Could you really retire 10 years early?
For most of us, the whole point of saving and investing is to bring closer the day when we can quit work and swap the office for the beach, the slopes or wherever else we‘d rather be.
But that task is not getting any easier. It’s good news that we’re all living longer but it means we also have longer retirements to plan for. The decline of generous ‘final salary’ style pensions also means saving enough to afford early retirement is a challenge.
However, there’s plenty you can do to improve your retirement prospects.
The most powerful tool available to any investor is completely free - time. Compounded returns, getting interest on your interest, is what can turn modest savings into something worthwhile, but the process needs time.
Even if you worry the money you’re able to save is too small to make a difference, remember that saving and investing is a habit - once you start, you’ll be in a position to do more.
Get the help of the tax man…
If you’re saving for retirement a pension is likely to be the best place to do it because your contributions benefit from tax relief. A boost equivalent to any basic-rate tax paid is automatic, while the extra available to higher and additional rate payers is either added automatically or else claimed through a self-assessment tax return.
A good way to look at it is that it costs a basic-rate payer £80 to make a £100 pension contribution, while a higher-rate taxpayer pays just £60 for the same effect and an additional-rate taxpayer pays just £55.
Contributions are allowed to build tax-free and then 25% of the pot can be taken with no tax due and income tax payable on the rest. The biggest benefit comes when your tax rate in retirement is lower than in your working life.
… and your boss
People who work for a company can usually benefit from an employer paying into a pension for them. Some employer contributions may be automatic but beyond that you may be required to make contributions which are then matched by your employer. Ask the administrator of your scheme what it would take to maximise the help on offer.
Keep an eye on cost
Just like your investment gains, the effect of fees is compounded over time and even a difference of less than 1% a year in your overall costs add up to a big difference over years and decades.
Understand what percentage amount you are paying in fees and drive this down where you can.
Managing your retirement saving - including the cost - can be easier when you bring all your pensions together in one place. Having pension savings in one place means you’ll be better placed to increase contributions or change investments in order to keep your plans on track.
Set a target
If you really are trying to save enough so that you can retire a decade early, your retirement fund target has to be very ambitious. But even those with more modest aims should make targets. Fidelity’s simple MyPlan tool enables you to set a target and then shows you whether you’re on track to achieve it, enabling you to change details such as the age you want to retire, and monthly savings contributions. It will also factor in details like the state pension.
If you have to suddenly start diverting a large share of your salary into a pension, it will be painful. If you start with a more manageable proportion, and increase this over time, it’s a lot easier to bear.
Start with an amount you can handle and aim to steadily increase it. Even quite small increases add up over time. For example, a 30-year-old earning £30,000 could contribute an extra 1% of their salary and then retire at age 68 with an extra £55,3451 in their retirement fund. Used wisely, that money could fund a year or more of retirement on its own.
Will it be enough to retire 10 years early?
That won’t be easy, but it’s not a bad goal to have in mind because, by attempting to meet it, you are likely to dramatically improve your retirement prospects. Whether that enables you to retire early - by 10 years or a more modest period - or whether it simply translates into a richer retirement, it will be worth the effort.
1 Source: Fidelity International as at March 2019. The calculation assumes a nominal investment growth rate of 5% per year, and salary growth of 3.75% each year (2% inflation plus 1.75% of real salary growth) and therefore that your additional contribution will also increase at this rate. Please note your own retirement savings may earn more or less than this example and income taxes will be due when you withdraw from your account.
See below for important information.
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