How on earth do you start planning for early retirement and what do we actually mean by early?
From our perspective early means we are planning to retire later this year at the age of 51, we can gain access to our teachers pension early at 55 and are then eligible for state pension at 67. We are hoping that our retirement plans will not involve having to work in the traditional capacity, although we realise that may have to be an option that we explore if funds run dry. Through our research and with careful planning, we have realised that early retirement doesn’t necessarily demand a huge level of wealth and is actually quite attainable – but it does require living within our means. The more modest your retirement lifestyle, the less funds you’ll need to provide for that lifestyle.
“Strategising is easy but execution is hard” — Chris McChesney
What's our vision for early retirement?
Reasons for early retirement
Early retirement can be an attractive proposition if you don’t like your job, and for many people this is one of the primary reasons to regularly revisit the idea of retiring early. Likewise, exposure to work and life related stress can also be a strong motivating factor to consider making a change. There is no doubting that these are important push factors for considering a new chapter of life, but there are also many more pull factors that focus on the more positive aspects of early retirement.
Many people in their early 50s, including ourselves, fancy a change in lifestyle. We want to embrace the things that make us happy and bring us joy, and find more time for those things in our lives. As we grow older, our values change and the things that we consider important evolve. For us, there can be no price put on spending time with our loved ones.
By creating more time for the things we love comes at a cost of a reduced income. However, at the point our income reduces, we also start to realise that our priorities and aspirations in life compensate for this. Where we were once happy to chase the proverbial dollar and push for career enhancement, we are now looking for a more simple life.
Equally, as we progress through life, we tend to consider our long term health more carefully and perhaps become more consciously aware of our own mortality. No one is going to live for ever. We all want to live long and fulfilling lives, and we can only do that if we take the opportunity to look after our health and wellbeing. By having more time to do this without the pressures of work has obvious physical and mental health benefits.
Reasons against early retirement
The simple law of economics means that early retirement will naturally result in a smaller pension and reduced income. When we were taking advice from a financial advisor, we were gobsmacked when he told us that many people were shocked and upset to find out that early retirement would result in a reduced potential pension! For us it is common sense that we will receive a smaller pension as we stop paying into the system and start withdrawing funds earlier than planned. Economics 101?
Likewise, we also have to consider that we will receive no State Pension right away, in fact we will have to wait 17 years until we are 67 to receive our dues from the Government. The earliest we can start taking our workplace pension is 55 and we fully intend to do this. For us, this splits our planning into three distinct stages: from now until 55, from 55 until 67 and from 67 onwards.
Giving up good salaries that we have relied on for over 30 years of working life is scary. The lack of security is really daunting for us as we are naturally risk adverse, however how risky is the risk? Over the last few years we have maximised our savings, minimised our expenses and have a financial plan in place that should see us through the various phases of early retirement that we have outlined above.
Early retirement naturally comes at a financial cost, it is up to us as individuals to consider the details and then make a decision based upon our costs vs opportunities.
Step by step planning for early retirement
Establish a timeline and milestones for retirement. As we have stated above, we have three distinct phases for our early retirement plan. From now until we can access our teachers pension at 55 we are relying on a range of different funds from savings to the equity release of funds by relocating and downsizing our house. At 55 we will access our teachers pension early, benefiting from a monthly pension and a lump sum of cash to re-supply our reserves. At 67, this will be supplemented by our state pension- happy days!
Financial efficiency. We have worked consciously hard over the last few years to clear our biggest monthly expense- our mortgage. Ideally, we know that we should have targeted this earlier in life, but it was not financially viable with the expense of bringing up children. For us, our mortgage will be paid off by August- coincidentally the exact date that we leave our current teaching careers. Similarly, we have minimised our debts, taking the opportunities afforded by frugal lockdowns to pay off various credit cards and loans. By August of this year, we will be largely debt free, have a modest pot of savings and minimal financial commitments within our lives.
Maximise financial reserves. Over the last few years, we have established a modest savings pot. Up to this point in life, we have never been savers- always preferring to spend money on family experiences and travel, building memories that the kids and us can look back on fondly. We have never regretted this approach. However, as our careers (and salaries) progressed, and our commitments and expenses reduced, we have been able to save. Once we made the commitment to retire early, we have implemented a much more aggressive weekly budget to maximise the savings from our remaining months of salary. This was for two reasons- to save for when we don’t have an income, but more importantly to reset our spending habits and mindset to reflect the simple life that we are going to have to live up to the point we can access our teachers pension at 55. Our plan also includes selling our current house, relocating and downsizing to a house that reflects our retirement needs. This will release some equity that will supplement our savings for the period up to 55.
Pension projections & advice. It is vitally important to engage in some professional advice about the effects of early retirement on your workplace pension. For us, it went beyond wanting accurate projections on accessing our pension early at 55. We also needed to consider the effect of not paying into that pension from 50 to 55 and effectively freezing the pension pot. Looking at the effect of these factors on lump sum and pension payments is essential for establishing an accurate budget for the early retirement years.
Find out how much it will cost to live. Establish a budget for your retirement years. This sounds sophisticated- but for us it involved the following steps using a notebook and a simple spreadsheet:
Establish what our monthly expenses will be up to 55- by minimising our financial commitments. This in reality is a list of unavoidable living expenses such as utility costs, council tax, car insurance, etc.
Establish a savings plan and budget up to our retirement date- once we made the decision to retire early, we doubled down on our financial efficiency in order to minimise our outgoings and maximise our savings.
Establish final a total financial reserves figure at the point of retirement as well as a budget plan to draw down funds in order to live during retirement.
Model out various plans based on permutations including house price sale, house price purchase, etc
Estimate your total costs over each phase of retirement
Income streams/contingency funds. For us this included:
Savings.
Equity release through relocation and the downsizing of our home.
Potential AirBnB rental income to generate income when we are travelling.
Emergency sources of income- online tutoring, gig jobs (ski seasons, festivals, etc), employment agencies for casual work.
Teachers pension scheme from 55.
State pension at 67.
Telling people & letting go emotionally. Do not underestimate this final step, no matter how prepared you think you are for it. We managed to keep it together when it came to telling family and friends, but the terminal nature of handing in our resignations (and ultimate job security) was surprisingly emotional...and incredibly scary. Likewise, coping with the anxiety of what people may think about our decision to pack it all in was not at all easy. Ultimately, we had to accept that we have absolutely no control over others’ perceptions of our decision- what others think of us is none of our business.
What next?
If you are thinking about early retirement, we would really encourage you to break out the pen and paper and start working through some of the calculations above for yourself. We found it really empowering to get to grips with the figures and it gave us a lot of confidence in moving forward and making our plans a reality. Having examined where you are currently at with your finances, you are then it a far better place to know what your next steps are to make the dream a reality.
We would love to hear from you with any specific questions that you may have so get in touch. Please remember that our plans are as yet untested- we are just an ordinary couple trying to live our best life in this crazy world. We are so excited about making our dreams a reality over the next few years and cannot wait to share our experiences with you.
Richard & Jackie
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