Retiring Early – It’s Not Impossible:

If you’ve been thinking about retiring early, you’re probably wondering how viable it is. But, while planning for your retirement is far from simple, the sooner you start thinking about it, the better placed you will be. So, we’ve drawn up this post to help you see how far off any hopes of retiring early really are.

First things first, looking at your retirement is a big job. So, it’s not something you should hope to tackle in one go. It’s important to break the job down into small, manageable pieces – and the big picture will then largely take care of itself. We recommend breaking it down into 6 steps, as shown in our diagram below. You will see that each step has an over-arching question of it’s own. retiring early steps Undoubtedly, the further you delve into each question, the more questions you will find that you will need to answer if you are to see whether retiring early is possible for you.

Step One: Dreaming Big

Step one is to determine what your big picture is, and then to chunk it up into manageable steps. It’s a bit like managing a project. You know what you want the finished result to be, so you need to determine what the key steps are to get there. Consequently, if retiring early is your big picture, you will need to think about what needs to be in place to allow for that to happen. We’d suggest you set yourself some high-level questions to handle your dream of retiring early. And first on that list should be:

What kind of retirement do I want?

This is the ‘Dream Big’ question. It’s best to start with your ideal of what your retirement will look like so that all other steps can feed into how to achieve it. If you start off with a luke-warm vision of what you want, you’ll never develop the plan that will get you beyond just that.

Step Two: Budgeting

Once you have determined what your ideal retirement is (inside of the ‘retiring early’ umbrella), you will need to think practically. Yep – sorry to bring you back down to earth, but it needs to be done to make the magic work! So, step two involves asking yourself:

How much do I need to live on?

That’s right – step 2 is the big budgeting question! You now know what your ideal retirement looks like, but you need to work out what you can realistically live on day-to-day in order to achieve this. When it comes to budgeting, it’s important first to list out all those expenses that cannot be avoided. Grocery shopping. Utility bills. Home repairs. Travel expense. Buying clothes. They will all need including. These are essentials that, try as you may, you cannot do without.

Then you need to budget for those ‘nicety’ expenses. If you enjoy going out, frequenting restaurants or pubs, going on holiday, or have hobbies, the money for all of these needs to be factored into your budget. While these can be difficult to budget for, they can have a significant effect on your spending. They are also usually the first ports of call for compromise when people don’t have the money they need for their ideal retirement! So, when thinking about retiring early, make sure you create an all-inclusive budget to give you an accurate picture of what you are dealing with – and where the compromise lies!

I don’t know where to start! How much on average, do people need during their retirement per year?

Most people will be familiar with consumer magazine Which? If not, it’s a great place to get the low down on many market products and services, including surveying the spending habits of 6,000 UK retirees. In doing so, they have been able to calculate the average living expenses of the three most ‘typical’ kinds of retirement. These were duly labelled ‘an essential lifestyle,’ ‘a comfortable lifestyle,’ and ‘a luxurious lifestyle.’ They have taken care to factor in extra costs covering long-haul travel and buying a new car once every five years. The results are a good starting point for a rough ballpark figure when thinking about whether retiring early is even a possibility.

Results:

Helpfully, the results are broken down into average living costs for both single and couple retirees (with substantial savings for the latter).

  Comfortable Lifestyle Cost per annum (£) Luxurious Lifestyle Cost per annum (£)
Single Retiree 20,000 33,000
Couple 27,000 42,000

There are, of course, caveats to consider when assessing this information. For example, such statistics don’t reflect any element of ‘change’. So, if you are thinking of retiring 10 years in the future, the lifestyle you think you’d like now may well be different in a decade’s time! That said, it’s important to have the target, even if it moves from time to time.

Also, once actively retired, you might find that the kind of lifestyle you want to live changes. After spending several years living the high life, you might decide that you’d actually now like to wind down. When thinking about retiring early, it’s important to remember that your retirement could well end up lasting over a third of your life. In that time, ‘change’ will inevitably come one way or another. And with it, your living costs will need to change too! So, any plan or financial forecast you make for retiring early will need to take that into consideration.

I wont need that much will I?

Broadly speaking, many people do find that their expenses decrease when they retire. This is usually because they no longer have the family to raise at home, and not going to work cuts out the often considerable costs of daily commuting. Mortgages are also an important factor. Paying off your mortgage before retirement will considerably cut your living cost. So, planning to pay off your mortgage is something you might want to factor into your plans for retiring early.

A word to the wise though! Be careful not to assume that your living expenses will definitely fall when you retire. Be sure to calculate it, and then do the maths again to be sure. There is a big disclaimer to any kind of financial forecasting in that there is never any guarantee of what will happen in the years to come. Listening to assertions like ‘retirees on average spend a third less per month compare to their working lives’ may not necessarily be true for you. So sorry to be kill-joys but…

 

It is always best to work with the worst case scenario as your starting
point when thinking about your finances and retiring early.

Step 3: Viability

So, you’ve worked out how much it will cost to live. Now you need to think about:

How will you afford to live once you stop working?

Welcome to Step 3 – the Viability step. You will need to think about all of your sources of income. For most people, their primary source is likely to be their pensions. But you may also have additional properties, investments or other assets that you can factor into your plan.

You may also want to think about whether you intend to convert a hobby into a small business for your retirement. Or, are you thinking of working part-time to subsidise your pension? Whatever your plan, you need to get a good picture of what your cumulative income will be and know definitively where it is coming from.

Step 4: Contingency

Next, comes the contingency step! Having determined what kind of retirement you want, and what your finances will allow, you then need to ask:

What other ‘extra’ costs might you have? 

It’s also important to think about having an emergency kitty in place should something totally unexpected happen. Having an amount ring-fenced for adhoc, one-off costs, will stand you in good stead if something comes up that you want ready cash for during your retirement.

Step 5: Getting Technical

Given what you have learned from steps 1-5, you should be in a good position to then tackle the all-important ‘technical’ question of step 5:

How much money will you need for your retirement?

Working this out will inform how much surplus cash you will have available. It may also inform what you do with your cash in the current situation to enable it to (hopefully!) grow and facilitate that all-important hope of retiring early.

The difficult bit!

Trying to work out how much money you’ll need will be littered with uncertainty. The number of ‘what if’ scenarios, and worries about what you don’t know to include, will undoubtedly add to the complexity surrounding answering the question. These ‘issues’ though can usually be summed up in two major factors:

1) You don’t know how long you will live

2) You don’t know what the future holds in terms of your later life needs and care.

So, let’s tackle these head-on!

There is no getting away from the fact that longevity will always be challenging to address. A nest egg designed to last you comfortably until your 80, will undoubtedly look very different to one designed if you live to over 100! This should tell you that you need to be sensible with your planning. Budgeting may be a bore, but it is essential in helping you live within your means, and catering for the situation where you do go on longer than you thought possible.

When it comes to healthcare costs, a bit of forwarding thinking can make all the difference. It is a sad reality that as we decline in health, we may need care. And care costs. Heaven knows, it can cost dearly! The most common example is, of course, needing to go into a care home. Long-term care is expensive and can easily swallow up your nest egg in next to no time.

The good news is that careful contingency planning for how full-time care could be paid for if required does exist. So, it’s worth taking the time to ensure you factor in adequate provisions to protect your savings.

Step 6: Adjusting

Armed with an artillery of information gathered from steps 1-5, you will now be in the position to ask:

What needs to be done to make your dream of retiring early a possibility?

Step 6 is the Adjustment step. This stage is all about assessing your information collectively. Look at the means available to you – your pension, investments, assets, shares etc. – and see how they marry up against your retirement hopes. What needs to be done to match them to your financial forecasts? If you dream of retiring early, what does the gap between your current financial situation and what you’d need, look like? What would need to happen for that gap to be filled?

It might be that you realise paying in more to your pension now will be necessary for retiring early. It might be that you can’t retire as soon as you’d have liked, but you realise with a few small changes you could be close. Equally, it might show that you’re way off from your hope. But this in itself will give you a much needed prompt to get something sorted so that you don’t have to work forever! Then again, you might be pleasantly surprised to find you’re in better shape than you thought and your dreams of retiring early are far more possible than you thought!

Where Might Professional Financial Advice Help?

You might have followed all of the steps above and decided retiring early is viable? Perhaps you’d like to double-check with a professional to make sure your maths are right? Maybe you’ve read all of the above but would prefer someone who does it for a living to show you your options? Whatever your reasons for seeking help from a financial planner, there is never any harm in having a free introductory chat to go over your findings and see what a professional has to say. Many people find the peace of mind this gives well worth the hour it takes, whether they want to become a client or not.

But, what exactly does a financial planner do? How do they magically find out the best options for you, and is the cost worth it?

Financial advisers, as you might expect, have a wealth of knowledge and experience in retirement planning. They also have access to the tools of the trade and are expertly trained in some very sophisticated software that enables them to mock up your situation as it would stand in a multitude of different scenarios. To give an example of the kind of things we are able to chart, our software can reproduce your ideal retirement in real-time based on your specific data.</p

A working example…

To show you an example, we end up with a chart that looks like this:

Retiring early graph 1
retiring early graph 2
retiring early graph 3

Source: Cashcalc Ltd

We are then able to overlay this with any ‘what if’ scenarios to establish the best option for you based on your situation and attitude to risk. Furthermore, our charts update to reflect change. So, as long as your situation is regularly reviewed, this tool can help ensure that your retirement (and any dreams of retiring early) go to plan. It alerts us to when you might be in danger of veering off course from your plan and allows us to step in with our expertise to ensure you stay on track.

When it comes to cost, most people are genuinely surprised to find that professional advice doesn’t cost as much as they thought. It’s usually charged as a percentage of x and is paid directly from y. When it comes to the value of professional advice, this largely depends on your own situation but just the weight you give time (and peace of mind!) over money, can be worth it. Some people handle their retirement planning very well on their own. But, and here’s the crux of the situation…

You never know how much further they could have gone if time, experience and the tools had been on their side.

So, if you are thinking about retiring early, there are many things to think about. There are many pieces of information to gather and a huge amount of assessing to do. However, if you plan ahead and arm yourself with the information and forecasting tools you need early on, there is no reason why retiring early shouldn’t be a possibility!

 

As always, if you would like to speak to an adviser about retiring early, please contact us on 01243 767 469. Alternatively, you can email us from our contact page, and an adviser will be in touch!

Written by Chris Page

Chris is an experienced financial service professional who joined the business in 2013, as a result of his hard work and dedication he was made a director of the firm late 2014.