How to retire early

Arguably it’s more difficult than ever to plan for early retirement. The increased cost of living, especially housing costs, inflation and job uncertainty, is slowly eating away at our predicted earnings, making it very difficult for some to save. And in our consumer society of instant gratification, the thought of putting money away now for something that’s not going to happen until decades in the future seems intangible. It’s easier to push it to the back of your mind for later. 

In the marshmallow experiment, first carried out by Stanford University in 1972, pre-school children were given a choice of a single marshmallow immediately or two marshmallows after 15 minutes. Some of the children took the early reward, while those who chose to wait found it difficult, displaying obvious frustration such as hiding their head in their arms or stamping on the floor. 

When you start saving into a retirement pot, it’s an intangible, complicated, and extremely long-term concept to get your head around. It’s little wonder that many of us find it so hard to set limits now in the hope of future benefits.

Early retirement is an achievable dream for most of us if we’re willing to apply effort, discipline and make the occasional sacrifice. 

You need to have these five goals front of mind when managing your money because only when these are met will you be in a position to retire early:

It sounds obvious, and it is, but the key to retiring early is being able to afford it. Your finances need to be in good enough shape to support you for the rest of your life if you’re never going to work again. So there will be some compromise on your lifestyle now to secure your lifestyle in the future:

1. Keep your spending in check

The age-old adage, look after the pennies and the pounds will look after themselves, still rings true. Start to consider what you spend on a day-to-day basis. Replace the £2.65 coffee on the way to work with instant in the office or take a packed lunch. Cutting out the small daily expenses can help boost your long-term savings and help you to afford an early retirement. A daily coffee of £2.65 x 260 days a year – that’s £689 a year straight into your pension or to overpay on your mortgage.

2. Shop around

Many companies profit from our lethargy when it comes to changing providers or services. Prices for existing customers will increase year on year: car insurance, home insurance, streaming services, phone contracts and energy bills. If you shop around just before contract renewal, you’ll normally find a better deal. Ring fence the money you save and put it into your pension, long-term savings, or mortgage.

3. Take advantage of tax-free saving opportunities

Saving into an Individual Savings Account (ISA) will give you a tax-free return on your investment – plus, there are other advantages and incentives you need to look out for. The government introduced a Lifetime ISA where every £1,000 you contribute receives a 25% bonus from them, up to a maximum of £1,000. This could give you an extra £1,000 per year in savings.

Some people want a luxury retirement, with expensive holidays, fast cars and fine dining. Others are comfortable with a less lavish lifestyle, happy that their time is their own. 

Your aspirations and dreams for the future will ultimately determine how much you need for your retirement and whether you are willing to make the compromises now to secure them.