If you’re looking into how to retire early, you need to start by crunching some numbers. Whether you’d like to travel or pursue a different passion, proper retirement planning is key to getting you there.
Here are the first steps to take to get you on your way to early retirement.
1. Decide what “early” means
Retiring at anytime before you’re 65 is considered early, but when exactly you do it has an impact on how to plan for it. Before you do anything else, pick when you want to retire. This could be a general age, such as “in my early 50s” or a more specific “when I turn 55”.
Next, work out how many years you have left until then. This is the timeline you have to work with so you can make plans for how to retire early.
2. Pay off debts
Retiring when you’re in debt is not a good idea. While you might still have a mortgage by the time you retire, you should aim to eliminate most of your unsecured debt, such as loans and credit card debt, before you leave your job. This will take a lot of the pressure off and ensure that any money you have goes towards living expenses rather than paying off old debt.
3. Figure out how much money you need
While it’s hard to know in advance how much money you’ll need for your retirement, it’s possible to make an educated guess. The general rule is that you’ll need at least 70 per cent of your pre-retirement income to maintain a similar lifestyle. So if your annual income is currently £50,000 a year, you will need at least £35,000 per year after retirement.
Some of that will be provided by your retirement pension, but the rest will need to be provided by you somehow. That could be in the form of savings, investments or a private pension. Or you could work on sources of passive income, such as buying rental property or starting a small side business.
You can also try to reduce your income needs in a number of ways. For example, you could downsize to a smaller home with fewer bills or move to a less expensive area. You can even decide that you’ll take on a part-time job to supplement your pension and stretch your savings.
4. Look at your pension
How much money you’ll get from the government when you retire depends on a few factors, including when you reach your retirement age. As of 2020, the retirement age for both men and women is 66, but it’s possible that it will increase in the future.
The gov.uk website offers a State Pension forecast calculator, where you can enter some information to find out how much your state pension payments could be, when you’ll start receiving them, and how to increase them, if possible.
While these numbers aren’t exact, they offer a good estimate of how much money you could get when you retire.
5. Build up your savings
No matter when you plan to retire, putting money into a savings account or pension system is always a good idea when you’re working towards early retirement. The earlier you start doing this, the less you have to put in every month to reach your goal. The Money Advice Service website has a pension calculator that allows you to estimate how much you should be saving per month in order to achieve your desired retirement income.
Regardless of whether you agree with that number, retiring early requires increasing savings and contributions. To do this, create a budget to help you understand where your money is going. You might be able to cut down expenses and send more of your current income into savings.
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