If you dream of early retirement there are lots of things 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:
- What age can you take early retirement?
- What is the FIRE method?
- Pros and cons of early retirement
- Should you retire early if you’re in debt?
- How does retiring early affect your pension?
Read more: ‘I retired at 52 with a tax-free income of £18,500 a year’
What age can you take early retirement?
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 increasing gradually.
In the UK the average retirement age for women is 64 while for men it is 65.
However, you can start taking money from your workplace or personal pension pot from the age of 55. To many people this might be considered an opportunity to stop work early.
If you want to retire earlier than that, you would need to have money in other savings or investment accounts where withdrawals are allowed before 55.
For example, fans of the Financial Independence Retire Early (FIRE) movement tend to use stocks and shares ISAs.
Read more: What is the UK state pension age and is it going up?
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 may involve tough choices. Early retirement can affect your relationships, health and motivation too.
There is a simple calculation that many FIRE savers use to work out how much money they need for retirement and how much to withdraw. We explain how the FIRE method works.
Read more: ‘I’m a Fire saver and plan to retire at 38’
Is retiring early a good idea?
It is important to plan your new lifestyle in advance 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 missing if you retire early. You might even miss the social aspect of work.
If you leave the workforce in your fifties or earlier then you might have decades without very much to do. Some people retire early only to find that they’re overwhelmingly bored.
To alleviate the boredom, you may find that you start overspending and putting what you have managed to save for your retirement at risk.
That’s why it’s usually important to plan how you will spend your time and money in early retirement.
Will you be happy spending your time on low-cost activities or will you want to go on an adventure? If it’s the latter then you will need more money than if you’re spending your retirement reading books and watching TV.
To understand whether it’s the right decision to retire early, you have to be realistic. Try to imagine a normal week without a job.
Sticking to a budget while you’re working can help you build the cash you need to retire early, but it may be more difficult to stick to low-cost living once you have more free time to fill.
You might want to ask yourself these questions:
- Will I have a companion to spend early retirement with?
- Do my retirement plans align with my partner?
- How do I plan on spending my time?
- How much money am I likely to spend each month?
- Will I have enough income to cover my expenditure?
- Is it likely that I could run out of money in retirement?
- What if I need to earn more money after I’ve retired?
You might decide that it’s best to wait until you’re a bit older when your friends are ready to retire too so you can socialise with them. Or rather than quitting your job, you might want to reduce your hours until you can fully retire.
Deciding to retire early isn’t a bad idea. But if you’re not careful, you may end up regretting that you didn’t work longer. So make sure to think through your decision carefully – and plan ahead.
Read more: What does a pension pot worth £37,000, £150,000 and £500,000 give you?
What to consider before retiring early
If you are set on taking early retirement, it is important to make sure that you will have enough money to cover your desired lifestyle.
This isn’t just about whether you are happy scraping by on a shoestring or would prefer a more comfortable retirement; you also need to take into account factors that aren’t within your control.
Here are some things to think about:
Inflation
Inflation is at a 40-year high, meaning the cost of living is going up.
This means every pound of your pension money will buy you less, making it harder to have the kind of retirement you might have imagined. We explain how inflation affects your money.
Even if prices are reined in to meet the Bank of England target of 2%, the purchasing power of your cash will shrink over time. That’s why it’s a good idea to make sure some of your pension is invested rather than sitting in a savings account paying a low rate of interest.
You might want to consider investing in assets such as shares to give your retirement nest egg the best chance of beating the ravages of inflation.
Read more: 10 inflation-busting tips.
Increased lifespans
Many of us also consistently underestimate how long we might live and and don’t ask ourselves whether money might be needed for care costs when we are older.
But with some people living into a ripe old age, would your savings and investments last if you survived into your eighties or nineties?
Unforeseen life events
Life might throw a curveball at you that could change everything.
A good example of this was the pandemic which turned all of our lives upside down. For some people, lockdown encouraged them to retire earlier than expected.
This was usually either because
- Of the money saved in lockdown
- Or because they had reassessed their lives as they no longer enjoyed their job while working from home, finding it stressful and mentally exhausting
But for workers who lost their jobs it pushed their retirement age further into the future as they needed to rebuild their earnings.
We can’t know what’s going to happen in the future, so it’s good to keep an open mind about when you plan to retire.
Read more: How to retire early: the ISA trick
Pros and cons of early retirement
As with many financial decisions, there are upsides and downsides to retiring early.
We have 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 your loved ones, plus a chance to meet new people
- Escape commuting and other work-related costs
- Chance to try something else, such as consulting, volunteering, part-time work or studying
The disadvantages of early retirement
- You have to make sacrifices to save enough to retire, whether that’s cutting living costs or working harder for extra income
- If you’re retiring before 55 you might need to fund an income gap before you are allowed to access your pension
- You may have a lost sense of status attached to 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
- Lack of structure, stimulation and social interactions can damage health
- Lots of free time means your expenses could shoot up
- If you run out of money it might be difficult to return to work when you’re older and have an employment gap
- You may underestimate how long you will live, and the cost of care in later life
- Your savings need to stretch for longer and will be at the mercy of inflation, unexpected expenses and stock market storms. Remember that without the income from a job to provide a buffer against these eventualities, your savings will be all you have.
Read more: How much pension should I have in my 20s, 30s, 40s, 50s and 60s?
Should I take early retirement if I am in debt?
Retiring early if you have debts is like boxing with one hand tied behind your back – possible, but why make your life more difficult?
Debt repayments increase your living costs, which means you will have to raise a larger sum to cover early retirement. Some people do retire early while still being able to budget for low-interest mortgage repayments.
However, if you have debts at expensive interest rates, such as on credit cards or overdrafts, it makes sense to pay off those balances before they drain your resources even further.
This way, you not only cut your living costs in future, but also free up more cash for saving towards early retirement as soon as those debts are cleared.
Of course, this assumes early retirement is a choice, rather than having it forced on you by ill health, caring responsibilities or a job loss.
Read more: How to manage your debts.
Early retirement: what are the options?
Early retirement doesn’t have to be an all-or-nothing choice between working and slumping on a sofa, or a full-time salary versus living entirely on your savings.
Instead, you should weigh up the different early retirement options.
You could always continue working, but do less by moving to a part-time role or going freelance so you can choose when to work.
This would maintain some income and stave off boredom, while still freeing up extra time for travel, hobbies and relationships.
You could also generate “passive income” such as renting out rooms in your home or invest in a buy-to-let property.We outline 13 ways to boost your income.
While you might not want to continue working for long, the extra money could give you more time before you start raiding your retirement savings.
Shrinking your living costs and expanding your savings will also improve your finances whenever you quit work.
Saving for retirement for as long as possible gives your money more time to grow, which will help you enjoy your later years.
Read more: Best SIPP providers
How does retiring early affect your pension?
If you stop work earlier, you have less time to pay into a pension.
How much do you lose from your pension if you retire early? Well, you will have:
- Fewer years of making pension contributions
- Fewer contributions from your employer
- And less free money in tax relief from the government
Unless you have been able to contribute substantial sums into your pension early on in your career, taking early retirement means you are likely to end up with a reduced pension pot.
If you retire early, you may not receive a full state pension either.
Pensioners usually need to build up national insurance contributions (NICs) – or claim NIC credits if they had time out of work to bring up children. You need at least ten years to get any state pension and 35 years to receive the full whack.
If you retire before making all the NICs required, you will either need to make voluntary contributions to get the full amount of state pension, or accept lower payments.
When retiring early, you may also need to budget for the gap before you can get your hands on your pension money.
You can usually only make withdrawals from workplace and private pensions from the age of 55, rising to 57 from 2028.
The current state pension age is higher, at 66, though this is rising gradually. You can check your own predicted state pension age.
When asking whether you should take your pension early, remember that the sooner you tap into your pension cash, the longer it will need to stretch – and the more likely it is to run out.
If you are lucky enough to be in a workplace scheme that pays out a guaranteed sum – known as a defined-benefit or final-salary pension – your options for taking money out are more limited. Many defined benefit schemes only allow withdrawals from the age of 60.
If you can start taking an income earlier, from 55, you are likely to get a lower income in exchange.
Read more: Best ready-made personal pensions
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
