Five steps to early retirement

Rachel Lacey looks at how to plan ahead for an early retirement and examines five steps you can take to get on track.

For many people early retirement is the financial goal. After a long career, working and saving hard, retirement is a welcome milestone.

But let’s not beat around the bush. Early retirement isn’t easy at the best of times - throw in economic uncertainty and spiralling costs and it becomes harder still.

That’s not to say early retirement is impossible though, and if you really want to retire early, there are a number of positive steps you can take.

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Some may involve reframing some of your ideas around retirement, but with a bit of planning and a flexible mindset you might just be able to retire a year or two ahead of time.

1) Find out where you stand

You can’t make any decisions unless you know how much money you have to retire on. That means your very first step is to work out where you stand financially and the likely income you can expect when you retire.

Start with finding out when you’ll get your state pension and how much you will be eligible for. Then check your personal pension valuations (including all the workplace schemes you’ve paid into throughout your career) and tot up the value of all your other assets – savings accounts, ISAs, shares, rental properties and so on.

Working out how much you’ll need to retire isn’t easy, you’ll need to factor in how long you’ll live, inflation and investment growth for starters. That’s why it often makes sense to consult a financial adviser who can do some cash-flow modelling for you to show how long your money is likely to last.

There is still plenty you can do to get your planning started yourself though and we’ve gathered together some helpful retirement planning tools here.

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2) Pump everything into your pension

Now’s the time to pay as much money as you can into your pension. Even though your retirement might be imminent, if you’re planning to stay invested, you’ve still got a lengthy investment horizon. Plus, all your contributions will still be boosted by tax relief, equivalent to your rate of income tax, giving you an instant return on your investment.

In addition to increasing monthly contributions, you might also want to consider paying in any lump sums. If you get a bonus at work for example, you can ask your employer to pay it direct into your pension rather than seeing its value whittled down by tax.

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3) Think about what retirement means to you

Cruises and playing golf might be what some people aspire to in retirement, but is it what you want?

Taking the time to think about what your priorities are cannot only help you get a better idea of how much money you really need to live on, but also open your eyes to more income opportunities.

For many people the desire to quit work is as much about a desire for a change, or a reduction of stress. Could you do some work in a way that still gives you the break you need?

Depending on your occupation, you might be able to stay in the same field but work part time or on an ad hoc project basis. Or you could look to your interests and passions and see what opportunities lie there. From private tuition to dog walking and house sitting, the opportunities for a side hustle are endless when you start thinking more laterally.

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4) Look for other income opportunities

Work isn’t the only way to boost your income. There are plenty of other ways you can earn some extra cash when you start thinking flexibly.

If you’ve got one or more spare bedrooms, taking in a lodger can go a long way towards paying the bills. It goes without saying that taking a stranger into your home isn’t for everyone, but if you like the idea of having some extra company it might be worth considering. Under the rent a room scheme you can earn up to £7,500 each year tax-free.

It might not just be your spare room that’s in demand. If you live close to a town centre, train station, airport or sports and entertainment venue, you might also be able to rent out any spare parking space you might have. There’s a range of websites that can pair you up with drivers in need of a parking space.

Any extra income could be crucial if you’re wanting to retire before you reach state pension age.

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5) Talk to your family

There’s no denying that early retirement costs you money. You have less time to save, and what you do save needs to last longer. However, you could potentially be able to free up some extra funds by reviewing and scaling back other financial goals you might have.

If you have earmarked some of your wealth for younger generations, it might be worth taking the time to think about what is most important to you. Will your children, for example, need the inheritance you’re hoping to leave or are they likely to do just fine by themselves? Or, if you’ve put money aside for a child’s wedding, could you help them out in another, more practical way? Money for a wedding will, of course, always be appreciated, but if the happy couple have or want children of their own, they may well appreciate having you around to help with childcare, far more than a wedding breakfast.

You might regard money you’ve allocated to family as untouchable, but if not, it might be worth a discussion, to work out what makes sense for your family as a whole.

Being able to afford to retire early is a big financial achievement, but it’s more than a bragging point. For many people it’s about shaking up their lifestyle, getting a better work-life balance and improving their emotional well-being.

If early retirement is important to you, it’s worth thinking about what you can do to make it happen.

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