Should I retire early? Pros and cons
The following contribution is from The Times Money Mentor and is written by Katherine Denham, who is an award-winning personal finance journalist. She was assistant editor at Times Money Mentor and is a consumer advocate for The Times, helping to solve readers’ financial dilemmas through her weekly Troubleshooter column. Katherine was named Consumer Pensions Journalist of the Year at the Headlinemoney Awards 2021.
If you’re dreaming of retiring early, there are many things you need to consider first.
While retiring early may be something you aspire to, there are pros and cons to stopping work before you reach state pension age.
This article looks at:
– At what age can you retire early?
– What is the FIRE method?
– Pros and cons of early retirement
– Should you retire early if you’re in debt?
– How does early retirement affect your pension?
At what age can you retire early?
Many people decide to retire once they start receiving their state pension. The current state pension age for both men and women is 66, but this is gradually increasing.
In the UK, the average retirement age for women is 64, while for men it is 65.
However, you can start withdrawing money from your personal or workplace pension pot from the age of 55 (rising to 57 in 2028).
For many people, this could be seen as an opportunity to stop working early.
If you want to retire before that age, you will need to have money in other savings or investment accounts where withdrawals are allowed before age 55.
For example, fans of the Financial Independence, Retire Early (FIRE) movement tend to use stocks and shares ISAs.
What is the FIRE method?
The Financial Independence, Retire Early (FIRE) movement has become increasingly popular. By cutting living costs and investing aggressively, enthusiasts aim to retire as early as their thirties or forties.
In practice, however, FIRE can involve tough decisions. Retiring early can also affect your relationships, health, and motivation.
There’s a simple calculation that many FIRE savers use to figure out how much money they need for retirement and how much to withdraw. Here’s how the FIRE method works.
Is it a good idea to retire early?
It’s important to plan your new lifestyle ahead of time and consider the reality of what will happen when you retire early.
Work provides many of us with structure to our lives, which you might end up losing if you retire early. You might even miss the social aspect of work.
If you leave the workforce in your fifties or earlier, you may have decades without much to do.
Some people retire early only to find that they’re mind-numbingly bored.
To alleviate boredom, you may find that you start overspending and put at risk what you have managed to save for your retirement.
That’s why it’s usually important to plan how you will spend your time and money in early retirement
Would you like to spend your time on low-cost activities or would you like to go on adventures? If the latter, you’ll need more money than if you spend your retirement reading books and watching TV.
To figure out if retiring early is the right decision, be realistic
Try to imagine a normal week without work.
Stick to a budget while you work can help you accumulate the cash you need to retire early, but it can be harder to maintain an economical life once you have more free time.
You may want to ask yourself these questions:
– Will I have a partner to spend early retirement with?
– Do my retirement plans align with my partner’s?
– How do I plan to spend my time?
– How much money am I likely to spend each month?
– Will I have enough income to cover my expenses?
– Am I likely to run out of money in retirement?
– What if I need to earn more money after I retire?
You may decide that it’s better to wait until you’re a little older, when your friends are also ready to retire, so you can socialize with them. Or instead of quitting your job, you may want to reduce your hours until you can retire completely.
Deciding to retire early is not a bad idea
But if you’re not careful, you may end up regretting not working longer. So make sure you think your decision through and plan ahead.
What to consider before retiring early
If you’re determined to retire early, it’s important to make sure you’ll have enough money to cover the lifestyle you want.
It’s not just a question of whether you’re happy to live on the cheap or whether you’d prefer a more comfortable retirement – you also need to consider factors that aren’t under your control.
Here are some things to consider:
Inflation
The Bank of England’s inflation target is 2%, but even when it’s hit, it still means the cost of living rises.
This means that every pound of your pension money will buy you less in the long term, making it harder to have the kind of retirement you might have imagined. We explain how inflation affects your money.
Even with inflation close to 2%, the purchasing power of your cash will reduce over time. That’s why it’s a good idea to make sure a portion of your pension is invested rather than sitting in a savings account paying a low interest rate.
You might want to consider investing in assets like stocks to give your retirement fund the best chance of outlasting the ravages of inflation.
Longer life expectancy
Many of us also constantly underestimate how long we might live and don’t ask ourselves whether we might need money for care costs when we’re older.
But, given that some people live to a ripe old age, would your savings and investments last if you survived into your eighties or nineties?
Unforeseen life events
Life can throw you a curveball that could change everything.
A good example of this was the pandemic that turned our lives upside down. For some people, lockdown encouraged them to retire earlier than expected.
Typically, this was because:
– From money saved during the
– Or because they had re-evaluated their lives because they no longer enjoyed their job while working from home, they found it stressful and mentally draining
But for workers who lost their jobs, this pushed their retirement age forward as they needed to rebuild their income.
We can’t know what will happen in the future
So it’s good to keep an open mind about when you plan to retire
Pros and cons of early retirement
As with many financial decisions, retiring early has pros and cons.
We’ve listed them below.
– Advantages of early retirement
– Say goodbye to deadlines, office politics and difficult bosses
– Time to travel, explore hobbies and take on new projects
– You are young enough to enjoy travel and activities
– Less stress and more time for exercise and sleep
– You have more time with loved ones, plus the chance to meet new people
– Avoid commuting and other work-related costs
– Opportunity to try something else, such as consulting, volunteering, part-time work or study
The disadvantages of early retirement
You have to make sacrifices to save enough to retire, either by reducing living costs or working harder for extra income
If you retire before 55, you may have to fill an income gap before you are allowed to access your pension
You may have lost the sense of status associated with your previous job
There will be less time for some of your retirement savings to benefit from investment growth
You could become bored and less active
The Lack of structure, stimulation and social interactions can be detrimental to health
Having lots of free time means your expenses could skyrocket
If you run out of money, you may find that It may be difficult to return to work when you are older and have a job gap
You may underestimate how long you will live and the cost of care in old age
Your savings need to last longer and will be at the mercy of inflation, unexpected expenses and stock market storms.
Remember that without income from a job to provide a buffer against these eventualities, your savings will be all you have.
Should I Retire Early If I Have Debt?
Retiring early if you have debt is like boxing with one hand tied behind your back: it is possible, but why make life more complicated?
Debt payments increase your living costs, meaning you will have to come up with a larger sum to cover early retirement. Some people retire early and can still budget for low-interest mortgage payments. However, if you have high-interest debts, such as credit card or overdraft debts, it makes sense to pay off those balances before they further drain your resources.
This way, you not only reduce your living costs in the future, but you also free up more cash to save for early retirement as soon as those debts are paid off.
Of course, this assumes that early retirement is an option, rather than being forced into it by health issues, caregiving responsibilities, or job loss.
Early Retirement: What Are the Options?
Early retirement doesn’t have to be an all-or-nothing choice between working and lying on a couch, or a full-time salary versus living entirely off your savings.
Instead, you need to weigh up the different early retirement options.
You can always keep working, but make less by moving to part-time work or becoming self-employed so you can choose when you work.
This will allow you to maintain some income and avoid boredom, while leaving you free time for travel, your hobbies and your relationships.
You can also generate “passive income” such as renting out rooms in your house or investing in a rental property. We outline 13 ways to increase your income.
While you may not want to keep working for a long time, the extra money could give you more time before you start to dip into your retirement savings.
Reducing your living costs and expanding your savings will also improve your finances when you stop working
Saving for retirement for as long as possible gives your money more time to grow, helping you enjoy your later years.
How does early retirement affect your pension?
If you stop working earlier, you will have less time to pay into a pension.
How much of your pension do you lose if you retire early? Well, you’ll have:
– Fewer years of making pension contributions
– Fewer contributions from your employer
– And less free money in government tax relief
Unless you’ve been able to contribute substantial sums to your pension early in your career, retiring early means you’re likely to end up with a reduced pension pot.
If you retire early, you may not get a full state pension either.
Pensioners usually need to build up national insurance contributions (NICs) or claim NIC credits if they had time off work to raise children. You need at least ten years to get a state pension and 35 years to get the full amount.
If you retire before making all the required NICs, you’ll need to make voluntary contributions to get the full state pension amount or accept lower payments.
If you retire early, you may also need to budget for the gap before you can get your hands on your pension money. Withdrawals from workplace and private pensions can usually only be made from the age of 55, and will be raised to 57 from 2028.
The current state pension age is higher at 66, although this age is gradually increasing. You can check your own expected state pension age.
When wondering whether you should withdraw your pension earlier, remember that the earlier you access your pension cash, the longer it will take to stretch and the more likely it is to be used up.
If you are lucky enough to be in a workplace scheme that pays a guaranteed sum, known as a defined benefit or final salary pension, your options for withdrawing money are more limited. Many defined benefit schemes only allow withdrawals from the age of 60.
If you can start receiving income earlier, from the age of 55, you are likely to get a lower income.
The pros and cons of working in retirement
The following contribution is from the TPT portal which defines itself: “our mission is to make pension plans work better for everyone. Thanks to our track record of over 75 years and our experience in pensions, we know exactly what it takes to make that mission a reality.”
The word “retirement” may conjure up images of leaving the world of work to devote oneself to gardening full-time, but more and more people are continuing to work beyond retirement age.
There are a number of reasons why people continue to work beyond retirement age. But what are the pros and cons of working in retirement and what could they mean for you?
There are a number of reasons why people choose to do so, both personal and financial, but what are the pros and cons of working in retirement and what could they mean for you?
Advantages
Keep doing what you enjoy
The most obvious reason to keep working beyond retirement age is that you enjoy your job and want to keep doing it.
There is nothing that forces you to hand in your P45 when you reach retirement age and, although many people choose this time to stop working, if you enjoy what you do, there is no reason to stop.
The extra income you receive from your pension may allow you to reduce your hours or work more flexibly if you wish, but you are under no obligation to do so.
It may be that you have a specific project or contract that you would like to carry out before you step back, or it may be that you simply have no immediate intention of retiring and would like to continue working in the near future. Either way, you are free to continue working if you wish.
Boost your income
Not everyone can afford to stop working immediately when they reach retirement age and a common reason to keep working in retirement is to boost your income beyond what your pension alone would provide.
This may involve working full-time, or perhaps taking on a part-time job to supplement your finances while giving you more time to do what you want.
Enjoy a bigger pension in the future
Alternatively, if you continue working and postpone the time you start drawing your pension, you can continue to invest in it to be better off financially in the future. This way, when you decide to stop working and draw your pension, the pension income you have to live on could be higher than it would have been if you had started drawing it straight away.
No need to pay National Security
An important, and often overlooked, aspect to bear in mind is that you stop paying National Security when you reach retirement age. This means that if you continue working, you will take home a little more each month, which you can spend or save as you wish.
Stay active and social
Another aspect to consider is the sense of purpose and satisfaction, not to mention the social benefits, that work can bring. R
