PensionsRetirement

Can You Afford To Retire Early?

Mature Couple At Home Looking Up Information Online Using Laptop

The UK’s state pension age may be rising, but for now, at least there is little sign that people are prepared to accept a longer working life.

Indeed, official government figures have shown that people are retiring younger on average than they were in the 1950s. For many, early retirement is the dream that keeps them getting up for work every morning.

Yes, there is a sense of achievement in climbing that career ladder and building a comfortable lifestyle for you and your family. But what makes it all worthwhile is the idea that one day, you will be able to leave the workaday world behind and dedicate your time to enjoying the fruits of your labour.

The million-dollar question, of course, is when will you realistically be able to afford to retire?

This is when you need to sit down and do some serious calculations – preferably with the help of a financial advisor to help guide you through the many, many variables and what-ifs. Let’s start with some of the more straightforward factors to consider.

Budget forecasting

Calculator, Women Budgeting

First of all, you need to have an idea of how long your retirement might last. The average life expectancy in the UK is now 81 years. So if you are aiming to give up work by 55, say, that means you would have to plan on spending upwards of 25 years in retirement. For most people, that’s two-thirds the length of their entire working life, but without an income.

The next step is to come up with a workable budget for what your living costs might be in retirement. The easiest way to do this is to estimate an annual figure. A lot will depend on the lifestyle you see yourself having in retirement – do you plan on travelling the world and indulging your tastes for the finer things in life? Or will you be content to tighten the purse strings and live more frugally as a compromise for no longer having to go to work?

A huge budgeting consideration will be whether you can pay off your mortgage before you plan to retire, thus considerably reducing your outgoings. Alternatively, you might consider downsizing your home, both to free up capital to live off and to lower your mortgage obligations.

Once you have a ballpark figure in mind for your annual living costs, then you can work out a total budget for your retirement – simply by multiplying the 20, 25 or 30 years you might expect to live as a pensioner. It has been suggested that roughly a quarter of a million pounds should be seen as the baseline asset value for people to have a comfortable retirement, although if you don’t own property this could double.

Assets and contingencies

Women with Piggy bank

Then it is time to compare your total budget to the assets you expect to have available when you are aiming to retire. This will include any pension you have, savings, investments and, of course, property if you own any. If your forecast of available assets doesn’t match your total budget, then this is where you will need to think carefully about revising your plans.

Can you adjust your budget downwards to fit? Do you have any options to increase your assets, such as downsizing your home or stepping up investments and pension savings? Or will you just have to bite the bullet and admit you might not be able to retire as soon as you had hoped?

Even if you do believe you will have the resources to fund early retirement, it is important to bear in mind that you can never predict the future with absolute certainty. You just don’t know how your financial needs might change over the course of 20, 25 years.

This is especially relevant with regards to your health in later life and the possibility of requiring long-term care. Discussing contingencies for unknowns such as these should always form part of the conversation you have with your financial adviser about your retirement plans.

Ready to discuss your financial plans for later life in more detail? Why not get in touch with Fiducia Wealth to find out more.

Poppy
About author

Poppy loves personal finance almost as much as she loves her two cats, Tif and Taz.
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