The prospect of retiring early may seem like a distant dream, but with the right choices, it can be achievable.
Start early and set yourself a goal
Any aspirations to retire early will need to be set in motion early, ideally in your early 20’s. The decisions you make at this stage will be key to determining whether the dream can later become a reality. Primarily, you will need to decide what level of lifestyle you wish to lead upon retirement as this will determine how much you need to save each month to fund this. Unbiased.co.uk states that as a rule, you will need 70% of your working income to fund the same level of lifestyle in retirement. Use a pension calculator to work out how much you personally will need to save.
Private investment pensions
Contributing to a private pension from an early age will put you in the best possible position to retire early. As the Pension Advisory Service states, private or personal pensions are a flexible way to build up retirement income benefits, while benefiting from tax advantages, whatever your circumstances. After setting yourself a target in terms of both retirement age and amount needed to fund your retirement, be prepared to live modestly in the meantime; such a long-term life goal will not come without sacrifice. Bear in mind that in most circumstances you will be able to draw out 25% of your retirement fund, tax free, at the age of 55. This will be a key factor as the UK state pension age is scheduled to increase over the coming years.
Company pension scheme
Many companies operate a pension scheme in which they match a certain percentage of your monthly contributions; be sure to take advantage of this to maximise your savings. As a result of tax relief afforded to pensions, for every £100 that you add to your pension, the government will effectively contribute £25.
Make the right investment choices
Although your pension is key to building the necessary savings to retire early, building upon it with a range of other savings and investment vehicles is key to reaching your goal. Research the broad range of ISA products available such as stocks and shares, cash or lifetime ISAs and try to make the most of your annual tax-free ISA allowance (currently £20,000 per year in the UK).
Continually reassess your savings and investment decisions
As your personal circumstances change, be flexible in your investment choices, be sure to shop around and take good quality financial advice on maximising your returns. Furthermore, look at other ways to source income to fund your early retirement. Getting on the property ladder early, for example, means you may be able to downsize and free up some equity at a later stage or possibly invest in a second buy-to-let property. Other examples include freelancing or renting out a room.
Be frugal but most of all, be smart; make the right decisions early enough and you will be on the path to financial freedom.
To read more on topics like this, check out the lifestyle category.