Retiring early is a major life goal for many people, not least because it means you’ll spend fewer years working and more time doing the things you love.
Quitting work while you’ve still got plenty of energy lets you pursue your passions and dreams – ticking things off your bucket list or exciting trips abroad – before settling down for your final years.
While that may all sound pretty idyllic, retiring at 60 (or earlier) means you’ll need to have a good sized pension pot and a solid savings strategy. Unless you suddenly receive an unexpected windfall, early retirement is something that you’ll want to plan out much earlier on in your life...
Regardless of your age, one of the most significant considerations you’ll need to make when it comes to retirement is your pension. There’s a range of different options out there. Many people receive workplace pensions through their employer or decide to set up a private pension.
In the UK, you’ll also be entitled to the State Pension. This is money paid to you by the government once you reach a certain age. Anyone in the UK can claim the full new State Pension as long as you have:
Paid at least 35 years of National Insurance contributions through work
Received 35 years’ worth of National Insurance Credits if you’ve been unemployed or sick (these can be combined with National Insurance contributions)
Voluntarily paid National Insurance contributions when living abroad, self-employed or on a low income
The new State Pension amount is currently set at £175.20 a week for men born after April 6 1951, and women born after April 6 1953. If you were born before this, the old basic State Pension is £134.25 a week. This amount tends to increase every year in line with inflation, average living costs, and the average UK wage.
When it comes to what age you’ll need to reach to claim your State Pension payments, it will probably be between 65 and 68, depending on when you were born. This is also likely to increase over the years. That’s because people are now living longer and can continue working until an older age.
If you’re adamant about retiring at 60, you won’t be able to claim your State Pension until you reach State Pension age. This means there could be several years in which you have no income from either a salary or the state. For that reason, it’s essential to consider other ways to save money for the future.
If finishing work at 60 is one of your main aspirations, you’ll need to begin planning for it many years – or even decades – in advance. Some of you’ll be able to ensure you have enough money for retirement – early or otherwise – include:
If you’re in full time or part-time employment and earning over £10,000 a year, your employer should enrol you on to a workplace pension scheme.
Most companies tend to choose the pension provider for you. That provider will then be in charge of investing and growing your pension pot. Your employer will contribute money towards your pension every month, in addition to taking money from your salary for it. Typically, most employers will pay between 3% and 10% of your total annual salary into your pension every year. You’ll then add your own contributions automatically out of your paychecks, topping it up to about 15%.
How much your workplace pension is worth will vary. This depends on your salary and how many years you’ve been adding to that specific pot. The age you can access may differ depending on the pension provider, but it’s usually between 60 and 65. When you first start your job, your employer should set out the details of their pension scheme so you can get a rough idea of when you’ll be able to access it.
As most people tend to work for more than one employer during their lifetime, you might decide to combine multiple workplace pensions into one pot for ease. This is called consolidating your pension, and it’s something you’ll need to organise yourself. It’s worth noting that some providers will charge you a fee for transferring your pension to another provider.
Also known as a defined benefit pension scheme, a final salary pension may be offered to you by some employers. It’s a special kind of workplace pension where your employer promises to pay you a set income or a lump sum based on your final salary when you retire.
Final salary pensions are not as common as they used to be; however, many people like them due to their additional perks. For instance, you might be entitled to access your full pension if you have to retire early due to ill health. Some final salary pension schemes may also allow early retirement regardless of health. However, this could mean you see a reduction in your final pension amount.
This is another kind of pension that anyone can set up, excellent for self-employed people who may not have access to a workplace pension scheme. How personal pensions work is that you’ll choose a provider, set up the pension, then decide how much you’d like to contribute either as regular monthly payments or lump sums. Note that there’s usually a minimum amount you’ll need to add into your pot every year.
The money you contribute to your personal pension is then invested by the provider. Your pension pot should grow over the years, especially if you’re regularly topping it up. You can choose to manage the pension and how it’s invested yourself, pay your provider to do it, or pay a financial advisor to take care of everything.
Personal pensions can usually be accessed at an earlier age than other pensions, although this will depend on the provider. Once you reach the eligible age to start collecting money from it, you’ll be able to withdraw 25% of the total tax-free. The rest will be taxed, and you’ll be able to access it in a lump sum or regular instalments.
Another great way to save for your retirement is by making some wise investments. There’s a range of ways to do this, with one of the most popular being ISAs.
An ISA is an Individual Savings Account which you can usually contribute up to £20,000 every year. This will then earn tax-free interest. You can have several ISAs at once, including:
Stocks and Shares ISA – the money in your ISA is invested into stocks and shares by an experienced fund manager
Cash ISA – a sort of savings account where you’ll make money through the interest yet won’t have to pay any tax on it
Lifetime ISA – you pay up to £4,000 a year into a savings account and receive a 25% bonus from the government. Note that Lifetime ISAs can only be used for those saving up to buy their first home or for retirement
Some people choose to open an ISA instead of a pension. If you can afford it and are savvy with your money, though, it can really pay to have both.
As well as savings accounts and pension pots, you may decide to invest your money into physical assets. The most common type is property, especially property which you’ve bought to rent out.
Having a regular rental income is a brilliant thing to benefit from throughout your lifetime. Still, it’s excellent if you’re hoping to retire before the State Pension age. Depending on how many properties you own and rent out, you may find that you’re able to live entirely off the rental income during your retirement.
You could also help fund your early retirement by selling an asset and then living off (or, at least, partially off) the profits. This could be a rental property or even your main home if you decide it’s time to downsize.
Keen to make the most of your golden years by retiring a little early? Before you get carried away with planning all the adventures you want to have, it’s a good idea to work out what you might need to fund your retirement lifestyle.
Many people recommend half to two-thirds of your final salary amount to live off every year during retirement. But there’s no specific amount you should be saving for. Everyone is different with different expenses, needs, and wants.
Working out what you might need can seem a little daunting, especially if you’re still young and have some years to go before you turn 60. Regardless, you can make a rough plan of what money you might need to retire at 60 by factoring in things like:
Your basic livings costs – this will include money you’ll need to cover rent or mortgage payments (if applicable), bills, food, and other essential items
Any luxuries – this might involve paying for hobbies, eating meals out, or buying new cars and gadgets
Travel – many people are keen to retire at 60, so they have more time to see the world while they’re still relatively young and healthy. If this is a priority for you, you’ll want to have enough saved to fund all those once-in-a-lifetime trips
The costs of the above things are likely to change as you get older. What’s more, you’ll find that there are certain things which you’ll no longer be spending money on (like commuting to work or kids if you have them) once you reach retirement age.
Nevertheless, you’ll need to have a good safety net to ensure that you’re able to retire comfortably and afford all the luxuries you want. The best way to do this is to start saving for the future as early as possible during your working lifetime.
Still not sure how much to save for your retirement? You’ll discover more expert advice about what you might need to live off in your later years on our ‘how much do you need to retire’ page.