How to retire early – save now, live by the beach sooner!
If you are thinking about how to retire early, you are already ahead of the pack!
Most people don’t think much about their retirement until they are close to actually retiring, let alone planning how to retire early. It’s a common mistake to make but for many it means they get to 65 or later and simply don’t have the money to lead the life they want. They either have to make big compromises or even retire later than planned.
I don’t want to be one of those people! And hopefully neither do you. Even if you are crap with numbers/ planning/ money, this is one thing we all need to get our heads round if we want a nice independent later life.
Preparing is crucial if you want to have enough to afford to live comfortably. Most people get to a decade or so before retirement and realise they should have been doing a lot more to save for this period of their lives. Think about it… it’s hopefully 30 or more years of your life. Frankly, if you’re not working, you need a shedload of money to last 30 plus years… You’re not going to get that by saving fifty quid a month.
I’m not sure what age is the norm for people to start thinking ahead properly to retirement. I’m 42 and for me it feels like a long way off. As things stand I hope to retire comfortably at 65, but if I put in place some of the strategies I am planning, it will happen earlier. And for me, retiring doesn’t necessarily mean stopping work altogether – I might start a new career, but having a decent retirement plan at least means I won’t have to worry about what I earn but can focus on doing what I love – the retirement dream….
Think there’s a snowball’s chance in hell of you retiring early? For some that may be true, but for many there are definitely options. With a bit of planning, there’s every chance you can shave years off your current retirement age. Here are a few pointers for how to retire early.
How to plan for retirement
There are a few stages to go through to plan for your early retirement namely:
- Work out how much you will need to retire
- Work out how much you have now
- Work out what you need to stockpile
- Work out how you are going to do it
- Do it
It sounds super simple put in a bulleted list, non? But it’s amazing how many people have never thought about these 5 steps. I first thought about it when I came across a “what you need to be financially free” planner, which is essentially the same as retiring early – creating enough income to not have to go to work. When I filled it out I was blown away by the idea that being “rich” just meant being able to afford a lifestyle you are happy with without selling your time, and that putting a number on it made it feel surprisingly attainable.*
*My lifestyle goals are pretty modest – it’s worth pointing that out now. I like nice food, good wine, music and occasional travel. I also want to afford to pay my bills and have central heating. I don’t need a private jet…
“My pension is my house”
I hear this a lot. “My pension is my house”, meaning the money in my house will see me through my old age.
It’s true there may well be a lot of money in your property. You can access it by borrowing against your home while you live in it (but then you will have the overheads of paying back the loan), or you can sell it and live somewhere smaller. It’s worth having a think about whether this is what you want and whether even doing this will give you enough money to last 30-40 years.
If not, you’ll need to plan to have either money in a pension pot, or sources of income that pay out through your retirement. For most people, saving into a pension is the main way to ensure you have enough money to retire but you could also look at making money from investing in all sorts of things – currency, art, wine, property. There are lots of ways of bringing in an income. But the safest of the ones here is probably a pension.
(A quick note here – there are a ton of different pension options and going into all of them is way beyond my scope. But if you have the option of putting money into a work pension and your employer contributes towards it, then this is the best to go for – take the free money! And when adding up your pension total, remember to add all the pensions you have personal, work, stakeholder. If you think you have a pension you can’t track down, the government can help https://www.gov.uk/find-pension-contact-details)
How much will you need to retire?
To work out how much you will need to retire (and how to retire early if you can) involves thinking about what sort of lifestyle you want. Most people imagine doing a bit of travelling – unfettered by the short 2 week holiday window afforded when working, they are free to do longer haul trips or take a few weeks at a time to explore a country. Sounds great, but you need the money with which to do this.
If you already have a budget (I LOVE a budget) then you are more than half way to understanding what you need to live on.
If you don’t then have a think about the following:
What do I spend on….?
- Daily/monthly expenses
Have a look at your last couple of months’ bank statements and jot down what you spend on key things. Multiply it by 12 and bonanza! That’s your annual pension requirement – more or less.
If you can’t be bothered to do this properly but just want a guesstimate, boffins on the internet have done the calculations for you, but obviously they are not tailored to your specific lifestyle.
£12,000 a year will give you a very basic living allowance (assuming you have your own home – it may not be enough if you have housing to pay for).
Once you have an annual figure you can multiply it by 35 (roughly the amount of years you’ll need an income but obviously no-one really knows how long they’ll live). For a mid range SILVER retirement income of £20,000 per year that means a pension pot of £700,000.
For a basic BRONZE pension living a frugal life at £12,000 a year, you’ll need £420,000.
For the high life – well you do the math! *clue – it’s more than a million.
I live in the UK. Won’t my state pension be enough?
The full UK state pension is currently £159.55 per week at the time of writing. Some people can get a little more and some a little less depending on what they paid in National Insurance contributinos over their lifetime. You can get more info from the government website. https://www.gov.uk/new-state-pension/what-youll-get
For many people the state pension is the only pension they get and are reliant on the state to look after them. It is hard to make ends meet on this amount. Plus, who knows if the state will still be paying out when it’s our turn to retire? A lot can change in the land of politics. If you are in a position to earn and save, it’s best to have a plan B.
In the US, Social Security also pays out retirement funds. These are calculated on your Social Security earnings record. To find out roughly what you could be entitled to you can go to the government website here. https://www.ssa.gov/benefits/retirement/estimator.html
As in the UK, most individuals are encouraged to save extra to fund their retirement as social security payments are not large. However, unlike the UK, the 401k plans are a flexible, low cost way to save for retirement that are great for private saving.
How much do I need to save each month to retire early or just retire?
Short answer: as much as you can spare, and then a bit more on top of that.
Doing my research on this has been an eye opener for me because lots of people say different things about how to retire early and some of them are pretty disheartening. Here is a potted summary of them all:
The BBC suggests saving as much as 20-30% of income if you want to retire early.“We are living longer these days, and not working from age 50 to 90 is 40 years,” Simmons said. “Plus, during those non-working years, you’re no longer contributing to pensions and savings. The portfolio must be quite large to see you through.”
The Telegraph says:
Unsurprisingly, those who enjoy happy retirements paid for by a good pension have contributed more during their working lives, according to a report by the Pensions Policy Institute.To retire at 55 on an annual pension of £25,000, you and your employer will need to make a combined annual contribution of £1,600 from age 25 or £1,950 from age 30. This falls to £1,233 at 25 or £1,466 at 30 if you plan to retire at 60.To retire at 55 on an annual pension of £25,000, you and your employer will need to make a combined annual contribution of £1,600 from age 25 or £1,950 from age 30. This falls to £1,233 at 25 or £1,466 at 30 if you plan to retire at 60.
(Holy jamoly! No early retirement for me then…)
There are some general rules of thumb for working out what percentage of your salary needs to be going into a pension, in terms of your and your employer’s contributions.
The most common is half your age from when you started saving from – so if you start at age 30 it could be 15 per cent, whereas if you start at 40 it is 20 per cent.
Money under 30 says:
The typical savings requirement for incomes is usually 5-15 percent of a person’s salary. However according to Early Retirement Extreme, increasing savings to 40-80 percent of revenue can enable individuals to acquire “six-figure net-worth’s” within a few years, which is an actual component of achieving earlier retirement.
Read more at: https://www.moneyunder30.com/how-to-retire-early
Based on me plugging a few figures into a pension calculator and assuming you’re happy with a mid-range £20k pension, these are the figures that came out.
The pension calculators don’t fully tell you how they crunch the numbers, but the one I used (Pension Bee) based their calculations on your money being invested and making a 5% return each year which then gets reinvested (compounding), and also took into account the UK state pension.
If you are looking to fund your pension without relying on the state pension (which may well change over the next 20 or more years…) look at the figure in the brackets.
If you are 20 and want to retire at 65, save £190 (£330)
If you are 30 and want to retire at 65, save £270 (£450)
If you are 40 and want to retire at 65, save £400 (£670)
If you are 50 and want to retire at 65, save £720 (£1200)
If you want to retire early, dig deep people:
If you are 20 and want to retire at 60, save £240 (£410)
If you are 30and want to retire at 60, save £350 (£590)
If you are 40 and want to retire at 60, save £560 (£950)
If you are 50 and want to retire at 60, save £1200 (£2050)
If you want to make your own calculations, have a bang on these calculators and figure out what you need to save.
BRITISH PENSION CALCULATORS
Find out my likely retirement income Money Advice Service
Tax calculator for lump sum withdrawals Scottish Widows
AMERICAN PENSION CALCULATORS
How living frugally can help you retire sooner
Of course the other way you can make retiring early (or at all) a slightly less outlandish prospect is by having a simpler life. There is an ocean of resources out there for frugal living and saving money and in time there will be plenty of resources on this blog too.
Basically frugal living just means cutting down expenses, getting rid of unnecessary fripperies and just whittling your life down to the stuff you really need. It doesn’t have to be onerous – you define your frugal. When I am budgeting hard I don’t buy shop bought coffee and I try and bring my own lunches in to work. I rarely buy new clothes and makeup and I stop impulse buying online.
However, I still eat out and I don’t economise on skin products, because those things are important for me to feel like I am having some of the good things in life. That’s my frugal (more or less!) When I’m in my frugal mode, I spend a lot less, leaving more money to save, invest or pay down debts. But long term it would also mean I need less to retire if, when retired, I don’t need lots of money to live on.
Cutting expenses means you can retire sooner – cut them now, invest more money, get used to living more frugally, retire sooner…
How to stockpile more money if you can’t save it from your income
So by now you should have figured out your retirement budget, your total amount needed for your retirement pot and your monthly savings if you are putting it into a retirement savings fund like a pension.
For the sake of argument imagine you are going to live on £2500 or $2500 per month.
If you haven’t got it in a pension, the other way you can plan for retirement is to generate this money as income. You can make cuts in your lifestyle to put money aside into money-making schemes. Think of it as a hobby rather than depriving yourself! Being frugal only works if it doesn’t feel like a massive hardship… otherwise what’s the point?
To try and bump up the retirement fund you can:
Earn more money
There are a ton of resources out there for doing “side hustles” jobs on the side, often online, that can bring you in extra income. You could either do this in the years up to retirement as a way of boosting your pension fund. OR you could look on side hustles as a hobby to take up for retirement, thus boosting your retirement income from whatever pension you already have.
Invest money as a money generating hobby
Stock market investing can be a lot of fun. Be aware that unless you either take good advice or educate yourself very well, investing in the stockmarket can be more or less the same as gambling. It is very easy to lose a lot of money…
However, a lot of the great and good of the financial world (including Warren Buffet) recommend investing money in funds that just copy what the stock market does. Over the years, the top stocks and shares in the market have made money overall.
If you could build up a big enough potfrom some canny investing, this can supplement your pension nicely.
N.B. As someone that got very excited in investing in stocks and shares and promptly lost £500 a few years ago, I would NOT recommend getting into this without taking advice or reading around the subject. But equally, remember that fund managers are not soothsayers and they don’t necessarily know what the market is going to do either. Take advice from a financial advisor and if your attitude to risk is very cautious then consider safer options.
Set up a passive source of income such as rental property
A rental property can be a great way to generate regular income on top of your earnings as an employee or business owner.
In the UK, it is becoming harder and harder to become a small time landlord but not impossible. You might also consider, however, buying property abroad or investing in property.
If you do want to go down this route, bear in mind that it’s not necessarily passive income – renting out property involves:
- knowing the law both for health and safety, the regulations and tax law
- dealing with tenants
- fixing problems with your property
- potentially having to go to court if you have a bad tenant
- re-decorating and renovating
You don’t have to do all of this if you have a letting agent or managing agent to manage your property. However, if you go this route they will charge you an arm and a leg to do all the gruntwork, potentially eating up your profits.
Another option for making money from property is to rent out rooms in your house for extra cash.
Is retiring in my 50s really a possibility?
Make no bones about it, retiring in your early 50s is a punchy goal. Assuming you started saving in your early 20’s your 30 years of savings have to stretch for another 30 years. And the rest…
This from the BBC: “
In the US, only 4% of non-retirees expect to quit before 55, according to a recent Gallup poll. In the UK, on the other hand, 58% of workers planning to retire this year are doing so early, according to research from Prudential.”
In the same way that you have to save more money if you started saving late, you will also have to save more money if you want to stop work/ retire early.
It’s not a biggie if you can do it, but if you were hoping to put away a few hundred a month and retire early, you might need to rethink. Or at least work out a supplementary income to help keep the bucks coming in.
Also bear in mind that a lot of pension plans don’t kick in until you are a certain age. If you want to retire at 50 for instance, this will have to be funded by things other than pensions. But the joy of thinking about it now and planning is that none of this will be a surprise to you when the time comes.
Other things to think about…
Plan to pay off debts
Paying off credit cards or loans might seem like a manageable monthly payment when you are working, but once you are not earning loans and outgoings really eat into your cash flow. Pay off cards, loans and ideally your mortgage before you think about retiring, so that you are as financially stable as you can be.
Retirement doesn’t have to mean getting bored out of your skull
Retirement means different things to different people. My father in law went from being a highly skilled engineer to retiring, but while his golf handicap went from strength to strength, he needed to do something else to keep his prodigious energy and intellect at work and went on to mentor small businesses in social enterprise.
My father retired and discovered a whole range of hobbies and skills (some of which could easily have been monetised if he wished). He started building his own computers, restored an old wooden boat to her former glory and is now renovating a house.
My plan for “retirement” is to move into other work. I like being busy! That’s why I’ve got two websites on top of full time work and being a parent…
There is nothing wrong with keeping work open as an option for your later years. After all, as people have noted… 30 years is a long time to play golf…
The dream is to work in an area that you enjoy and that satisfies you and if there is a pension pot in place, you may not have to earn much money. But every extra bit of income you make can help extend the power of your retirement fund into the years when you really cannot work.
What about dreaming bigger? Rather than just thinking of retirement as the time when you stop working, how about thinking about it as the period when you can do what you always wanted to do? Make your mark? Perhaps you’ve got a book inside you dying to get out. Perhaps you’ve got dreams of activism, doing something to help the environment or injustice. I’ve always wanted to learn more languages and make electronic music. Maybe there’s an album in me. Watch this space…
Plan taking your pension cash carefully and work out what tax you will need to pay
I do not profess to be a tax pro. But retiring has tax implications, especially retiring early. Also if you are thinking of living abroad to retire there may be higher taxes to pay – or if you downsize, you may need to pay tax on the profits you’ve made.
It’s always worth speaking to a financial planner to check what the tax outlook is for your retirement. There may not be a hurry right away, but certainly if you’re planning on stopping work soon make sure you check everything only.
Could you downsize to retire sooner?
If you live in a family home, but you’re rattling around it, consider downsizing as part of your retirement plan. Living somewhere cheaper – whether it be smaller, outside a city or in a new country – could fast forward your retirement considerably. The equity from your home could add a sizeable chunk to your retirement pot. For me the money in 50% of my home would equal 50% of my desired retirement fund, so I would definitely consider keeping it in the mix.
One cost you may not have factored into your retirement plan that is DEFINITELY worth a thought or two is healthcare. In the UK, we may not always have the NHS to look after us. It is worth having some room in the budget pot for private health insurance, even if you are not planning on taking it out now.
In the US, retiring early means losing health insurance paid for by your employer, so you will also have to think about paying for your own healthcare. It’s worth researching what different options you have before you stop work.
OK so by now you should be getting the gist of it. Basically saving for retirement is much easier the earlier you start. I started my pension aged around 28 and for many years just paid £50 into my monthly pot. It’s way better than nothing but I WISH someone had told me how much difference it would have made if I’d (a) started earlier and (b) paid a bit more into it. Starting in your 40’s makes it much more difficult though. (But if you are in your mid 40’s don’t be put off! Start anyway because that’s better than starting later still).
Bottom line is that if you start later, you’re going to have to put more money aside OR be more aggressive about finding ways to bring in money/ a second income to see you through your retirement. Time to get your entrepreneur hat on!