Here we are at session number 72 , and we’re going to be talking about How to retire early. I reckon this is going to be at least a two part podcast, if not three, but it’s going to be a good one with some actionable points and some thought-provoking stuff to really get you thinking about retirement and all that that means.

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But first…

Sponsor Message

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Introduction

First up, I want to give a shout out to Tony from Reading, who has given me some things to think about while preparing this. Tony sent me what was, in his words, a ‘brain dump’ email, which he later refined, and which has prompted certain things which I might have missed. So thanks Tony – much appreciated.

So, this week I’m going to be focussing on what you need to know and understand about the whole idea of retirement and indeed, early retirement.

Everything you need to KNOW

1 – Know what ‘retire’ means

It’s vital, right at the outset, that we, or rather you, define what retirement means for you and yours. I think that the old fashioned notion of stopping work and doing nothing has largely fallen by the wayside. That way lies an early grave.

For many of us, retirement means not having to do work in order to afford our lifestyle. That way, if we choose to work, then it can either be philanthropic in some form, or the money it brings in can be just gravy money we can do what we want with, or give to the kids.

Many of my colleagues in financial planning look for alternative terms to that of ‘retirement’, such as financial freedom, or financial independence – maybe these are more helpful.

For our purposes, retirement is the process of decumulation, that is, drawing down from your accumulated wealth. Throughout the first half or two-thirds of your life, you will amass sufficient assets in the form of pensions, ISAs, property or whatever, so that you have the means to fund your lifestyle for the rest of your life, however long that is. The point at which you can retire, or become financially free, is the point where those assets are large enough.

2 – Know what ‘early’ means

Here we need to reset our traditional view of retiring early. Many of us sync our idea of retirement age to the state retirement age, which is up to 67 and will push back to 68 and probably even later eventually. So to retire early means to retire before our state pension?

Maybe. Or maybe it means to retire before the normal retirement age of our company pension scheme. That could be from age 60 or 65, or even earlier if you’re a policeman, say. Removing the outliers such as footballers retiring at age 35 and the like, for most of us, retiring early is about bringing forward the date as early as possible, with the thinking being that the earlier we can be financially free, the better our health is going to be and the more likely we are to be able to enjoy our freedom.

Still, we will need to have a notional date in mind to work towards, and this needs to be realistic. If you’re saving £25  month into a stakeholder pension and want to retire on £25,000 per year from age 50, you are dreaming.

So be thinking of what your ideal age might be and have a justification for it.

It’s also important to know that retirement doesn’t have to be a line in the sand, a one-off event that looms in the future. It can definitely be a gradual thing, where you reduce your dependence on a salary over time by reducing your number of hours worked, for example. That is arguably much more healthy than a full stop, once and for all event.

Let’s agree that we need to work towards a date where we are financially free, but that the process of actually retiring might be spread over five or ten years. Much more on phasing your retirement to come…

3 – Retiring early is basically a numbers game

If, as I have said, retirement is about being financially free rather than anything to do with stopping work, it is all about the numbers:

How much you need

Obviously we need to identify how much money we are going to need based on what you’re spending now, what bills you’ll no longer be paying when you retire, and some factors for inflation and investment growth. Much more on this next week.

How much you can save

You need to be saving, and saving quite hard to be able to become financially free one day. But current pressures are important too. There’s no point having a lavish retirement and going without food now! IF all you money is going on expensive holidays now, there will come a time when those holidays will have to stop. Or, we can adjust our spending now to give us a chance of being able to spend at that level for the rest of our life

What growth you get on your pensions/investments

What we save into, and what return we get is a key factor. How much risk are we prepared to take to achieve our goals? Can we cope with a downturn in markets? See Session 71 last week for how to keep your head in a financial crisis.

What rate of withdrawal you can safely take

Once you have amassed a fund of some kind, across pensions, ISAs and other investments, what level of income or regular withdrawal will it support. You don’t want to spend all your money before you’re 75 and then have to live in poverty. Neither do you want to die with hundreds of thousands still left in the bank, because then you haven’t lived. We’ll need to establish a safe withdrawal rate and work back from there to work out how much is enough.

Will you be supplementing your income with paid work?

Ore and more likely is either the need or desire to supplement income with work of some kind. Unless we are volunteering, this will bring in some money which needs to factored in. There will come a time when we are unable to continue working due to failing health, so we need to make sure that when that time comes, we still have enough. Our outgoings are likely to be reduced at that point too, unless we end up needing long term care, which is a whole different scenario

The key to a successful retirement is maximising these factors in our favour. We’ll be looking much more at how to calculate these figures next week

4 – Cashflow is king

I’ve said several times on this show that financial planning can fundamentally be distilled to money in over money out. If you are trying to save for retirement and have more going out than coming in, you’re never going to get anywhere. Spending less than you earn, at least while you are accumulating wealth, is a necessity.

When you are decumulating in retirement, it is fine to spend more than you are bringing in as income, as long as

a) you have the capital to dip into to make up the difference, and

b) you don’t spend this capital too fast.

I spend a good proportion of my time telling people that it is fine to erode their capital. Money is for spending after all.

We can get hung up on income; that my portfolio must provide me with an income but the portfolio itself needs to remain intact. It doesn’t.

I often preach the concept of total return, a combination of income and growth to my clients. Having two strings to your bow rather than just one, makes it easier on your portfolio and broadens your options for how your portfolio should be invested.

Again, we’ll cover this in a bit more detail in the future, but for now, just get to grips with the fact that it is OK to dip into capital in retirement, as long as you don’t go crazy and jeopardise your future.

5 – Inflation is a bigger issue in retirement than it is while you’re working

When you are earning a salary or running a business, your earnings usually rise in excess of inflation. Any nurses, police or fire officers listening, please don’t throw your iPod to the floor in disgust. I said ‘usually’ – I know it’s been a tough few years for you all.

But earnings do usually rise faster than inflation leaving us a little bit richer each year. In retirement, you are no longer earning a salary, probably, so inflation can have a bigger impact on your spending power in later life. Another issue is the fact that the essentials of life, like food and fuel, tend to become more important to us than electronics and holidays as we get older. These essentials often rise in price faster than the headline rate of inflation, but are offset by the other things when arriving at a total inflation figure. We need to assume a higher inflation figure in retirement than before it.

6 – Know the detail of your pension and investment arrangements

Needless to say, we need to know what we’re working with. Too many people are very passive about their finances and don’t really know what they have got, particularly when it ones to pension provision. Many of us move jobs several times in our career and collect pension funds like stamps.

In thinking about retiring early, you need to know where you are right now and make the best of what you have. This isn’t limited to pensions. You need a snapshot of your current financial position so that we can have a baseline to work from. Know what money you have where, and in each pot, how the money is invested and what charges you are paying.

Summarise KNOW

#1 – Know what retire means

#2 – Know what early means

#3 – Understand that retirement is basically a numbers game

#4 – Cashflow is king

#5 – Inflation is a bigger issue in retirement than it is before

#6 – Know the detail of your current provision

Everything you need to DO 

Just three quick to-do’s to be ready for next week

1 – Find out when your state pension age is

As scathing as we might be about the state pension, how many of us would turn down £150 a week? Exactly. The state pension is going to a major part of your retirement planning, unless you’re a millionaire with a fully funded pension portfolio and massive other investments.

We need therefore to know when it is going to kick in. The state pension age is being stepped backwards. Mine is age 67, but it is very likely that it will be put back further before I get there.

There is a very handy calculator at the Gov.uk website so you need to find that out before next week.

2 – Establish what a baseline level of expenditure is

You’ll only be able to enjoy retirement if you can do the fun things like eat, and turn on the heating. There will be council tax bills to pay, petrol to put in the car (unless we’re all driving solar powered cars by then) and lots of other bills.

You need to establish which of these you will be paying for the rest of your life. Take your current level of expenditure on all major bills and use that as a starting point. If you are currently in a household of four or five people, adjust your food and utility usage accordingly. Being in a house with three women I reckon if there was just me, I’d use about a tenth of the water, for example. And no, I’m not kidding!

Well, maybe a bit.

You hopefully won’t have a mortgage by then. If you’re planning to retire early, I’m guessing having a mortgage when you retire doesn’t figure in your plans. So ignore mortgage payments, also life assurance, pension contributions and other regular savings. You’ll be spending, not saving, most likely.

Don’t worry about establishing your desired retirement spending level yet, we’re looking for the baseline ‘able to eat and heat the house’ level of expenditure.

We’ll come back to these figures over the course of this week and next

3 – Collate details of your existing pensions and investments

Get together all the paperwork for your existing pension plans and investments. If you’re not organised with your financial paperwork, it’s time to get a grip. Listen back to to Session 46 on how to do that. It’s a really practical session.

Make a list of what you have, where. Include company names and policy numbers, most recent balances and what funds you are invested in.

Summary

OK, this is part one of two, and next week I’m going to attempt to get practical and give you some ways of working out what you need to do to achieve your retirement goals

This week’s reviews

[This is where I read the reviews]

If you like what you hear on this podcast, please leave a rating or review on iTunes by going to meaningfulmoney.tv/iTunes just like Swel08 did this week. This helps others to hear about the show and to subscribe, because it keeps me near the top of the rankings.

News

Weight loss – an excellent week, losing 2.5lbs to 15 stone 11 lbs. Whoop whoop! Listener Andy N suggested that I should adjust my target to 14 stone by Christmas, so that I can put a bit on over the holiday and still be 14st by my birthday in February. Sounds like a plan…I think!

For the next two weeks I am on holiday, but the podcast will be published as usual in my absence. I have recorded the next two weeks worth, so there’ll be fresh, shiny content for you each week. I may be slow responding to email though, so bear with me for that.

Next Session Announcement

Next time I’ll be finishing up this subject with some practical steps you can take to calculate what you need to retire rich, and implementing the plans you need to get there. If you have a question on this subject, or any other financial query that you want answering here on the show, then the best way to do that is to leave me a voicemail at meaningfulmoney.tv/askpete

Outro

That's it for this session of the MM podcast, I hope it was helpful. If I missed anything or if you have any questions, please leave them in the comments section below

I hope you enjoyed this session. Thanks for listening – I'll talk to you next time.