities

But let’s be honest, who has a spare £300 left over at the end of each month to put towards their pension? What if you’re saving for a deposit to buy a house, or you have kids to provide for, or want to build a savings safety net in case you lose your job? There are so many things we should be doing with our cash that it's extremely difficult to do most of them, let alone all of them.

With the cost of living rising, and salaries relatively static, it’s getting harder than ever to find some extra cash to stash in the pension pot each month.

But there are ways to increase the size of your pension without necessarily having to pay any more than you already do. Check out Boost your pension, without paying a penny more! for more.

Getting the best possible pension

If you want to retire with the best possible pension, you need to start paying in early, and keep up those repayments during the tough times. That's advice that is a little late for me, and perhaps for you too, but not for my son or the rest of his generation. If you do have a few quid left over each month, you could do worse than start a pension for your children, as we detail in Best pensions for children.

Actually putting the money aside to build up a pension pot is not the whole battle though – the decision you make once you reach retirement can make or break your financial future.

That’s because you need to decide which annuity to buy with your pension pot, and the return you get can vary greatly. The worst thing you can possibly do is just accept the quote from the insurer you’ve been saving with – make use of the Open Market Option, and shop around for the best possible deal. You can use the lovemoney.com annuity tool to do just that.

For a great guide, be sure to read How to buy the right annuity.

Who wants to retire?

The idea of this article was to see if it’s still possible to retire early. But the fact is, I’m not sure I’d actually want to. We are all living longer, so retiring early just means spending even longer with not a lot to do. My grandfather didn’t retire until his 80s, and I’d imagine I’ll be the same. I’d go out of my mind with boredom otherwise.

My son has a one-in-four chance of reaching 100, according to the Department for Work and Pensions. Why would he want to spend the final forty-odd years of his life at home, in retirement? Yes, he’ll have to work longer. But he’ll get to live longer too!

*A number of assumptions are made in the calculations of these tables, including 7% annual growth rate before fund charges, annual management charges of 1% and inflation of 2.5%.

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