When should I consider retirement?

For many folk in their 50’s and early 60’s this is the million-dollar question. Go too early and risk running out of money or wait a few more years and risk unforeseen events impacting your life, or worse still, health issues that limit or constrain what you’re able to do…. There is of course no “right answer” however in this short blog post I’ll try to make the case for why you might consider a sooner rather than later approach to the retirement conundrum.

I guess the main reason for delaying retirement is financial and the million-dollar question… have I got sufficient funds to support a long retirement? If, for example, you live into your 90’s you might need an investment pot that lasts for over 30 years and that’s a long time – in anyone’s book.

Retirement budget

First and foremost, the most critical factor, as has been mentioned in previous blogs, is budget – your standard of living and what you spend in retirement, will be the single most important aspect in affordability. If, for example, you have two good incomes, maybe exceeding 100k per year, still have a mortgage and maybe a car loan or lease and enjoy two long haul holidays a year. Then unless you have an enormous fund, you’re unlikely to be able to afford to retire in your 50’s and would be best remaining in the world of work for the foreseeable future. However, if you are in that fortunate position and wish to retire within the next 5-10 years, then you need to get your affairs in order to prepare for that future you’re dreaming of.

Preparing for retirement

For example, I would consider paying off your mortgage, maybe using the tax-free lump sum from your pension fund. Possibly trading in the car for something more modest, and then use the monthly savings to increase your pension through salary sacrifice. In my last few years of employment, I sacrificed over half my salary into my pension fund and while this meant I had less to live on, I paid much less tax and significantly increased my pension contributions. Remember that these contributions are tax-free on the way in and 25% are tax-free on the way out through drawdown and in addition with a lower income in retirement you’re also likely to pay less tax.

Can I afford to retire now?

Anyway, back to the point of this blog – can I afford to retire NOW? As I say, constructing a budget is critical.

Committed outgoings

For me, it was all about getting my committed spending down to a minimum and then working out whether the quality of life I aspired to, was attainable with the funds I had available. As I have no borrowing, my committed spending is based on the following: council tax, electric (including car charging) water, car and home insurance, mobile phone, broadband, and my gym subs. These totalled around £500 a month.

Discretionary outgoings

On top of that, I had what I considered to be discretionary spending, on subscriptions including things like Amazon Prime, Microsoft Office and various streaming services – believe it or not these come to about £100 a month. So my fixed costs are around £600 a month. On top of that I need to eat, clothe myself and have some fun, which might include things like eating out, going to a show or of course travelling. And of course, there needs to be contingencies for car and home maintenance and spending on “things” such as new phones and other non-essential gadgets.

As I say, it’s hard to come up with a specific “number” but I came to the conclusion that at a push I could “manage” on £1,500 a month, but a more comfortable budget would be £2,000 a month or £24,000 per year. As the personal allowance is currently £12,500 of the £24,000 of drawdown you would pay 20% on £11,500 which would be £2,300. Therefore, the total amount of available funds in this scenario, would be £21,700 a year or just over £1,800 a month. As I’m now just 64, I’m two years away from receiving my state pension at 66. This will provide nearly £1k a month in income making my target of £24,000 achievable as my drawdown would be just £12,000 per year, which is an achievable 4% of a £300k pension fund.

The key to my early retirement

So for me, the key to my early retirement was and is to manage on less until the state pension kicks in, to ensure I don’t draw too much from my fund, particularly when the stock market is depressed. So, unfortunately, there isn’t a single or easy answer to the question “when should I retire” or “can I afford to retire”. However, the principles of preparing your affairs, reducing spending and ultimately trying not to withdraw more than 4% of your fund per year are good places to start…