Retire early

In your mid-40s, with £250,000 in your pension pot? Wondering if you really have to wait until 67 to retire? Well, perhaps not – with a little bit of planning and investing, you could retire early.

Determining your retirement expenses and setting realistic goals

The Pension and Lifetime Savings Association and the University of Loughborough have researched the amount required per annum to provide a ‘comfortable retirement.’ They concluded that, for an individual, it was around £37,300 a year. This sum certainly isn’t a lavish figure: it’s enough to provide £144 a week on food, enjoy three weeks of holiday in Europe, and spend around £1,500 a year on clothes, shoes, and gifts.[1] So, perhaps ‘mildly comfortable’ might be a more accurate description.

There are some flaws in Bengen’s approach though and it really should just be taken as a rough rule of thumb rather than Gospel.[2] To more accurately determine the required investment amount for your retirement, the best approach is to work with an adviser to create a customised cash flow plan. The plan can account for various factors that will more closely reflect real life such as variable withdrawals, capital expenditures, and the flexibility to accommodate different market returns. You can also stress test some of the plan’s assumptions, which helps ensure a more comprehensive and reliable assessment of what you will personally need for retirement. Of course, even this is based on assumptions so updating the cashflow on an annual basis, and as life changes, is equally as important as creating your initial plan.[3]

An example cashflow plan can be found below:

The importance of the State Pension in early retirement

Fortunately, if you’ve made around 35 years of National Insurance contributions, you should be eligible for a full state pension of just over £10,500. [4] For the first seven years of retirement, you’ll have to draw entirely from your own assets, but your state pension should be a real game-changer. Due to the additional £10,500 of income (increasing with inflation), your pot should now last well into your late 90s, and you can close in on that comfortable retirement figure of £37,000 per annum.

Optimising investments and minimising tax in retirement

Investing your money across different across different tax wrappers, to reduce the tax you’ll pay in retirement, is paramount as the £37,000 is very much a net figure. The investment strategy you employ will also be of equal importance to ensure your pot is growing at a sufficient rate to reach your early retirement objective. Two areas that are likely most effectively overseen by professionals.

So, if you’re in your 40s and have £250,000 in your pension pot and want to retire early, get planning, get investing, and maybe take some advice!