Many of us would like the idea of retiring early yet transitioning from relying on a salary to other income sources (e.g., pensions) requires careful planning. The UK average life expectancy is over 81 years, so, your savings, investments and pensions need to potentially provide for you for many years. Below, our financial planning team at Vesta Wealth explains the fundamental areas to consider when planning for early retirement.
Establishing a target retirement number
You need to first determine whether early retirement is a feasible goal for you. This means you need to determine a “target number” in terms of the required value of assets, savings, and investments to cover your costs. From there, you can start to determine if you are on track – and, if not, what it would take to set you on course. As a starting point calculate your expected salary in the years immediately preceding your desired retirement date, then, multiply that figure by anticipated life expectancy. For example, if you wish to retire at age 55 and your earnings are £30,000 with life expectancy of say 30 years, then £900,000 could be a simple target number for your early retirement fund.
However, a range of factors will determine what you really need. Retiring in your early fifties, for instance, is likely to require a larger fund than aiming to retire in your late fifties. Your expected expenses – taking account of inflation – will also be key to figure out. On the one hand, your costs may go down as children leave home and mortgages are paid off. Future cashflow modelling can consider your existing and future pension and savings values, income, and expenditure requirements as well as factor in future investment returns and inflation to arrive at a more realistic number.
Make use of your pension(s)
Pensions are amongst the best tools for retirement planning. First, any capital growth within your pension is tax-free, in addition, your contributions qualify for tax relief at your highest marginal rate so, a basic rate taxpayer needs only put 80p into his/her pension to contribute £1 (i.e., 20% tax relief). For someone on the higher rate of income tax, the amount would be 60p.
With early retirement you do need to be mindful of the limits of pensions. Firstly, there is a limit on the total contributions you can save each year within your pensions before punitive taxes apply, for most people this is £40,000 per annum but is restricted for higher earners. In addition, there is a maximum sum, currently £1,073,100, known as the Lifetime Allowance that may be held in pensions at the time you take benefits before tax charges apply. Your retirement strategy may therefore need to consider other tax-efficient vehicles in addition to your pensions – such as ISAs.
Ordinarily, money inside your pension pot(s) cannot be accessed before the age of 55 (rising to age 57 in the future). So, if you do want to retire before this age you will need to consider additional options.
The State Pension is typically a crucial pillar of any retirement plan. Not only does the full new State Pension offer £9,339.20 in 2021-22, but the income rises each tax year – at least in line with inflation. Your State Pension is guaranteed until you die and does not fluctuate in value (like a pension pot, which is usually invested). However, those looking to retire early should bear in mind that the State Pension cannot be accessed before your State Pension age. This is set at 66 for men and women in 2022, and is due to rise to 67 and possibly higher in the years ahead. So, whilst the State Pension is a valuable part of retirement planning, would-be early retirees will need other assets and income streams in place for their 50s (and most of their 60s) outside of the State Pension.
Often early retirement planning will consider various forms of existing and recommended investments and may include bridging a period prior to your State Pension becoming payable, this again is an example of when our cashflow modelling service can help you understand whether your early retirement dream is a real possibility.
Invitation
If you would like to discuss your retirement strategy including our cashflow planning service, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.