1. Pay off your mortgage
Unless your monthly mortgage payment is very small, you’re probably going to need to pay if off before you can consider taking early retirement. Otherwise you’ll need to generate enough income from your pensions, investments and savings to cover this payment PLUS all your other expenditure.
Making regular overpayments to your mortgage between now and when you retire is a great way to reduce the outstanding balance, and will also cut the amount of interest you pay. Always make sure that you keep your standard monthly payment the same after you overpay. This will ensure you save more in future interest payments, and pay the mortgage off quicker.
2. Pay off all other debts
Like mortgage payments, covering debts in retirement is a killer for your monthly finances.
Make sure you clear all outstanding debts before you give up work. Not only will this reduce your outgoings in retirement, it could save a significant sum in interest payments in the meantime.
It’s usually best to prioritise debts with the highest levels of interest, so gather all of the information before deciding on what you’re going to tackle first. If early repayment penalties apply, do your sums to check you’re doing the right thing in paying it off.
3. Try to reduce your spending now
The less you spend each month, the more you have left over to save, invest, or contribute to your pension.
If you can try to minimise your outgoings before retirement, this has the double advantage of leaving you more money to put away now, plus it may help you get used to living on a reduced budget, which you may have to do post-retirement.
4. Get a state pension forecast
If you’re retiring early you may not end up working enough years to qualify for the full state pension.
To get the full amount of £9,109 a year, you need to amass 35 qualifying years of national insurance contributions. This means that if you started full time work at age 21 you’ll need to work until at least age 56 to meet the full 35 year requirement.
A state pension forecast will tell you how many qualifying years you already have, how many more you need to make up the full entitlement, and what level of state pension you are projected to receive.
It’s possible to make voluntary national insurance contributions to fill in any gaps in your record and it may be worth doing so if you’re planning on retiring before you’ve reached the full 35 qualifying years.
5. Work out your retirement outgoings
It’s essential to know what you’re going to be spending in retirement. Without knowing this, you won’t be able to tell if you’ve got enough income or assets to see you through.
I advise all my clients to use our handy outgoings spreadsheet - feel free to download this and start tracking what you’re spending each month.
6. Calculate what income you’re going to receive in retirement
Once you know what your retirement outgoings are, you need to work out where you’re going to be getting this money from.
You already know what you’re going to be getting from the state pension from your forecast, although this won’t start until at least age 66. You may have other income to factor in, such as rental income or payments from a final salary scheme.
Make sure you take tax in to account – the figures provided are likely to be gross, so you need to work out what your tax position is going to be, and therefore the net income these will provide.
7. Calculate your shortfall
It’s possible that the income you expect from the state pension, rental income or final salary pensions won’t be enough to meet your outgoings, particularly if these don’t start paying out until some point in the future.
You have to understand what your income shortfall is each month, because you’ll need to make this up from your personal pensions, investments and savings.
8. Gather information about your investments and personal pensions
Many people have collected a variety of pension and investment plans over their working years. It can be difficult to get a grasp on what the total value of these plans are, as the statements come in at various times of the year.
Use a spreadsheet to make a note of what you have, and seek independent financial advice about what you should do with these plans.
9. Contribute to your ISA and pension every year
If you want to retire early, it’s really important to build up as much as you can during your working years.
Pensions and ISAs are extremely tax efficient ways to invest for your retirement. Both of these grow tax-free and can be invested in a wide range of funds.
10. Work with a retirement specialist financial planner
Working with a financial planner who specialises in pre-retirement planning is a great way to ensure you are on track to meet your early retirement. They will work with you to help you understand how much money you need to retire, and create a strategy to make sure you build the assets required to achieve this income.
Risk Warnings
· There are limits to how much you can pay in to a pension.
· The annual allowance is £40,000 in the tax year 2020/21, but for personal contributions you are limited to 100% of your earnings in the tax year you make the payment.
· Higher earners may have a lower annual allowance. Please seek financial advice.
· The lifetime allowance of pension savings is £1,073,100 in 2020/21
· Income from pensions is taxed at standard income tax rates and bands.
· The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
· Levels, bases of and reliefs from taxation along with the tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. A pension is a long-term investment not normally accessible until 55 (rising to 57 from April 2028)