Life is not a rehearsal! It should be spent doing the things you love at a time of your choosing and when you are still young enough to get full enjoyment.

At the beginning of this year, I had a call from Alan (name changed) who is a long-standing client of mine.

Alan retired early, in April 2021, and is absolutely delighted that he took that decision. He told me he loves not having to travel so much and enjoys the fact that he’s getting to spend more time around his property and with his young grandson.

He has never been happier and would not consider going back to work.

Soon after that call, I read through some research that Aviva, one of the leading pension providers, recently carried out into the whole issue of early retirement.

This article gives you an insight into the challenges and benefits of retiring early and shares some of the headline figures from the Aviva research.

The pandemic has prompted many people to consider retiring early

If the unprecedented events of the last two years have led you to start considering when you want to stop working, you’re not alone.

Anecdotally, many people have been worn down by the pandemic – having to deal with lockdowns, restrictions on movement and the ever-present health threats – and this has been physically tiring and mentally stressful.

Even if it hasn’t prompted you to start thinking about stopping work completely, if you coped well with homeworking, you may well be considering downsizing your career and making working from the comfort of your own home a permanent feature of your life.

According to Aviva’s research, nearly a quarter of those who want to retire early see 60 as the optimum age to do so.

The same research reports that:

• 23% of people have reassessed their priorities
• 19% are tired and bored of working
• A further 19% now find work too taxing and stressful.

Moreover, 68% of those who have taken the plunge and stopped working earlier than they planned confirm they are happier as a result.

Understanding your regular expenditure is a key first step

If you are thinking of retiring early, one key priority is to get your sums right. The Aviva research reveals that 47% of early retirees said their financial situation took a hit after they stopped work.

So, a clear idea of your assets and liabilities is essential to help you understand whether you can stop work immediately or need to wait for a few years.

A simple income and expenditure spreadsheet is a good place to start. You can then consider what regular outgoings would stop or reduce if you were no longer working.

One of the key financial steps cited in the Aviva research as being important in facilitating early retirement was paying off your mortgage. However, everyone’s circumstances are different and this may not even be necessary depending on your retirement income and your other requirements. But it is important to be aware of the impact and timings of continuing payments. So, if you haven’t yet done this, a clear idea of the outstanding amount you owe is essential.

Knowing where your income will come from

Once you’ve established your outstanding liabilities and expenditure, the next step is to see what assets you have that will provide you with an income in retirement.

It’s likely that most of this will be provided by your pension fund, but other potential sources of income or cash inflows at particular times, could include:

• Savings and investments
• Your State Pension
• Other assets such as property
• A windfall such as selling a business or inheritance.

Don’t forget to take any pension, savings, and assets your spouse or partner may hold into account.

Also bear in mind that although you can currently start drawing from your pension fund at age 55, this will rise to 57 in 2028, so you should factor that into your planning.

What to do if you currently have a shortfall

Once you’ve looked at your potential income and expenditure, you’ll have a good idea of whether income will exceed spending in retirement and if there are any years of shortfalls (where you might need to boost your retirement income from other sources such as savings).

If you have a shortfall, there are some simple steps you can take to give you the best possible opportunity to still retire early, even if it isn’t immediate. These might include:

• Boosting your pension savings. You can generally save up to the lower of £40,000 gross, or 100% of your earnings into a pension in the 2021/22 tax year, so it’s worth contributing as much as you can.
• “Carrying forward” pension contributions from previous tax years if you have sufficient entitlement.
• Continuing to work, but on a part-time basis so your reduced income will lower the amount you have to take from your pension fund.

You may also be able to retire early but continue to work on a consultancy basis. The income from this could help you fill any shortfall and will also mean you can start to enjoy the retirement lifestyle you want without stopping work totally.

Pension Freedoms gives you extra flexibility

The introduction of Pension Freedoms in 2015 gave you much more control over your pension funds. Importantly, you’re able to take lump sums or different income amounts from your fund, rather than a fixed income.

So, you may find that you’re able to cover an anticipated income shortfall from your pension fund for a short period.

As a very simple example, if you’re age 62 and you’ve calculated that you’ll need an annual income of £30,000 when you stop work, don’t forget that you’ll start receiving your State Pension of £9,339.20 (2021/22 tax year) when you reach age 66.

This means that you’ll only need to fund £30,000 for four years until your State Pension starts.

Obviously, you’ll need to take inflation, and the consequent reduction in the spending power of your money, into account.

Cashflow forecasting becomes invaluable

It’s the flexibility derived from Pension Freedoms legislation that effectively makes retiring early more easily achievable than it has been for previous generations.

Another key factor is the increased sophistication of cashflow modelling.

By regularly reviewing your financial position on at least an annual basis, you can keep track of your pension, savings, and other investments. You can then make informed decisions around projected investment growth and expectations of your future income and expenditure.

This means you’ll be able to get a clear idea as to whether retiring early is currently achievable taking all your assets into account (pensions, savings, investments, properties, etc.), or if you need to make adjustments to your finances to be able to stop working when you want.

By doing this, you’ll more likely be able to be one of the 32% of people who, according to Aviva’s research, plan to retire early to embrace a new lifestyle. And you’ll join the 26% of early retirees who said their decision was a result of “being in a financially stable position” so they can afford not to work.

Having your finances organised in a way that makes sense for your current and future needs can help you see and plan for living the life you want with confidence.

Get in touch

Since my conversation with Alan, I’ve spoken with several potential new clients who are considering their options and the possibility of early retirement.

If you’d like me to help you review your own situation, please get in touch.

You can email me at graeme@macfp.co.uk or call me on 01349 832849.