Early Retirement – All You Need To Know

- by Isla Williams

Sometimes, you may be left with the decision: Be made redundant or decide to go for an early retirement. In this chapter, we discuss the pros and cons of an early retirement and how to know if it’s right for you.

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Early Retirement -  All You Need To Know - Cashfloat

It can be a difficult time when work comes to an end. If you have been made redundant, it is doubly stressful, especially if you still have a mortgage to pay and a family to raise. However, sometimes the opportunity arises to go for early retirement, and while this may seem to be the perfect opportunity to fulfil your dreams, it can come at some financial cost.

So, is the dream of endless spare time worth the financial costs that could occur if you choose this path?

How to Retire Early

Thinking about retiring early? Retiring early begins with looking at your finances to see if you can afford to retire early. Aim to have all your debts paid off before you retire, including any bad credit loans and your mortgage if possible. Begin living below your means and focus on reducing your big expenses. Think of a backup plan which could work for you – what if you hate the unstructured days of early retirement, can you return to work?

Before you retire early, here are some points to think about;

  • How much money do you need before retiring?
  • Do you have debts which are not paid off?
  • Have you maxed out your retirement accounts?
  • Have you gotten serious about lifestyle changes?
  • Do you have a retirement budget in place?
Considering early retirement? Make sure you have a retirement budget in place - Cashfloat

Early retirement due to ill health

First, let us look at considering early retirement due to ill health or disability. It is important to get expert advice on this matter and to consider all the available options before going down this route. All employees have various rights. If a chronic illness, such as diabetes, is making it hard for you to work your regular hours, then an employer must take reasonable steps to assist you at work. One option may involve working part-time or taking on flexible hours. An employer who has been requested to help in this way is obligated to assist as long as the request is reasonable.

If you suffer from long term ill health, some benefits can be claimed if you take early retirement. One of these is the Personal Independence Payment, and there are others for housing. If you cannot claim a full pension due to lack of contributions, the Employment And Support Allowance may be applicable.

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Early Retirement – The Pros and Cons

Early retirement may be an option, but it can depend upon several factors whether or not this a good choice. If you own your home outright, have no debt and have a healthy savings account, then you can anticipate a decent retirement. However, some trade-offs will have an impact on your decision. So, looking at the advantages and disadvantages of early retirement is a worthwhile exercise before you take the plunge.

The pros of early retirement

Early retirement can look like the opportunity you have been waiting for. It is a chance to expand your horizons by travelling, taking up a long-awaited hobby or achieving a closer relationship with family and friends. All of these are valid reasons for wanting to retire, but like other choices in life, there are always consequences to be considered before you take action.

• Part Time Work And Higher Education
Taking early retirement can allow you to start a part time job in a new field of employment. In some cases, people fulfill their dreams by working at something that they have dreamed about all of their lives. If this is the case, then working part time may also allow you to go for a part-time degree or some other qualification that you have always wanted to achieve.

• Travelling Around The World
Of course, a lot of early retirees put travel at the top of their bucket list. If you have taken early retirement, the chances are that you are still healthy and active. So, many newly retired now spend their time in very active pursuits like hiking or mountain biking in remote places. However, extended travelling is costly, and this should be a consideration before you leave work.

• Spending Time With Family And Friends
An early retirement means you can invest more time with your family and friends. This means more quality time with children, elderly parents and a spouse. It also means that you can spend more time in your own home instead of spending the bulk of your waking hours at work.

The cons of early retirement

Working can often make people feel young, especially when they are around younger people. Some people may choose to continue working even after reaching retirement age and they say it keeps them vibrant with something to wake up for every morning.

• Access To Pensions And Savings
One of the cons of early retirement is that access to a private pension may be limited. Also, any pension package taken early, may cause a reduction in the amount you receive each month. If this is going to have a severe impact on your monthly income, then it may not be possible to enjoy all the aspects of retirement that you crave. If you find your monthly pension is not enough, you may be tempted to take out a quick loan with an instant decision. Borrowing money once you have stopped working could be difficult to repay, and payday loans should only be used with a clear plan of repayment.

Any savings that are invested in stocks and shares may benefit from being left in for longer. Look at your portfolio and consider the penalties for early withdrawal as well as the price of shares. Do this before you retire and not after, as the price of shares can and do take a hit just when you don’t want them to.

• Health Care And Insurance
Although the UK has the National Health Service, which is still free for all, leaving work early may mean the loss of private health care if that is part of your employment package. Additionally, as you get older the cost of travel insurance will increase, this can also affect the terms of a policy if you have a long term condition. As a result, those long trips abroad are going to cost more.


Ways to Supplement your Income in Retirement

Part-Time Work for Pensioners

After retirement, many older people choose to remain at work but on reduced hours. Alternatively, they take up a part-time job in a completely different field. This can supplement the income from your pension without making you feel so exhausted that you can’t enjoy your retirement. The added benefit is that it gives you an interest outside the home and brings you in contact with others if you feel isolated.

Using Your Home as a Source of Income

One way you could make money from your property is to take in a lodger. Having a stranger living in your home will bring its own challenges but can solve your financial problems and bring in extra cash. Make sure that you calculate how much another person in the household will affect how much you’ll pay for energy bills, Council Tax, etc. Recent changes in the tax rules mean you’re allowed to make £7,500 per year from a tenant before you need to pay tax.

You might decide to sell your property and choose to downsize. With increasing house prices you won’t be left with much of a lump sum. Still, if you move from a larger house, all your bills will be smaller.

Equity Release or Converting your Pension Pot

Finally, another way you could use your home as a source of income is to arrange an equity release. This complex financial transaction has its pros and cons, so it’s best to consult an independent financial advisor before you decide whether it is right for you.

You might choose to convert your pension pot into a (life-time) annuity or income drawdown. Like equity release, you’ll need the advice and guidance of a FCA-registered financial advisor. Guidelines of their pros and cons are available from the government’s free advisory service, Pension Wise.

Cashfloat assist in preparing a retirement budget

Planning for Retirement

Retirement is a time when budgeting becomes more important than ever. Although your state pension increases according to inflation, your other sources of income might not. For this reason, it’s essential that you look at your retirement budget every three months. In this way, you’ll be able to take steps to increase your income, reduce your non-essential expenses or both before the situation gets out of control. Here are a few tips on how to estimate your income and expenses to make your budget as accurate as possible:

  1. Work out your Retirement Expenses

    You should start thinking about your retirement at least a decade before you reach retirement age. The two questions you must ask yourself are ‘How large an income will I need?’ and ‘How much must I save beforehand to give me that level of income?’

    Statistics would suggest that you need to have a half to two-thirds of your final salary to maintain your current lifestyle. If you’re prepared to economise on some categories where you used to spend money when you were in paid employment, you can manage on less. Budgeting is necessary but not so much that you can’t maintain a decent standard of living. Before you can make this decision, you need to have a clearer idea of how much you’ll have at your disposal.

  2. Calculate your Income

    • Check your State Pension

      Did you know that according to the charity Age UK, £3.5 billion remains unclaimed every year quite simply because older people don’t know what they’re entitled to? How much you’ll receive from the government will depend on your National Insurance contributions over your years of work. To be eligible for a full state pension, you need to have worked or been accredited with N.I.contributions for at least 35 years. To find out how many you have, you can request a statement, which will inform you if there are any gaps in your record.

    • What if you have Gaps in your N.I. Record?

      If you lack the necessary number of N.I. contributions, then you can opt to make voluntary contributions to fill in the gaps. Alternatively, you might continue to work and defer your retirement for a few years. If you do so, your pension will increase by 1% for every 9 weeks you delay retirement (the equivalent of 5.8% annually).

    • Estimate your Private Pension Schemes

      If you have contributed money to a defined benefit pension scheme, then you should receive an annual statement letting you know of your savings and investments. Remember to include this sum when you’re calculating how much money you’ll have when you retire. In the last ten years before you retire, any investments should be lower-risk. Some pension funds will make this switch automatically, For others, you’ll have to notify them.


  3. Clear your Debts

    Apart from checking your income, another thing you should do in your final years of work is to clear as many of your debts as possible. If you had a standard 25-year mortgage, then this will no doubt be paid off in the years before you stop work. Apart from your mortgage, you should budget so that you’re also able to clear any other debts such as personal loans and credit cards. You should start with the ones with the highest interest rates and work your way down the list. The benefit of this is that you’ll save money and have fewer expenses when your income is smaller.

Conclusion

One of the most important factors to consider before taking early retirement is to think about how you are going to fill your days. If you do not have an interest in a particular hobby, you could find yourself with time on your hands and nothing with which to fill it except TV or gardening. Before going for your early retirement, you might want to get some advice from the pension advisory service who offer free, independant guidance on pension matters and can help resolve any problems you may have with your pension.

Additionally, taking early retirement is sometimes a trigger for adult children to use you as an unpaid babysitter. As our life expectancy is continually going up, the government has seen fit to raise the pension age – this is for a good reason. Unless you have a life plan in place that allows for early retirement, it is probably a better option to reduce your hours gradually at work until you are ready for final retirement.


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About The Author
Isla Williams
A born writer, Isla had her first article published at age 9 in a local magazine. Isla's joy emerges when pen strikes paper, and she can tap into her creative self. "I love to share knowledge/information and help others to be in the know while being as friendly as I can.” Isla is an accountant by profession but has taken a break to do what she enjoys most - writing.
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