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Saving for retirement? This tip could help you quit work sooner

When you’re grinding your way through a typical day at work, retirement often seems a long way away.

In this article I’m going to suggest a simple change you could make that could help you retire many years earlier.

This could be easier than you think

When we talk about retirement, we usually assume that we’ll work full-time right up to the day when we stop work forever.

But it doesn’t have to be that way. Imagine if you could retire earlier, but still do a little part-time work on the side to supplement your income. Before you close this page in disgust, just hear me out. The numbers are pretty impressive.

Using a conventional 4% annual withdrawal rate, you’d need a retirement fund of £600,000 today to provide an income of £24,000 each year.

But if you could earn £500 per month from part-time work, you’d only need £18,000 each year from your pension. That would reduce the required size of your retirement fund to just £450,000.

That’s right: £500 per month is equivalent to an extra £150,000 of retirement savings. I suspect that for most of us, it would be easier to earn £500 each month than to save an extra £150k.

Crunching the numbers

How long would it take to save that extra £150k? If you were starting from zero and saving £500 per month into a FTSE 100 index tracker fund (inside a tax-free Stocks and Shares ISA), then I estimate it could take 14 years to save £150,000.

This period will be much shorter if you’ve already built up a retirement fund. Going back to my example, increasing your retirement fund from £450k to £600k could take as little as four years, at £500 per month.

The reason why this is so much quicker than starting from zero is that you’re benefiting from compound interest – the interest (or dividends) earned on your existing savings each year. That makes a massive difference.

Don’t make this mistake

I think that for many of us, planning to stop work forever when we retire could be a mistake. I’ve already discussed the financial implications. By working part-time, you could retire many years earlier.

But there are other advantages too. There’s plenty of evidence that suggests staying active with some form of work is good for your mental and physical health.

You meet new people. You can make a contribution to your local community. And it’s probably more fun than sitting around watching daytime television.

Getting started

Part-time work won’t be for everyone. But regardless of your retirement plans, the right time to start investing is now. I believe that for most people, the best approach is to invest monthly in an index tracker fund or a balanced mix of FTSE 100 stocks.

Both of these investment choices should provide steady long-term growth and a reliable dividend income. Keeping your investment inside an ISA means that capital gains and future income will be tax-free.

They say that investing is simple but not easy. It’s true. The hard part is starting today and carrying on long enough to get the right results. But it’s worth it, in my view. And I’m sure you can do it.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.