1. Identify how much you need to save
When you first start planning for an early retirement, think carefully about how much money you’ll need each year. Can you live off £20,000 a year or will you need more than £30,000 to maintain your lifestyle?When working out how much to save, the hardest part is determining how long you’ll live. With the average life expectancy for people in the UK currently standing at 81 years, if you wanted to live off £25,000 a year in retirement, you’d need to save £775,000 before you stopped working.
With life expectancy constantly increasing, it’s becoming more and more difficult to identify exactly how many years to factor into your retirement. For this reason, pension experts tend to recommend saving 10-15% of your income from your early twenties onwards.
2. Start saving early
In an ideal world, everyone would start saving for retirement in their twenties. By saving money as early as possible, you give your pension pot plenty of time to benefit from compound interest.For example, if you were to start saving for retirement at the age of 25 and decided to put aside £3,000 a year for 10 years, by the time you reach 65, your £30,000 investment could have grown to more than £338,000, thanks to compound interest. This is assuming a 7% annual return.
If, however, you were to delay pension saving until 35, even if you saved £3,000 a year for 30 years, your £90,000 investment would only have £303,000 by 65. Again, this is assuming a 7% annual return.
If your twenties have been and gone, there’s no need to panic. Instead, increase your monthly savings, squirrel away as much as you can, and shop around for the most rewarding interest rates. Seeing a financial advisor could be a great way of identifying the most profitable options and ensuring you have a sizeable nest egg for your early retirement.
3. Invest
Although traditional workplace pensions are widely celebrated for being the best option for saving for retirement, many people choose to invest in stocks, shares and bonds. With pensions often having restrictive rules regarding the age in which you can access your money, investments can offer a more flexible solution. Whether you invest in addition to your pension or as an alternative is up to you, but it’s important to take fluctuations into account and see these investments as a way to grow your money in the long term rather than the short term.4. Overpay on your mortgage
If you want to retire early, it’s crucial that you become debt-free. Not only are you wise to pay off credit cards and consumer loans as soon as possible, the same can be said for your mortgage. By tackling your debt long before you draw your pension, you can ensure that your expenses are as low as possible during retirement.In recent years, it’s become increasingly common for mortgage lenders to allow homeowners to overpay a certain amount each year without having to pay early repayment charges. Some lenders will allow you to overpay your original loan by 10% each year. So if for example you have a mortgage of £100,000, you could pay an extra £10,000 annually.
Other lenders will allow you to overpay by 10% of the previous year-end balance. So if you’d already paid £25,000 of that £100,000 loan by the end of 2016, you’d only be able to overpay by £7,500 this year. The following year, this overpayment allowance would reduce.
Rules vary between mortgage providers, so be sure to check with your lender to see how much you’re allowed to overpay and whether you’ll be expected to pay early repayment charges.
