Retiring young: Is it too tough or worth the sacrifices needed?
The extreme saving tactics of the ‘Financial Independence, Retire Early’ movement are unrealistic for most people and ‘one way to work yourself into loneliness’, according to critics.
In recent years, some have been inspired to pursue retirement as early in life as they can via a combination of frugality, maximising income and aggressive investing.
Opinion is divided on how successful this approach is unless you are a relatively high earner, and willing to make significant financial sacrifices while still young.
Even naysayers agree that starting to save early and sticking to a financial plan are a good strategy, but urge people to set realistic goals and beware the pitfalls of leaving the workplace too soon.
‘Financial Independence, Retire Early’ was born as a movement from financial self-help books and has gathered momentum on social media and podcasts.
Tactics can vary but typically its fans aim to retire in their 40s by boosting their earnings as much as possible, saving some 70 per cent of their income by living simply, and building up their savings by investing.
‘According to most FIRE how-to guides, you need to save up around 25 times your annual expenses to achieve financial independence,’ explains Richard Harwood, financial planner at Brewin Dolphin.
‘This is known as your ‘FIRE number’. So, if you expect to spend £20,000 a year when you retire, you’d need to save around £500,000.
‘This calculation is based on the assumption that you withdraw 4 per cent of your savings each year in retirement – a withdrawal rate that the FIRE method believes is sustainable if you invest.’
Want to retire early? Your income could take a drastic hit
People determined to retire early have to accept a significantly lower income or risk their pension pot running dry, according to a study published by AJ Bell earlier this year.
This looked at the impact of retiring at either 55 or 65 with a pot worth £91,000, the average size in the UK, if you want it to last to age 90.
AJ Bell also ran the same exercise with a pot worth £200,000. Anyone choosing to wait usually benefits from more investment growth, so they can afford bigger withdrawals and their savings are likely to last longer.
He adds: ‘Quitting work at age 40 might seem like the dream, but it’s a tough goal that might not be right for everyone.’
Sean McCann, chartered financial planner at NFU Mutual, says: ‘While the idea of retiring in your 40s is appealing to some, the level of sacrifice required and the need to save aggressively make it unrealistic for most.
‘However, there are elements of the FIRE movement’s ideas that we can learn from.’
What are the pros of setting a radical early retirement goal?
Having a plan
‘It’s great to have an early plan in place to take control of your financial future,’ notes Harwood, though he is sceptical of many other aspects of the FIRE strategy.
‘The FIRE movement may not be for everyone, but the planning aspects of the movement certainly could prove beneficial to all investors, without necessarily compromising on their quality of life.’
McCann says: ‘Having a retirement age in mind allows you to plan and work out the level of savings you need to make now, whether you want to retire at 45 or 75.’
Looking to the future
‘It is encouraging that so many young people are now thinking about the future and considering sacrificing spending today to secure the lifestyle they want in their later years,’ says Tom Selby, head of retirement policy at AJ Bell.
‘People just need to set sensible, achievable goals and consider the spending/saving balance that best meets those goals.’
McCann adds: ‘Time is one of the key elements when it comes to building up enough funds to achieve financial independence and starting to save as early as possible allows you take advantage of compound growth.’
When will you retire?
The rising state pension age has prompted more people to work for longer, often out of financial necessity.
At present, men and women start drawing the state pension at 66, and this is worth £9,300 a year if you qualify for the full amount.
It is due to rise to 67 between 2026 and 2028, and the Government is currently considering whether to increase it again to 68 between 2037 and 2039.
The minimum age to tap private pensions will rise from 55 to 57 in 2028, to keep it tandem with the state pension.
Setting a budget
‘Questioning everyday expenditure is sensible,’ notes McCann. ‘Whether you’re buying a holiday, a mortgage or your weekly grocery shopping, taking the time to find the best deals can save you thousands of pounds.’
Gaining tax breaks
This is good practice, and pensions are one of the most tax-efficient ways to save for retirement, according to McCann.
‘For every £80 you pay in HMRC will add another £20, and higher rate tax payers are able to claim back additional sums too.
‘However, you can’t access your pension until you reach 55 – and from 2028 this rises to 57 – so if you want to retire before then you’ll need to fill the income gap.
‘Isas can provide a tax-free income alternative.’
‘If you’re married or in a civil partnership make sure you’re using the tax-free allowances you both have. Using both personal allowances, savings allowances and dividend allowances can allow a couple to enjoy an income of £31,140 tax-free.
‘Moving income producing assets between you can help you maximise the income you hold on to.’
See the box above for more on retirement ages, and scroll down to find a guide on plugging the financial gap if you retire earlier.
What are the downsides of trying to retire in middle age?
Sacrificing your youth
‘Selling an unrealistic dream of financial independence at the expense of your younger years is ill-conceived and one way to work yourself into loneliness,’ says Harwood.
‘Would you really like to look back on your life and see that you’d spent your 20s and 30s sacrificing valuable experiences?
‘You may have money later, but the time is probably lost forever, for the sake of £20k a year- if you’re lucky.’
Richard Harwood: ‘Selling an unrealistic dream of financial independence at the expense of your younger years is ill-conceived’
He adds: ‘It’s crucial to consider the sacrifices involved to achieve a very aggressive savings rate, and to work out what’s realistic, particularly if children could be on the horizon or are already in the picture.’
Selby says: ‘Most people will prefer to balance enjoying life today with saving for the future.
‘There is nothing wrong with targeting early retirement, although the extreme saving methods often associated with the so-called FIRE movement won’t appeal to the majority and often involve making huge sacrifices in your youth.’
Running out of money
‘The biggest risk is that you retire and discover your retirement pot isn’t sufficient to fund what could be an extremely long retirement if your calculations fall short,’ warns Harwood.
‘It’s worth noting that it will be hard to go back into the workplace 10 or 20 years after that early retirement, bearing in mind that you can’t access money inside personal pensions until age 55 – rising to 57 from April 2028.’
Harwood also cautions: ‘It’s worth noting that the 4 per cent withdrawal rule was developed using US market performance data from 1926 to 1992 and targeted at retirees with a 30-year time horizon.
‘For a UK investor in the 2020s, with a 50-year time horizon, there’s a real risk that relying on the 4 per cent rule results in savings being depleted too quickly.’
Selby says you need to be clear about the trade-offs involved because ultimately the earlier you retire, the longer your pension pot will need to last for.
‘You need to consider the lifestyle you want to enjoy when you stop working and how much it will cost to fund that lifestyle,’ he says.
He reckons the biggest challenge to the FIRE strategy is likely to be achieving a sustainable long term income.
‘A healthy 40-year-old can expect to live another four or five decades – for a 4 per cent withdrawal rate to be sustainable over that period of time would require some serious heavy lifting from your investments.
‘The big danger here is that you will end up running out of money early and left relying on the state, potentially for decades. Few people’s retirement dreams would involve being on the breadline in their 60, 70s and beyond.’
>>>How to invest your pension and live off it in retirement: Read This is Money’s 12-step starters’ guide here.
Relying on Isas
If you want to retire at 40, you would need to save a large chunk of money in Isas or other vehicles to see you through until you can start drawing private pensions and the state pension, points out Harwood.
But he cautions: ‘Whilst Isas are a tax-efficient way of saving and investing, they don’t have as many tax saving benefits as pensions.
‘Without a workplace pension, individuals will miss out on employer contributions and tax relief on personal contributions, both of which can supercharge retirement funds.’
State pension age is 66 and rising
‘If you are planning on retiring in your 40s, you do need to factor in that you won’t receive the full state pension when you reach your state pension age unless you have 35 years of qualifying National Insurance contributions,’ says McCann.
You can make voluntary top-ups to improve your state pension, which is currently worth around £9,600 a year if you have a full record.
How do you plug a retirement savings gap?
This is Money looked at how savers could bridge the gap if they want to retire early or need cash here.
Pension experts offered the following advice.
1. Check your mortgages or loans
If you have any that need to be repaid using your tax-free lump sum when you are 55, you should start talking to your lenders as soon as possible, says Carla Morris, wealth director at Brewin Dolphin.
‘Discuss all the options available to you including the options to extend the term of the mortgage or loan. It is important that you are aware of what repayments may need to be made.’
2. Make other arrangements to cover university or school fees
‘People who are turning 55 when their children go to university may well have been thinking about using their tax-free cash to pay fees, or even to help pay school fees,’ says Morris.
‘If you are in this position, do make sure you make additional savings contributions to cover the costs. The earlier you start saving the better and using tax efficient investments such as Isas will ensure returns aren’t taxed.’
3. Review your pensions
Find out if your pension fund will be derisked or ‘lifestyled’, suggests Morris.
‘Some pension providers offer lifestyle funds which move the pension from higher to lower risk over the years, especially as you move towards retirement age.
‘If the provider has set a retirement age of 55, they may start changing the composition of the pension fund too early and you could lose out on some investment gains.’
Read a This is Money guide to derisking a pension, including whether to avoid this or call a halt if it doesn’t suit your plan to stay invested in retirement.
Build up your Isas
Having savings outside of a pension wrapper gives you complete choice, says Ian Browne, pension expert at Quilter.
‘It is illusory for most people to expect to be able to retire in their 50s unless they really have substantial private savings.
‘Isas are much less generous than pensions because they don’t come with the same top-up in the form of tax relief.
‘The trade-off with a pension is that you get that savings boost from the Government, but you have to keep your money locked up for longer. With an Isa you can withdraw money to supplement your income at any time.’
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