How much does it cost to retire early?

When you sit down with your financial planner, one of the things they’ll want to establish is the kind of retirement you envisage. They can then start to determine how much money you’ll need to achieve it, as well as advise whether or not you need to make any adjustments to your current lifestyle.

Some people are happy with a relatively modest retirement income, which may afford them a UK holiday once a year, occasional meals out and more time with family and friends. Others look forward to exotic holidays, fine dining, and the pursuit of new hobbies or interests.

To calculate exactly how much you need, you need to consider the following:

– Retirement Duration: How many years will your retirement savings need to provide you with an income?

– Lifestyle Choice: Do you aspire to a moderate, comfortable, or luxurious retirement?

– Later Life Care: Have you factored in the cost of potential healthcare or long-term care needs?

To explore this further, see our article: How much do I need to retire?

These days, retirement can take different forms. Many of us are living longer and healthier lives than our parents. At the same time, there’s increasing demand for experienced employees to remain in the workplace, and some people choose to do this, but on their own terms.

This is called a phased retirement. Rather than abruptly stopping work on a given date, phased retirement might involve reducing your hours, switching to something less stressful, or moving to another role that you’ve always wanted to try.

Crucially, phased retirement enables you to continue generating an income. You may find this allows you to retire earlier than you expected, or make your retirement savings last longer.

A 2022 study by Legal & General found that 34% of those aged 55+ who are still working (around 3.3 million people) have taken this phased approach. Retirement is no longer linked to a specific age or moment in time. In fact, almost half (48%) of employees aged 55+ expect to work less, with 14% planning to do so in the next year.

To find out more, see our article: Is a phased retirement right for you?

Having helped you calculate how much you’ll need to retire early, your financial planner will help you draw up a plan to get you there. But regardless of what your personalised plan looks like, there are some steps everyone should consider to enhance their retirement prospects:

You will need 35 years’ worth of qualifying NICs to receive a full state pension. If you have gaps in your record, and you’re aged between 45 and 72, it may be worth considering topping up your NICs with a voluntary national insurance contribution. You’ve got until 5 April 2025 to buy back any missing national insurance years from 2006 to 2016.

When you pay into your pension, you’ll get tax relief on your contributions. If you’re a 20% taxpayer you’ll effectively get a 20% top up on every pound. If you pay above the basic rate you can potentially claim more back through your tax return.

You may have several workplace or private pensions, invested in different ways and charging different fees. It’s important to ensure you have up to date information on all of them, and take a closer look at the performance and charges associated with each one. A financial adviser will be able to help you assess your current pensions and provide guidance on what to do with them – such as whether they should be consolidated, or not.

Remember to opt into your company pension to benefit from their contributions. Your employer must contribute at least 3% of your earnings to your pension, in which case you will need to contribute 5% yourself. If your employer is more generous, they may contribute a larger percentage, meaning you can contribute less.

Check your pension projections and, if necessary, consider increasing contributions to achieve your goals. Although there is no fixed sum, the amount you need to contribute depends on what you expect from your retirement. Some advisers recommend saving up to ten times your average work-life salary by the time you retire. So, as your salary increases, you may want to increase your pension contributions in line with your wages to avoid any shortfall.

Speaking to a qualified expert lets you plan for retirement with confidence. A financial planner will help you identify what you want from your retirement, understand what action you may need to take, identify tax risks or opportunities, and adjust to changes that may affect your pension savings or retirement income.

Like any investment, it’s important to remember that the value of pensions can go up as well as down, and you may not get back the full amount invested. What’s more, the law relating to tax is complex, subject to individual circumstances, and can change at any time. Always seek advice before making any decisions.