Early retirement: Are you saving enough?

Are you dreaming of taking early retirement? With suggestions that the State Pension age should rise at a faster pace, it’s a dream you’ll have to take action to achieve.

The State Pension alone probably won’t be enough to fund your retirement dreams. However, it’s a foundation to build on and losing this source of income during the early years of retirement may mean your plans aren’t feasible. Withdrawing extra funds from your personal pension to make up a shortfall could mean taking too much too soon. So, if you hope to give up work before you’re able to claim the State Pension, careful planning is essential.

Changes to the State Pension

In 2018, the State Pension age for men and women equalised at 65. However, this is now gradually increasing. By 2028, the State Pension age will reach 67. It will also be kept under review, which means it could change again in the future depending on a range of factors.

One key factor to the changes in State Pension age is life expectancy. A report from the Office for National Statistics asks if 70 is the new 65. The report argues that, in terms of working patterns, seeing age 65 as the start of older age is ‘out of date’.

People are living longer and healthier lives. In 2018, a man aged 65 could expect to live another 18.6 years. For women, it’s another 21 years. So, on average, a 65-year-old woman will still have a quarter of their life ahead of them and a 65-year-old man just over a fifth. As a result, suggestions that the State Pension should rise to reflect this are beginning more common.

In fact, think tank Centre for Social Justice suggests that the State Pension age should reach 70 by 2028 and 75 by 2035.

So, what does this mean for early retirement? It could mean you have to support yourself solely from your personal pension and other provision for far longer than you anticipated. Even if early retirement hadn’t been a plan in the past, would you still be comfortable working into your seventies? It’s worth considering how potential changes to the State Pension age could affect your plans.

Securing an early retirement

Calculating how much you need to save for an early retirement needs to focus on two key factors:

  1. Retirement expenditure
  2. Life expectancy

First, how much will you spend when you retire?

Whilst expenditure will depend greatly on the retirement lifestyle you want, research from Which? can give you a rough idea. On average a retired household spend around £2,200 per month, or £27,000 annually. This is enough to cover all the basic areas of spending (£17,800 per year) as well as some luxuries.

If you’re hoping for a more luxurious retirement lifestyle with long-haul holidays, new cars and more to spend on hobbies and going out, the survey indicated you’d need £42,000 a year.

When planning early retirement, calculating how much you’d need each year to achieve the desired lifestyle is important. Remember, your priorities and commitments are likely to shift when you’re retired. You’re likely to find that day-to-day travel costs and housing payments fall but utility bills rise, for instance.

You should also factor in the one-off costs you may payout in retirement. This could include paying for a once in a lifetime trip to celebrate the milestone or adapting your home so it’s suitable for the rest of your life.

Your annual expenditure alone can’t tell you how much you need to save to retire early. How long you’ll spend in retirement is also important. Dying isn’t someone anyone wants to think about, but your life expectancy does play a role in whether early retirement is affordable.

The Office for National Statistics figures suggest both men and women, on average, should expect to celebrate their 80th birthday. However, it’s worth noting that many people exceed the average. How would you cope financially if you were to live into your nineties? The average life expectancy can give you an indication of how long you’ll spend in retirement, but it’s wise to ensure your money can stretch further.

Assessing your retirement savings

Retirement expenditure and life expectancy can give you a target to save. But it can still be difficult to understand if you’re on the right track.

You may have multiple pensions and need to consider long-term investment growth if the milestone is still some way off. Of course, it’s not just a pension that is used to fund retirement either. You may have savings, investment or property that you also want to use. Bringing together these different strands can be complicated, and this is an area that financial planning can help with.

We can take your current provisions and show how they’ll grow between now and your planned retirement date. We can also model the impact of different decisions you make, such as increasing pension contributions or retiring two years earlier, as well as changes to the State Pension age.

To assess your retirement savings and how they align with your plans, please contact us.

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