Would you like to retire early?

Author – Michael Morris

For many people, the thought of being no longer tied to a job, having those long holidays, pursuing more hobbies, spending more time with family and friends, and chilling out generally remains a dream that is difficult to achieve.

The issue is that if we finish working early in our life, it usually means a smaller pension and less savings. With long life expectancy, early retirement requires good financial planning. Put simply, if you decide to stop working in your fifties or early sixties you might have to fund yourself for another few decades.

If you have thought about retiring early but don’t know if it is possible for you or even if it is actually something you’d like to do, it is surely worth considering. And you might find it useful to talk to someone who has had such discussions with many people, see which parts of it resonate with you.

In my experience, those who have achieved or look like they are going to achieve the dream of early retirement seem to do some of the following things while they are still working:

1. They don’t focus solely on paying off their mortgage

Stock markets have generally provided inflation busting returns for many decades and while we cannot predict future returns, we need to find ways of building our wealth in a way that does not get seriously undermined by inflation.

It is quite normal to want to be mortgage free and indeed many people overpay their mortgages when they can. However, it does get to the point where the mortgage is no longer the burden it once was. If the interest rate isn’t so high and your remaining debt has substantially reduced, you really should consider the opportunity cost of focusing solely on eliminating your mortgage completely.

You could instead allow your remaining mortgage repayments to follow a slower path. You would then free up some flexibility to make some investments. If you think returns from stock markets might be better on average than the mortgage rate you’re paying, it could make sense for you to make regular or lump sum contributions to stock market related investments.

You might also consider giving your pensions a boost by making additional contribution and in so doing take advantage of the very valuable tax relief on offer.

By making these adjustments you will ultimately have cleared your mortgage anyway, albeit at a slower pace than before, but importantly, you will also in the meantime have built your pension further and added some flexible access investments. This gives you valuable incremental income and lump sum options for your retirement years.

2. They are open to some part time work

For many, the early stage of retirement is about reducing the amount of time spent working rather than stopping completely. Since the pandemic, people have become more accustomed to flexible working hours and commutes, and this naturally leads to more options being considered for the early retirement years.

Final salary schemes are increasingly rare these days and are very valuable to those who have them. The State pension is very valuable too although that comes much later. Even retiring in your early sixties still means several years wait until State pension is available.

Many are reliant on defined contribution schemes where their retirement income is unknown and depends on achieved investment returns. The early retirement years can be expensive, especially if you want to do lots of fun things.

Looking at their own circumstances realistically, some will find that there is a gap between their likely needs and their income. In such cases, they may choose to take on some freelance work in the early years of retirement, consultancy or even try something completely new. This is about delaying access to pensions, savings and investments and for some might also ease the psychological transition from full time working. Work becomes such a part of routine that for some it can be hard to stop completely immediately.

3. They are pro-active about their financial planning

Many people do not speak with a financial planner but those who do usually do it because they want peace of mind in answering the very important question, will they and their loved ones be okay financially.

People who are thinking seriously about being better at their financial planning try to establish initially what is in their pensions, how it is invested, what tax reliefs are available, the remaining term on their mortgage, the interest rate, repayment penalties and the return they’re getting on their savings and investments. These are all relatively straightforward to answer but if you’re thinking of stopping work early, you need to have a clear understanding of your finances.

There are times in your life when you just don’t have the spare income capacity to make good pension contributions, while at other times you can really ramp it up, using salary increases and bonuses where possible, getting those valuable tax reliefs. Some decide to simply not spend so much on luxuries for a while as their focus becomes the goal of retiring early.

However, those who seem best at this seem to have a good understanding of how their pensions and investments are performing. They don’t rely on their hard-earned money just sitting in a default fund that might not be suited to their objectives. They take the time to understand how their money is invested and why.

They are interested and seek out strategies and investment managers whose approach suits their needs. Investing is not easy, and financial planners are very good at helping people get a good understanding of the important and relevant risk return trade-offs, and recommending suitable strategies.

4. They understand their future financial needs

If you want to stop working early you need a plan and to understand your future financial needs. What are your likely expenses and when will they be? What are your assets worth? Many people are paying into pensions and investments, but they don’t really have an idea of the income or capital they might generate.

We do a lot of work with our clients, modelling their assets, income and expenditure right through from today until the end of their retirement. This process gives valuable peace of mind. It is also powerful in helping decide how much to give away as lifetime gifting, helping the children get on the property ladder for example, while also providing adequately for their own needs and possibly long-term care*.

Inheritance tax is increasingly an issue for more people, and the current government seems set on taking more from this valuable revenue source. With pension savings coming into the inheritance net, proper lifetime cash flow modelling is very useful, providing the insights needed to set up inheritance tax mitigation strategies.  

5. They know their pensions

While some people have inflation protected final salary schemes, which are extremely valuable in retirement, many also have money purchase or defined contribution or self-invested plans, which have less certainty attached.

With all of these options, it is important to understand what each of the plans do and the role they play in funding the retirement years. There will be elements that give steady income and there will be a tax-free lump sum part.

Many people have several pensions from different employments. These will have an investment strategy applied that may or may not be suitable for the retirement goals. Those who are good at this have located all their pensions and have taken suitable action with them. This usually includes a review of the features of each and this is a good reason to consult with a financial planner.

Conclusion

Whether early retirement has been on your mind for a while or it’s only just crossed your radar, this could be relevant to you. It’s about taking a sensible, informed approach and putting the right steps in place to make it achievable.

The points above are not exhaustive and there are many more factors to consider. I’m always happy to discuss your personal circumstances in more detail.

If you would like to book a no-obligation 1-2-1 meeting to discuss your pensions and retirement plan, please get in touch via michael.morris@sjpp.co.uk or 07906 151525.

Your home or other property may be repossessed if you do not keep up repayments on your mortgage.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

This may involve a referral to Karehero, a care navigator and matching service provider, whose services are separate and distinct to those offered by St. James's Place.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.