A US movement known as early retirement extreme has sprung up, dedicated to the idea of finishing work by 40, or even sooner.
Enthusiasts, bloggers and writers share ways to live frugally, spend only on bare essentials, drive old cars, and save and invest up to 70% of their income.
According to Forbes magazine, it all took off thanks to a best-selling book and blog called Early Retirement Extreme from Jacob Lund Fisker, a Chicago scientist who retired at 33 after saving enough, he believes, to last him the rest of his life.
As he explained to CNBC, it’s simply about keeping the “big three expenses” — housing, transportation and food — as low as possible: “Look at those top expenses and see if there’s any negotiating room.”
Know what you need, save what you don’t
While extreme budgeting isn’t for everyone, having a handle on your finances makes good sense for everyone, and could help to make early retirement a reality rather than just a dream.
With a clearer idea of what you need to live on, you should have a better idea of what you can afford to spend, and to save - both into longer-term investment pots such as a pension or a Stocks & Shares Individual Savings Account (ISA), and rainy-day savings pots that you can access more easily.
And if you’re planning on early retirement, getting rid of large costs such as a mortgage or rent could make a considerable difference.
When it comes to your pension think about tax efficiency, employer contributions and whether you’re in the right investment option
Saving into a pension is very tax efficient as you can benefit from tax relief based on the rate of income tax you pay.
That means if you are a higher rate taxpayer and you want to boost your pension by £10,000, with 40% tax relief, the cost to you would be just £6,000.
And if you’re in a workplace pension, as so many of us are now, it makes sense to take advantage of any matching contributions from your employer to further boost your pension.
Remember that tax and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.
Being in the right investments as you get closer to retirement is important, but knowing whether you are can be difficult if you’re not an investment expert. Many pensions offer options which automatically move your money into lower risk investments as you get closer to retirement to make this easier for you. So it’s worth checking with your pension provider where you’re currently invested and what options you have.
Of course, the value of investments can go down as well as up and could be worth less than what’s been paid in.
It’s about more than just your pension
When planning how to get the income you might need in retirement, make sure you consider all your possible sources of income, not only your pension.
That means thinking about any other savings or investments that you have, such as ISAs. And make sure you’re keeping track of any old pensions, such as those you’ve had with previous employers, and what’s in them (even the small ones).
If you plan to work part-time in retirement or if you have things like property, these can be important sources of income too. And don’t forget to find out what your State Pension entitlement will be and factor that in too – even if it doesn’t kick in for a number of years after you retire from work.
Consider what you want retirement to look like
Unless you have an idea of what you want your retirement to look like, it’s difficult to know how much you’ll need and what you’ll need to achieve this.
How much you need to live on after you begin to access your retirement savings depends on many factors, including your lifestyle, life expectancy (as best as you can know it), your health and whether you have outgoings such as a mortgage still to pay.
What you need in retirement is personal to you and your circumstances, and it can change over time as your life changes. The Retirement Living Standards have been independently developed to help you picture what kind of lifestyle you could have in retirement based on your expected income.
To see how much all your retirement savings, including your pension and state pension, could give you as a retirement income, use our handy, free retirement income report. The report gives you an idea of your income, as well as how this matches up with the Retirement Living Standards.
How Standard Life Retirement Advice could help you retire early
If early retirement is appealing to you, our retirement experts
can help. From when you can afford to retire, how to fund big purchases, what you can afford to spend, as well as recommending the right pension product and investment options for you.
When Mr and Mrs Taylor initially got in touch, they wanted some tax-free cash to pay off their mortgage.
Working with one of our specialist retirement advisers, we were able to recommend how best to pay off the mortgage, as well as show that Mr Taylor could afford to retire five years earlier than he’d thought.
Mr Taylor said “I’m not in jeopardy of losing my job at all but I would like an easier life whenever I deem that time is right. Great to know I could make it happen now if I wanted.”
Mr and Mrs Taylor’s retirement adviser helped them see they could afford to repay their mortgage, buy new cars throughout retirement, and help their son get on the property ladder. They could afford these things alongside a comfortable income, with money predicted to be left over at age 90.
Mr Taylor said, “Both quite clear, quite happy, excited that our future can be decided by us now rather than my employer.”
Two easy ways to get your retirement started
If you’re looking some help on the road to retirement, here are two easy ways to help get you started:
*According to a recent study cited by the Center for Retirement Research, Boston College, USA.
The information in this blog or any response to comments should not be taken as financial advice.
Tax and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.
The value of investments can go down as well as up and it may be worth less than was paid in. Investment returns aren’t guaranteed.
The information here is based on our understanding in November 2020.