Seven top tips if you want to retire early
Picture this: a life of lie-ins and long holidays – all when you’re still spritely enough to enjoy the free time.
For many of us, the prospect of retiring early will seem like a pipe dream. It’s true that there is no magic formula – whether you can afford early retirement is usually a question of how long you’ve been saving for, and how much you manage to squirrel away each month.
But there are some habits you can adopt to increase your chances – and the earlier you take action, the better off you’ll be.
1. Avoid the default option
When it comes to workplace pensions, people tend to opt for the “default” fund, which is usually invested in a mixed portfolio of shares and bonds.
“However, when you’re investing for the long term, you can withstand more risk, so an equity portfolio makes much more sense,” says Sarah Coles from Hargreaves Lansdown.
She points to figures which suggest that, over a 30-year period, an equity portfolio performed better than the default option 85 per cent of the time – and on average it provided a pension pot that was 25 per cent higher.
“Making an active choice about where your pension fund is invested can therefore transform your pension pot.”
2. Timing is everything
Unless you’re lucky enough to win the lottery, making enough money to last you through retirement will take time and a huge amount of patience.
And if you’re invested for several decades, that inevitably means you’ll have to endure some downturns – which is when savers tend to panic and make mistakes.
“When there is a decline in markets, investors want to exit and wait for the markets to recover before jumping back in,” explains Hannah Goldsmith, author of Retire Faster and founder of Goldsmiths Financial Solutions.
But trying to predict market movements is a losing game – and you will erode your savings in the long run.
“Instead, manage your emotions by investing in a risk portfolio that is correlated to your capacity for loss, not one that is based purely on your search for the highest returns,” says Goldsmith.
Essentially, you should stick to a reliable long-term strategy, and avoid taking short-term bets.
3. Remain realistic
As the old adage goes “by failing to prepare, you are preparing to fail” – and this saying certainly applies to your retirement fund.
“Make a plan, be realistic (you need to live in the meantime), review regularly, and stick to it,” says Keith Churchouse, director of Chapters Financial.
If you don’t have guidance from a financial adviser, there are useful apps like 7Imagine that can help you calculate how much you’d need to save to hit a realistic target.
“Think carefully about your attitude to investment risk and what you can achieve within these parameters,” says Churchouse. “And remember that getting to retirement early is a great objective, but it might only be half your life span.”
What he means is your money might need to last longer than you think.
Take control of your money and ensure that the ‘hidden’ costs are kept to a bare minimum
4. Don't pay over the odds
Value for money is a hot topic in the investment world, and if you want to get the most out of your cash, you need to look at whether you’re getting a good deal in terms of fees.
Goldsmith is particularly scathing about some conventional wealth management institutions. “Don’t assume that the financial services industry has your best interest at heart,” she says, arguing that many firms are in business to maximise their own profits – not your investment returns.
“It is essential to take control of your money and ensure that the ‘hidden’ ongoing portfolio costs are kept to the bare minimum. The industry average is around 2.3 per cent, so if you save yourself one per cent a year, you will have made a substantial amount of money using compounding interest over the life of your portfolio.”
It might not sound like much, but a 2.3 per cent fee on a £100,000 portfolio (with a seven per cent return) would have eroded your profits by a whopping £227,479 over 25 years. By comparison, a one per cent fee would have cost you £113,548 over the same period, according to figures from Candid Money.
Low fees will also accelerate the growth of your pension fund, meaning you can retire sooner.
Limiting yourself to one stock market is a concentrated strategy with high risk implications
5. Have faith in the markets
Despite Goldsmith’s reservations about some wealth managers, she stresses that you should trust the markets – or at least trust that investing broadly across all markets will make you money over time.
“Buying a wide basket of stocks from around the world can reduce the risk of trying to outguess the markets – or worse, paying somebody else to outguess them,” she says. “Limiting yourself to one stock market is a concentrated strategy with high risk implications.”
Goldsmith instead recommends that you buy a diversified basket of index tracker funds, and “leave the speculation to the gamblers”.
6. Mix it up
Another good tip is to invest across a range of investment vehicles, so that you have options to withdraw money and fill the gap before you reach retirement age.
While pension pots are understandably the core component of a retirement portfolio, Coles says you shouldn’t neglect your Isa allowances. because it will give you more flexibility in the first years of early retirement.
The personal finance analyst points out that Isas can also be a great way to top up your income if you plan to retire in stages.
7. Watch out for game-changers
With the minimum private pension age set to increase to 57 from the current 55 by 2028, Churchouse says savers should look ahead to these rule changes to see if they meet their early retirement plans.
We don’t know what rule changes will emerge when the chancellor delivers his Budget next week, not to mention what will happen after that.
But, while you might have to adjust your expectations, don’t let that stop you planning your financial future.
And who knows, maybe that dream of cruising around the Caribbean will become a reality sooner than you think.