BasicsSavings&Banking

How To Retire Early In The UK: 9 Essential Tips

When Do You Want To Retire?

In the modern industrialised world, retirement is normally seen as the ideal end goal a working person should strive for.

After 40+ years of working, people want to spend their twilight years enjoying the fruits of their labour.

In the UK, many retirees receive funding from a state pension fund. Over your working life, contributions from your paycheck are put into this fund and doled out to retirees based on their total contributions.

However, more young people are realizing that the traditional trajectory of retirement is not for them.

Why spend your entire life working only to have your enjoyment at an age where you may not be able to fully appreciate your freedom and financial independence?

This is just one reason why more and more young people are taking on aggressive strategies to set themselves up for early retirement.

Interesting Stats About Retirement in the UK

As of 2018, there are currently 11.8 million people of retirement age in the UK, a number that is expected to grow to over 20 million by 2030.

By 2040, it is estimated that 1 in 4 people in the UK will be age 65 or older and it is currently expected that 1 in 5 people alive in the UK today will reach their 100th birthday. This growth is largely driven by increasing life expectancy.

As of 2011, it was estimated that 1 in 6 people in the UK were pensioners. Despite boasting one of the most comprehensive retirement schemes in the world, many UK citizens are worried that their chances of retiring are slowly growing smaller. An estimated 1 in 3 adults have no privately funded pension and will rely on state pension later in life.

As it stands, fewer and fewer people are opting to retire at 65. A new trend of young twenty-to-thirty something-year-olds are jettisoning the traditional concept of gaining a pension after spending 40 or so years tied to the corporate machine. Instead, through a pattern of smart financial decisions and extreme savings, more and more people are seeking out an early retirement at the ages of 30-40.

Tips to Secure an Early Retirement in the UK

1. Save, Save, Save

First things first, retiring early costs more money than normal retirement as you have to factor in costs from the extra 15-20 years you will not be working. In general, the earlier you start saving, the better off you will be in the long run.

Saving for retiring at a young age is compounded by a few challenges.

Statistics will show that most people end up making the most money when they are in their 40s, so then why would one wish to retire during the stage where they make the most money across their lifetime?

If you want to retire early, then you have to save a larger chunk of your income to make up for the opportunity cost of the increased wages you receive during your 40s.

Additionally, if your employer provides a private personal pension, then retiring earlier means you give up more of that fund.

Because of these saving hurdles, young people who want to retire earlier should probably try to save about 50% of their annual income. For example, if your income is £50,000 a year, then about £25,000 of that should be going solely to retirement. This sounds like a very high number, and it is, but it is doable, particularly if you cultivate good spending habits, which leads us to…

Read More: Here’s How A Weak GBP Could Affect Your Investments (Post-Brexit)

2. Watch Your Spending Habits

We get it, most people enjoy stopping by the local cafe for a cup of coffee in the morning. However, consider this: if the average cup of coffee costs £1.30, then at 5 cups a week that comes out to almost £400 a year. You could save virtually all of that by making your own coffee at home, or by taking advantage of your office’s free coffee facilities.

The lesson does not only hold true for coffee. Daily meal expenses are another thing that can add up over the year without you even noticing. If you want to retire early, you’ll have to watch your spending habits and cut down on any unnecessary expenditures.

Ask yourself, do you really need the £5 sandwich from the shop downstairs or could you get by on making your own lunches at home?

If necessary, download a financial tracking app that can keep an organized list of your expenses. Using one of these can help you better manage spending so you have the maximum amount to put away towards retirement.

To be clear, this does not mean you have to forgo all financial pleasures. It just means being smart and rational about your financial decisions.

3. Avoid lifestyle creep

As people find themselves making more money, their spending normally increases to match their available income. Someone who makes £70,000 spends about £70,000, and when they get a £5,000 raise, they find £5,000 worth of things to spend it on. This kind of “lifestyle creep” is perfectly understandable; after all, if you have the money why not spend it on nicer things?

However, lifestyle creep can be the bane to those who want to retire earlier. If you want to retire earlier, then you have to keep your lifestyle modest, even if you are making decent amounts of money.

The key is to dissociate spending from earning. This means passing on that fancy new car, or 70-inch 4k TV. By keeping expenses low, you have more of your income to put towards your retirement fund. This point is especially poignant because once your lifestyle has inflated, it is hard to deflate it again. People like the taste of nice things so the best idea for retiring early is to not tempt yourself with immediate gratification.

Avoiding lifestyle creep may also require relocation to a less expensive are, or picking up some roommates to help foot the bills. While it may not be desirable now, compromising on your lifestyle is one of the best ways to save up the maximum amount of money for retirement.

4. Invest early and often

Investments into businesses and property are a very smart way to generate some compounding passive income. Investing in low-risk funds can provide a nice safety net you can tap into when it is time to step out of the workforce. Early retirees have an increased need for the compound interest generated by investments. Without some investment fund, you run the risk of running out of money during retirement or not reach your goals.

The key is to start investing as early as possible. The earlier you invest, the more time you have for compound interest to grow.

Early retirees also have to take a different strategy towards investing.

Most long-term investment strategies involve making low-risk low-reward investments. These tend to be the most stable, but they take a good deal longer to gain any substantial interest.

Early retirees have to take a more aggressive strategy towards investing. This means putting more money into higher-risk higher-reward investments. This necessity points out a characteristic of saving for early retirement; it is not for the risk-averse.

You have to be willing to take a larger risk to make a larger payoff.

That is why it is recommended for early retirees to keep a good chunk of their investment funds in cash so you do not have to sell in a downturned market.

You also have to keep an eye out for investment expenditures.

Most firms operate with a 1-2% expense ratio. Typically, the less actively managed an account is the lower its expense ratio is. In general, the maximum expense ratio you should deal with is 4%.

For passively managed funds, looks for an expense ratio of around 01%. There is a recent trend of robo-investing in which sophisticated computer programs handle your funds for you, automatically adjusting things to your preset parameters.

Read More: Putting Robo Advisers To The Test (All About Robo Advising)

Robo-investing tends to be much cheaper and has lower expense ratios than traditional financial advisers, so it may be a good idea to get a robo-advising managed fund to handle basic investment transactions.

If you can swing it, investing in property is also a good idea.

Owning a house means you can rent it out to cover your mortgage and reap any extra income.

Read More: 5 Passive Income Strategies That Actually Work

5. Set a retirement budget

One thing that messes with young retirees is that they frequently underestimate their amount of yearly expenditures they will require while retired. That is why it is a good idea to write up a mock budget for the possible expenditures you will face as a retiree. This includes expenses like:

  • Rent
  • Utilities
  • Food
  • Clothing
  • Insurance (car, home, etc)
  • Car expenses
  • Entertainment
  • Hobbies
  • Savings

Basically, take a monthly expenditure sheet, multiply it by 12, and you have the magic number that sets your annual retirement needs. Luckily, if you are following the other steps listed, then living a modest lifestyle will cut down the total annual amount you will require for retirement.

It is also important to consider inflation when making your tentative retirement budget.

As Warren Buffett has stated frequently, inflation is the main killer of wealth. You need to tailor your retirement budget to take into consideration possible inflation over the coming years. In general, a good idea is to take your annual retirement budget and multiply it by 20%-30%. That should give you a good idea of how much more cost inflation will accrue over time.

6. Minimise debt wherever possible

Financial debt is, unfortunately, an unavoidable part of modern life. However, there are easy steps you can take to minimise the amount of debt you acquire and maintain over your life. Outstanding debts can throw a wrench in the gears of potential early retirees as more of their income has to go towards paying off those debts.

One of the best ways to lessen your debts is to not have any at all.

Whenever possible, you should avoid putting yourself into debt for something, or at the very least, try to pay off that debt as quickly as possible.

Eliminating debt early means that you (1) have more money to put towards retirement and (2) avoid future interest on that debt.

7. Consider picking up a side hustle

The good thing about being young is that you typically have enough energy to work long hours and make as much as possible.

Many em[ployers set weekly limits on how much their employees can work, so if you really want to maximize your savings potential, you may consider picking up a smaller side gig to generate extra income.

In today’s gig economy, finding a side hustle is easy and can help you make an extra £200-£300 a week. Over a year, that comes out to almost £3,000 more you can put towards savings.

Working 60-70 hour weeks sounds difficult, but it is worth the extra 15-20 years of work-free life you can gain from early retirement.

8. Set realistic goals and expectations for retirement

Setting yourself up for retirement can be hard if you do not have clear saving goals or a good picture of how you would like your retirement life to be.

You need to set clear expectations on what kind of life you want to live when you are retired. Most people do not make enough during their lives to have an exorbitant retirement full of the finest things money can buy.

Most people instead have to go with a more realistic pragmatic plan.

You need to consider things like where to live, whether you want to make some side money while retired, and any financial issues related to having a spouse or children.  

9. Have a contingency plan

Saving for early retirement can be a rocky road and you can run into pitfalls you may not expect.

If your investments falter off or you have unexpected medical or home expenditures, the loss of savings can set back your retirement plans.

That is why it is imperative to keep a contingency plan in case some of your retirement plans fall through.

For example, if you are a trade person, consider keeping your licenses up to date, or if you are in a technical position that requires specialized knowledge, keep your knowledge base up to date.

If something goes wrong with your retirement plans, you don’t want to have zero options to help you out.

Financial planning for retirement in the UK: A checklist

Here is a truncated checklist of things you should take into account while planning for retirement:

  • Save at least 50% of your annual income
  • Cut down on unnecessary spending habits
  • Avoid lifestyle creep and inflating lifestyle expenses
  • Invest early, often, and aggressively
  • Set a retirement budget and keep it updated as you continue to save
  • Minimise and eliminate any outstanding debt
  • Consider getting a second part-time job for extra income
  • Have a contingency plan in case you planning goes awry

These tips are not foolproof and it does require a bit of luck to be financially secure enough to retire early. But, following these general guidelines will, on average, increase your chances of successfully retiring at an earlier age.

FAQ

How much do I need to retire in the UK?

There is no absolute number that answers this question.

The amount you need to retire in the UK depends largely on your annual retirement expenses and how much money you can save.

According to a survey from Which.co.uk, the average retiree in 2018 spent about £2,200 a month or about £26,000 a year.

This figure covers all basic costs like rent, utilities, food, etc and includes a bit for luxuries like vacations, hobbies and eating out.

A good number to shoot for is an annual retirement fund of about £35,000-£40,000. This amount supplemented by investments and side gigs should be plenty for your retiree years.

Retirement planning software for individuals: What is out there?

If math is not your strong suit then getting some retirement planning software is a great way to cook up a suitable budget and keep track of possible expenses.

There are a lot of programs tailored explicitly to help people prepare for retirement.

If you need help making a feasible budget, consider picking up some software to make the process easier.

How do I plan for retirement with inflation in mind?

Inflation is the real wealth killer.

Inflation over the years can decrease the value of static investments, which is why if you are investing you need to make sure to invest in things that show a good rate of growth.

Investing in things like dividends and real estate, although they are generally higher-risk investments, tend to keep up with the pace of inflation.

Inflation comes in degrees of severity and can be hard to predict, but making smart investment strategies can lessen the impact inflation may have on your retirement funds.

CharlieWP
About author

Fully qualified CISI Investment adviser for 6 years. Managing high-net worth private client portfolios as well as whilst providing Equity insight for numerous publications. Brains behind Spotlight.
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