Here’s how to fulfil those dreams of early retirement

WORK HARD, LIVE FRUGALLY AND INVEST TO THE MAX

EARLY retirement is a dream for many, but if you want to make it a reality you have to put in a lot of hard work first.

Nobody wants to retire early only to spend their final years counting every penny, so you need a sizeable pot of money to see you through.

Growing numbers reckon they can do it though, fired up by an online movement called Financial Independence, Retire Early (FIRE). Its followers reckon they can retire years ahead of schedule by working hard, living frugally and investing to the max.

Today’s low interest rates and the pandemic have made it harder, but the sooner you start, the better your chances of success.

1 See how long you’ve got

Your first step is to set a target retirement date. Currently, the state pension age is 66 for both men and women, but this will climb over time.

You are free to stop working before then, of course, but that only makes sense if you have saved enough.

From age 55, you can start withdrawing funds from your company or personal pensions. This will rise to 57 from 2028.

If you want to retire before that, you will need other sources of wealth, such as tax-free Isa savings, a string of buy-to-let properties, or a windfall, such as an inheritance.

2 Work out what you need

Next, work out how much income you need after you retire.

FIRE advocates say retirement is possible once you have savings worth 25 times your current annual spending (not salary), no matter what your age.

So if you can get by on £15,000 a year, plus the state pension (currently a maximum £9,110 a year), you need £375,000. Once you have this, you have achieved financial independence and can retire, they say.

If you need £40,000 to fund your lifestyle, your target is £1million.

It may sound daunting, but Romi Savova, chief executive of PensionBee, says this is a marathon, not a sprint.

“Start putting away whatever you can afford now, and aim to increase contributions later,” she says.

3 See where you stand now

You may already have a head start, through a company pension scheme, or possibly several schemes.

Pull together all your pensions, and track down any lost schemes through the Pensions Tracing Service. Savova says consider consolidating your pensions on a single, low-cost platform. “This can make your progress easier to check and cut fees,” she says.

4 Commit to it

If you want to retire early, you have to throw the kitchen sink at it and make it a top priority. Heather Owen, of wealth management firm Quilter, says this requires sacrifices today for rewards tomorrow. “If you are serious, you need to put away around 20% of your salary every year,” she says.

This means cutting back on your everyday spending and either working extra hours of overtime or starting a side hustle. This isn’t for everybody, Owen says, adding: “You still have to enjoy life today.”

If you have a vast salary or brilliant business idea, you may not have to make these sacrifices.

5 Get your employer on board

Employees aged 22 and above who earn at least £10,000 should be automatically enrolled into a company pension scheme.

You have to contribute 4% of salary between £6,240 and £50,000, known as qualifying earnings. Your employer will then pay 3% and you get another 1% from tax relief, lifting the total contribution to 8% a year.

Tom Selby, senior analyst at AJ Bell, says do not opt out. “You will be waving goodbye to this free money for ever, possibly destroying your chance of retiring early,” he says.

6 Claim your tax relief

You can also claim tax relief on personal pension contributions. The Government gives everyone 20% relief, which means if you invest £100 in a pension, it only costs you £80.

Higher and additional-rate taxpayers can claim further relief through their self-assessment tax return. So a £100 contribution only costs a 40% taxpayer £60.

Selby says: “As a rule, the maximum you can save in a pension is £40,000 a year and just over £1million in your lifetime.”

If you like to make your own investment decisions, you could take out a selfinvested personal pension (Sipp), available from online platforms such as AJ Bell and PensionBee. You can then buy into shares, funds, bonds, property, commodities and other investments.

You can also invest up to £20,000 this year in a tax-free Isa. With an Isa you don’t get tax relief on your contributions, but your returns are free of income tax and capital gains tax. Most people will not be able to save anything like these amounts, but do your best. Then stick with it.

Alternatively, you could invest in a buy-to-let property, and use the rental income to pad out your pension.

7 Invest every month

Forget trying to build a quick fortune by speculating on get-rich-quick assets, such as Bitcoin.

Stocks and shares are the best way for most people to build the money they need for retirement, but do not expect to get rich overnight. The best way to save is little and often.

If you put away £250 a month and increased this by 3% a year as your pay increases, you could have £232,998 after 25 years. If you save for 35 years, you would have £516,456.

If that’s not enough for your desired lifestyle, invest more.

These figures assume your investments grow at an average 6% a year after charges. Selby says don’t leave

The sooner you put plans into operation the better your chances of success

long-term savings in cash, where you will get a near-zero return. “Stocks and shares are more volatile, but should deliver higher returns over the long term,” he says.

8 Pay down debts

Early retirement won’t be much fun if you are worrying about servicing your mortgage or clearing credit cards. So as well as building up your savings, you should pay down your debts.

At retirement you can take 25% of your pension as a tax-free lump sum, and use that to clear outstanding debts. Ideally, do it before then. Then you can use that tax-free cash for other things.

9 Check your motivation

Retiring early doesn’t simply mean lazing around afterwards. Many hope it will give them the freedom to pursue a long-cherished business idea, rather than being a wage slave all the way to state pension age. Moira, 45, from North London, is aiming to scale back her hours and learn new skills, such as woodworking and sewing.

“My husband is 10 years older and we’d like the freedom to travel together when he retires,” she says. Becky O’Connor, of Interactive Investor, says there’s more to life than work.

“If you have unfulfilled dreams, such as writing a novel, travelling, volunteering for a charity, or starting an academic course, you could end up busier than ever,” she says.

10 Make it last

Give yourself the freedom to pursue ideas rather than being a wage slave

A word of warning. Many people underestimate how long they are likely to live in retirement.

At age 65, a man can expect to live for a further 18 years, on average, and a woman for 21 years. If you stop work too early, your money may not last as long as you do.

You have set yourself a big challenge and may need help, so consider independent financial advice to draw up a plan.

Even if you don’t manage to retire early, you will be better off simply by giving it a go.