20th February 2019 at 1:26pm
By Elle Tucker
There’s more than one way to retire early. Elle Tucker looks beyond the fashion for frugal living to share the tips and tools that could help you to achieve early retirement.
Have you thought about retiring early – and what you would do to make that happen? There’s a global movement of people that are trying to do just that, called FIRE, which stands for financial independence, retire early.
The idea is to live as frugally as you can, saving half your income – and then retire in your 30s or 40s.
It’s an admirable goal but the frugal lifestyle won’t be for everyone – especially when you’re young. In an interview with The Guardian last year*, Elizabeth Willard Thames talked about how she started mending clothes and ditching the take-aways in favour of a strict food budget in order to retire at 32.
But is this a lifestyle that’s practical if you don’t live in a homestead in Vermont? What if you could take control of your finances and enjoy an early retirement without the need for such sacrifices?
Bridging the gap
According to our research, around two thirds of people want to retire early before their state pension age. The good news is that having financial independence and retiring early doesn’t have to mean darning socks and cooking lentils when all your friends are out at the cinema or eating in the coolest new places in town.
“Early retirement is a possibility for some people provided they set it as a desirable goal in numbers and move beyond being emotional about it,” explains Ken Okoroafor, personal finance expert and founder of thehumblepenny.com.
“The key question to ask is, how much income do I want in retirement and when do I want it to start? This then needs to be compared to one’s current financial position in order to identify what gap in savings needs to be filled.”
Goals should be fun
If you find yourself a bit behind on your retirement plans you may need to consider how to increase your saving and where that money could be invested to give the best chance of growth, says Ken.
Remember that investments can go down as well as up and may be worth less than you paid in.
“A thorough review of one’s lifestyle and a bias for the essentials are necessary to stay on course for early retirement. This frees up more cash to be saved and invested. Making the most of matched employer pension contributions is also a good way to boost that pot. A focus on personal development is also critical for increasing one’s income and future earning potential.
“Goals should be fun”, concludes Ken. “The destination is not as important as the journey itself. So whilst aiming for early retirement, remember to live, enjoy and appreciate life daily.”
Here are some tips for helping you retire earlier – while enjoying a ‘normal life’.
Get into a budget habit
How much you earn doesn’t matter if you continue to spend all or most of what you make without putting any money away for your future.
If you are aiming to retire early, you need to know what you’re spending – and set yourself limits. That’s because without a budget, it’s easy to overspend without even realising it. For some tips on tidying up your bank account, read our seven ideas for a financial fresh start in 2019.
Make the most of tax-free saving
If early retirement is your goal, making the most of any tax-free saving opportunities can make a real difference.
Putting money into a pension is one of the most tax-efficient ways of saving for your long-term future – thanks to a combination of tax relief on contributions and the fact that most modern pensions allow you to take a quarter of your pot tax-free.
At the moment you can normally access what you have saved in your pension from age 55, though this might change in future.
Keep track of your savings and investments
New research from the Pensions and Lifetime Savings Association (PLSA)** revealed that 80% of working age people aren’t confident they’re saving enough for retirement.
Whether or not you’re planning to retire early, one way to get confident about your future is by regularly reviewing where your pension savings are and what your pension pot might have in it when you get to retirement age.
This way you can work out how early you might be able to retire and how much more you might need to save. See how much you could have in the future by trying our pension calculator.
Your pension is invested and its value can go down as well as up and it could be worth less than was paid in. So, in the lead-up to retirement, it’s important to make sure how it’s invested is aligned to how you plan on taking that money. Read our article How to choose your investment options for retirement for more.
Get your money working harder
The number of people putting money into a workplace pension in the UK is growing, with over 10 million now saving thanks to auto-enrolment. This means they save and their employer contributes money to their future too.
If you plan to retire early, and your employer offers a workplace pension consider taking full advantage as this is money that you’re entitled to. It could make a real difference to when you stop working or choose to work less.
The future you want
Retiring earlier than you thought you could doesn’t have to mean making sacrifices. With your finances in better shape, you could get the opportunity to help build your savings.
This means you’re more likely to be able to live the life you’ve been dreaming of as you grow older. And not a darning needle or a lentil in sight…
Elle Tucker is a freelance journalist writing on behalf of Standard Life.
This article should not be regarded as financial advice. Tax rules and legislation can change and will depend on your own circumstances.
* Extreme frugality allowed me to retire at 32 – and regain control of my life, The Guardian, March 2018
**Pension Confusion leaves millions unsure if they’re saving enough, PLSA, July 2018