How on earth do you financially plan to retire at the age of 50, a full 17 years before statutory retirement age in the UK? We are a normal married couple living a modest life who are making plans to retire in September 2022 at the age of 51.
20 years from now you will be more disappointed by the things that you didn't do than ones that you did. So throw off the bowlines. Sail away from the safe harbour. Catch the trade winds in your sails. Explore. Dream. Discover.
Mark Twain
Before we even start this discussion, we are not financial advisors and have a very simplistic and pragmatic approach to home finances that may not be to everyone’s liking. However, we are prepared share some of the decision making steps that led us to the decision to retire at 50 in the hope that it may help you to make informed decisions about your own circumstances either now or sometime in the future.
A bit of background- we are both teachers in the state education sector and we have been doing so since graduating from university at the age of 22. We have two kids who we are so intensely proud of, who have now graduated and are leading their own lives with their respective partners. Up until recently, we saved very little money, preferring to spend our surplus income on travel for us as a family- and to be fair- we travelled well and spent a lot of our spare income on this.
When thinking about the reality of early retirement, we tried to think of it in the very simple terms of:
Retired finance = money in vs money out
As long as the above formula remains in the positive, all is well and early retirement will be a viable option. However, all is not lost if you cannot get the formula to be positive at this stage, as you have two potential options:
Increase the money in by a variety of different ways
Decrease the money out by making compromises to our expectations
Before we start on the exciting game of balancing the numbers and getting into the finer detail, we need to firstly look at trying to get to as clean a financial slate as possible before the point of early retirement. This is commonly referred to as financial independence. We will be really honest in the fact that our timeline for financial independence runs pretty close to the wire of our early retirement date of September 2022. We would not recommend this last minute approach for everyone, but it has allowed us up to this point in time to live a rather carefree life , spending money on the things that were important to us at the time.
So here we go, a four step approach to early retirement financial planning...
1. Financial independence
Before considering early retirement, it is important to gain as much financial independence as possible.
Pay off your debts- clear them as fast as you possibly can, with a focus on settling the highest interest rate debts first.
Credit cards are undoubtably one of the biggest challenges that people face, we certainly did. We worked hard to ensure that all of our credit card debt was on a minimal interest arrangement by regular balance transferring between cards to take advantage of 0% interest for 6, 12 or 18 months when available. The key is then to set up automated payments for as much as you can budget for on a monthly basis, to chop away at that debt month by month. In addition, make a commitment to no longer use the credit card and even cut it up if you are feeling brave.
Pay off your mortgage- your house debt is one one the biggest single debts that you will take on in a lifetime. Your house is also one of your biggest financial assets that we will look at later.
Paying off your mortgage can be rather awkward, as the banks obviously want you to keep paying as long as possible. Some banks limit the amount that you can overpay each month, so keep a careful eye out for this. We remortgaged every few years to ensure that we were getting the lowest possible fixed interest rates at all times. At each remortgage point, we also assessed our monthly payments and pushed them as high as we could possibly afford, reducing the overall duration of the mortgage significantly. This happened every time that we remortgaged and is one of the reasons that we managed to just about get it payed off by the age of 50.
Maximise your savings- we are not great savers and we never have been, as we always preferred to spend any access funds on experiences for us and the kids. Once the kids had left home however, we diverted any surplus funds into savings. Jackie loves our little savings pot and takes great joy in watching it grow each month. Once we have set our monthly and weekly budget, we know how much money is surplus and needs to be put way each month. The key to making this work is to put the money into savings on payday- don’t wait until the end of the month because you will have been temped to fritter it away!
2. Planning for financial independence up to early retirement.
List all of your current monthly incomes (take home pay ie after tax) and total it up.
List all of your current monthly expenses that you pay out. A good starting point is looking at all the fixed payments leaving your bank account each month. Include a weekly cash spend figure that you will consistently use for food shopping, unexpected outgoings and any treats.
Calculate your monthly income slush.
income slush = current income - current expenses
If you find that you don’t have any income slush- you are living beyond your means and you either need to increase your income or reduce your expenses. If you do have income slush, we used it to:
Pay off high interest debts first
Overpay on your mortgage
Save the remainder in an account that is not easily accessible.
On payday- shuffle your funds in line with your monthly plan- so that there is no unaccounted funds available. One thing that has drastically changed our weekly discipline for spending is the pure cash system. Each week we withdraw a set amount of cash to live off and that has to cover our food shop, our entertainment and our petrol costs. To overspend in one area requires an saving in another area. It really focused our minds to our budget planing and kept us on track and disciplined in our spending for many months at a time.
3. Early retirement money in
When we hit early retirement, we will effect live off our retirement income that consists of the following things. You need to have an accurate and up to date valuation of these assets:
Value of your house
Value of your savings
Value of your pensions. This is quite tricky to predict, but we used a free of charge professional pensions advisor through our Union membership to do the hard work for us. We looked at the effect of accessing our pensions early. Be warned, there is a considerable cost to accessing your pension at 55- as you will be withdrawing from the fund 12 years early (in addition to not contributing to the fund for the same 12 years). You have to balance this financial cost with having to work for another 12 years and also critically look at your potential life expectancy. In addition, we also needed to model out the lump sum vs monthly pension permutations that would work best for us as a couple.
Value of any income from assets. In its simplest form this could be the interest from your savings- we get no interest of worth from our modest savings pot. It could be from potential equity release from selling your house and down sizing. That is what we have chosen to do. We no longer require a big family home. A more modest 2 bed house will be sufficient for all our future needs.
Potential income streams. This could include any part time jobs, side hacks, or other ways to earn money. For us, we know that we could always online tutor students for SAT’s and GCSE maths if money was tight. We are also happy to work casual agency jobs if funding requires. One thing that we are adamant about is that we will not return to the classroom. We both loved our jobs, but our life in the classroom is officially over.
4. Early retirement money out
Look ahead and map out a list of your monthly expenses once you have stepped into early retirement. A good starting point is your current monthly expenses. We went through and cancelled off or amended any expense that we felt was either non essential or not applicable in retirement. These included cancelling union subscriptions, car insurance for our extra car that we will no longer own, Microsoft subscriptions or gym memberships. For us, it was really important to try and cut these expenses down to the bare bones of essential expenditure, as one of our guiding principles of early retirement was to live a simpler life.
There should be a significant difference in this list and the monthly expense list that you produced when you were working. For starters, there should be no mortgage payments, repayments against any loans or debts or any work related expenses.
You have to then ask yourself the question, how much are you prepared to compromise to retire early? Years of early retirement freedom do not come without a cost, and only you can answer what changes to your lifestyle you are prepared to sacrifice for that newfound freedom. For us, the 12 years of not working prior to statutory retirement age is so valuable that we are willing to make some quite significant compromises in our expenses to realise our goal.
Once you have arrived at a monthly expenditure value that works for you, you then need to project this forward into an overall cost projection for each month and year of early retirement.
Making it all add up
You then need to produce a financial projection per year that will incorporate all the yearly expenses that you have calculated. The challenge is then to see how you are going to meet these monthly expenses over the years of retirement that you are planning. In the initial stages of the pre-pension years, this will inevitably have to include a plan to draw down an income solely from your assets such as savings and in our case the equity release from our house downsizing.
For us, we have 3 distinct phases of retirement to financially plan for:
Life up to 55- no pensionable income therefore we have to plan to live off our assets until we can access our teachers pension early at the age of 55. This is by far the most challenging and scary phase of our plans!
Teachers pension early access at 55- happy days. We will no longer be dependant upon drawing down on our assets and can rely on a steady monthly pension payment and also a lump sum that we can either invest and/or draw down on a monthly basis to supplement our costs of living.
State pension at 67- an additional funding stream that we have not really accounted for as we know that we can happily live on our teachers pension. An added bonus.
Worst case scenario- what happens if it all goes wrong and we run out of money?
We considered this seriously and realised if the worst came to the worst, we would have to work to supplement our income up to the age of 55. We were always planning to retire at 55 anyway, so we are pretty certain thereafter, we should be ok, but the time up to 55 is not quite as certain. Our options for income would be online tutoring to fit in with our travelling lifestyle. This is currently readily available through agencies and also independently. Another option that we have not discounted would be local employment agency work on short term contracts that would adequately supplement our income if required.
I have tried to bring all of these calculations together in one coherent template that will apply to all people, in all situations... but quickly realised that you need to make these calculations in your own way and record them in a way that works for you. I have however attached a planning pdf document below that is available if you want a starting point for your thinking.
I hope that you find the steps that we went through of use in your own financial planning for early retirement.
Richard
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