Updated: Feb 21
In theory you can retire whenever you like.
Most people expect to work until they start claiming their state pension. But you can quit working earlier if you want. That’s providing you’ve got everything in place of course. So how soon can you retire? What do you need to have in place?
Here are 5 boxes that you need to check before handing in your notice.
1. You need to have set a retirement budget and proven to yourself that you can stick to it
Living expenses in retirement don’t fall as much as you’d expect. True, you can expect to save money on not travelling to work and you’ll not need to spend as much on clothing. However, researchers found that after finishing work, the average Brit plans to take three holidays a year and fill their time with a horde of new hobbies and pastimes.
On average, adding the cost of running a car, utility bills, food and other necessities, pensioners should expect to spend £19,000 a year in total. That rises to £26,000 for a couple.
Before you can retire you should draw up a budget that reflects the lifestyle you want and which fits with the income you expect to receive from your pension fund. Then stick to it for 6 months.
If you can’t live that long without raiding your savings or building up balances on your credit cards, you’re probably not ready to retire. You need to save some more into your retirement fund first.
2. You have little or no debt
You don’t want to be using your retirement savings to service interest on debt. Using your retirement savings to pay creditors will cut the amount of money you have to spend on the fun things that you’ve been planning for years.
Debt also creates a risk to your budget. You could find yourself unable to meet debt repayments if interest rates increase after you stop working.
Having said that, the high cost of housing in some areas of the country means that many people will not be free from their mortgage by the time they retire. It’s important to clear that debt straight away, probably using any lump sum payments you get.
If you have any outstanding debt and won’t be able to take a lump sum big enough to clear that on day one of retirement you’re probably not ready to retire.
3. Your Children Are Financially Independent
Children are a costly business. From birth to 18 the average child costs their parents over £71,000. There is nothing more likely to sink your budget than having children that are still financially dependent on you.
More than 3.6 million adults between the ages of 20 and 34 were living with parents in 2020, 28% of that age group, according to the Office for National Statistics. Even though they may be working in paid employment, grown up children living with their parents still places a drain on the family finances.
If you’ve got kids at university or have an “adult kid” at home you can still retire, but make sure you’ve sufficient money set aside for supporting them. It’s easier to retire after they’ve flown the nest though.
4. You Have Enough Money Saved to Withstand Losses and Still Provide the Income You Need
There is no single value of pension fund that is required for retirement. It all depends on your circumstances. Any income that you expect to receive from a rental property, an inheritance or other savings should all be taken into account.
You might want to consider getting qualified advice on how big your pension pot needs to be in order to support your retirement plans. But you will want to ensure that won’t run out of money even if your fund suffers losses.
Where does the “suffers losses” bit come in?
Let me explain.
It’s wrong to assume that, if you expect your pension fund to grow at 4% a year after inflation, you’ll be able to draw down 4% a year from your fund. Market returns will vary year-by-year around the 4% average you hope for. If, for example, the market falls by 10% one year, and you still take the 4% as planned, you will need a circa-16% gain the following year to recover your initial position. Miscalculating withdrawals in a downturn can put your long term income at risk.
[Note: Find out whether you’re on course to achieve the retirement you desire and discover how to retire when you want. Schedule a free 15-minute initial consultation with a qualified adviser.]
5. You Need to be Ready Emotionally Too
When considering how soon you can retire, it would be a mistake to think only in terms of your financial health. Your mental health is important too.
Think carefully about the life you want to live after you’ve finished work. About the holidays you want to take, the places you want to visit, where you want to live and the activities you want to pursue. Do you want to continue in a part time job, or perhaps work as a volunteer?
You’ll hopefully live about one third of your total life in retirement so it’s important to make sure that you know how you are going spend your time. If you are a real career person, being emotionally ready means that you know how you intend to replace that sense of worth that you gained from your job.
So, you’re asking: How soon can I retire? If you can check these five boxes, the good news is that you should be ready to retire now. If not, the answer is “as soon as you’ve checked the boxes.”
The articles are for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.
Names have been changed to protect identity.
No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.