Retirement has long been associated with golf courses, cruises, and relaxing on the beach with a drink in your hand. Traditionally, these retirement luxuries have been reserved for the later years in life.

But some don’t want to wait until their 60s or even 50s to be tied down by a job and aim to retire at a younger age. This brings some lifestyle perks: you have more time where you are physically capable of travelling and enjoying the hobbies you choose. But if you haven’t prepared properly financially, this can leave you without enough savings later in life, forcing you into a difficult position in the later years of life where you are less equipped to work.  

It might seem obvious to say, but another struggle of retiring early is having less time to save. Pensions benefit massively from compound returns, which can mean that the final 10 years in your pension are likely to be when the most significant gains happen, as long as your investments trend upwards. So, can you really afford to retire early, and is it the right choice for you?

HOW DO I LOSE OUT IF I RETIRE EARLY?

You currently don’t gain access to your state pension until the age of 66 (rising to 67) and can’t access your private pension until you’re 55 (rising to 57). If you’re retiring before state pension age, you won’t get the £11,973 income for those first years. And if you’re younger than private pension access age, you’ll need to fund your lifestyle through other savings.

Retiring too early means you’ll either need to find money to fund the rest of your retirement or significantly change the amount you take from your pension each year.

For example, if you retired at 55 with a £200,000 pension pot, you could withdraw £15,000 each year, but it would run out by 72. That £15,000 also doesn’t increase with inflation, meaning its spending power will decrease over time.

However, retiring five years later would mean that pot lasted until age 83 (even without adding to it during that five-year period) based on 4% investment growth post any charges.

You’ll also need to factor in income tax. While you get 25% of your pension free from income tax, you will have to pay on the rest. The state pension will give a nice boost to your retirement income once it kicks in, but this also counts as part of your income and uses up most of the tax-free allowance.

WHAT ABOUT TAKING LESS INCOME?

What if someone decided to retire at 55 but changed the amount of income they took from their pension? For it to last until they turned 90, they would have to take £7,650 less from their pension each year, compared to retiring at 65 (£17,800 versus £10,150). Even retiring at 60 would mean withdrawing £4,600 less each year.

The average pension pot in the UK is £91,000, according to The Investing and Saving Alliance (TISA). This means it would pay out an income of £8,000 a year if you took it at age 65 and wanted it to last until the age of 90. (Assumes 4% investment growth post charges each year.)

However, to retire 10 years earlier at age 55, you’d have to take over a 40% pension pay cut.

WHAT WILL EARLY RETIREMENT LOOK LIKE?

The Pensions and Lifetime Savings Association estimates that an average UK retiree will need at least £13,400 per year in retirement for a minimum lifestyle, rising to £31,700 per year for a moderate lifestyle as a single person. While the state pension can help retirees reach that income level, those entering retirement early will feel a much larger strain on their pension pot until the state pension kicks in.

For many, the appeal of retiring early is socialising, travelling, or enjoying other hobbies. But these often come with a price tag. It doesn’t mean it’s impossible to retire early – it just means that you need to be realistic with how far your pension pot can really get you.

WHEN SHOULD I RETIRE?

There’s no perfect formula for when to retire, because of the unknown factors of how long you’ll need that income, and how your money will grow if it’s left in the market. But keeping estimates conservative can allow for a more relaxing experience and ensure you have enough money left in your pot for care towards the end of life, if needed.

To get an idea of how much you will spend each year in retirement, you can take a look at your current spending and eliminate any costs that will go away (such as commuting to work), while anticipating new costs (like a few extra holidays or paying for hobbies, for example).

Retirement can take different forms for different people, and if you don’t feel financially ready to fully retire, you could opt for part-time or consulting work. This can help the income keep flowing while giving you additional free time and flexibility.

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