I retired three years ago when I was 55 years young. My plan was to always retire early, for no particular reason apart from the fact that I felt there was more to life than just work, and I wanted to have a good long retirement in which to enjoy it.
I remember when I set up my first personal pension, back in the days before you could do these things yourself on the computer, a pension advisor from Barclays came round and one of the questions he asked was ‘when do you want to retire?’. I told him 55 as that seemed like as good an age as any, and then from that point on, this became my goal. In hindsight I feel that I was actually quite late setting up my pension and thinking about retirement. In an ideal world I should have done this earlier, but I was unsure what I wanted to do with my life, was late going to university, spent four years as an undergraduate and then drifted into post graduate research. I was 27 years old when the man from Barclays asked me what age I wanted to retire, and it was only then that I started contributing to a personal pension plan. I was paying in £30 a month which was around 3.5% of my annual salary as a university Research Associate. I’m not sure what made me decide to start a pension, but it was the start of a life long habit that paid off later in life. I guess the important point here is that you don’t have to start contributing to a pension particularly early in life and you don’t have to contribute a lot to start off with. You probably don’t want to leave it much later than I did, but starting is the key thing. Once you start, it becomes a habit, and the money that goes into your pension is never really missed if it never actually reaches your bank account in the first place. After my research post I got a ‘proper’ job in sales and then had the opportunity to join my company pension scheme. I stopped contributing to my personal pension and instead contributed to the new work pension. I don’t recall much about the details of this pension, but believe I paid a nominal percentage of my income and the company also contributed a small amount. In those days I was less interested in the detail, and anyway, everything was done via letter and access to the detail was not really as easy as it is today. I worked for this company for around nine years and my average salary during that time was probably around £20,000 (starting around £12,000 and rising as I progressed in my career to about £30,000). The total contribution to this pension per year was probably in the region of 8% (3% from me and 5% from my employer), and so over the nine years I was working for them, I would guess that the total contributions to my pension were around £15,000, of which just over £5,000 were taken from my salary. Bear with me, there is a point to all this. After moving to a new company, this pension was frozen and I filed away the details. However, it was still ‘doing its thing’ in the background, growing slowly at first and then more and more over time as growth was applied to the original investments and all previous year’s growth (the compounding effect). After sixteen years, I decided to consolidate some of my old pensions including this one. I checked that I would not lose any benefits or incur any costs by moving it (I wouldn’t) and then asked for it to be transferred to Hargreaves Lansdown where I had been consolidating my finances. The £5,000 that I had personally paid towards my pension (plus £10,000 from employer and any government contributions), was now worth a rather impressive £101,000. That was from nine years of pension contributions between my late 20s and my late 30s. Over my working life I did contribute to a number of other pension schemes, but this one is worth highlighting as it clearly demonstrates a fundamental principle of pension contributions. It doesn’t matter if your contributions are not that great to start off with. Contribute what you can, it will be supplemented by your employer and the government. But more importantly, starting early gives you the gift of time, and time in the market is what will help your pension pot grow. There is also another investment that we should look at briefly, and this one should also be considered for early and regular investment if you want to retire before your official government retirement age. This is the stocks and shares individual savings account, more commonly referred to as the stocks and shares ISA. When I was in my 20s ISAs didn’t exist, however, there was something that was very similar which was a Personal Equity Plan, or PEP for short. These were eventually superseded and by 2008, these PEPs had all been converted to stocks and shares ISAs. Anyhow, I started my PEP while in my 20s and continued to invest small amounts over the years. Currently an ISA has an annual contribution limit of £20,000 and so this is very generous. I will stress, this is the maximum you can put in each year, but you don’t have to invest as much as that. As with a pension, any small, regular contribution from an early age will grow with time, and it’s the development of a habit to invest that is as important as the amount invested. As you get older, and earn more money, you can increase your monthly contributions as appropriate. You may be wondering why bother with a stocks and shares ISA if you already invest in a pension. Whilst the underlying investments are often similar, the tax treatment of a pension and an ISA are different, and having both can give you more flexibility when you retire. As an example, the current personal tax free allowance is £12,570, and so you can withdraw this amount each year from your pension without paying any tax. In other words, if you take much more than £1,000 per month from your pension, you are going to have to start paying tax on it. However, with an ISA, any money you withdraw is tax free. So if you have money invested in both a pension and an ISA, once you retire you can minimise the amount of tax you pay by utilising your investments in both. As an example, you could take £1,000 per month of tax free cash from your pension and another £1,000 per month, tax free, from your ISA, giving you a potential retirement income of £2,000 per month completely tax free. Another reason to utilise an ISA alongside a pension is that you cannot access your pension money until you are 55 years old (but expected to rise to 57 by 2028). Therefore, if you need income before this, you definitely need to invest in an ISA to enable you to retire when you want. Many people dream of retiring early but never achieve it. However, it is possible to retire early if you make the right plans and start investing as soon as you can. Time is the friend of the investor, as while in the short term your investments can go down as well as up, over the long term, with a diversified portfolio of quality investments, your pension and ISA should both grow to allow you to retire by the age of 55. However, contrary what anyone might say, there isn’t just one approach to achieving an early retirement, and the options I present here are just that, options. This isn’t financial advice, but reflections from my own plans to retire early. Did I do everything right? Probably not. Did I manage to retire at 55? Yes, I most certainly did.
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Guest blog written by Jordan from Sterling with Sterling Pleasingly, it is slowly but surely becoming more and more 'trendy' for the average Briton to start looking deeper into their personal finances. For many years we have set our money to autopilot and allowed it to go in and out of our bank accounts without utilising it in a way that grows our net worth. In fact, I would argue that most people in the UK couldn't tell you what their net worth is, can you? Do you know your projected retirement age? These are questions we aren't taught the answers to at school but perhaps ones that are vital to get your head around if you are to retire early. So, without further ado, here are the 5 rules I swear to live by in order to retire early.
Take home pay - know your monthly income figure Before spending money, you must know your ‘starting point’. Once you are paid, see what you have. Then, work out what your necessity spends are until you next receive income. Now, with just a few minutes sitting down looking at your finances, you know how much you’re starting with, what you have to spend and what you can spend; this is the value of knowing your take home pay. It’s the foundation on which you will build your future. Remember, if you are to retire early, the difference between what you start with and what you have to spend is best off being invested or saved. The gap between income and expenses is the one thing that will allow you to reach your financial goals. Conveniently, this leads me onto my next rule… Pay yourself first This rule refers to what I call ‘me money’. This, as explained with the first rule, is the difference between my income and my spend. The bigger this gap, the sooner I can retire. I’m sure that anybody who has retired early will tell you that this ‘me money’ needs to be utilised before you spend money on life’s necessities (bills and groceries etc). Pay yourself first or else you won’t pay yourself at all. Set yourself a budget - without a budget the spending never stops Once again, this next rule ties in with the previous one. If you fail to start the month with a budget in place, then how can you track your spending? What are you tracking it against? Chances are, without a budget or plan in place, you will spend more money than necessary in all areas. Whether it be transport and petrol/diesel, groceries and essentials, or even leisure and hobbies… without a budget, your spending will spin out of control. Work out what you currently spend on each ‘category’, then work out what you want to spend on each category – try and find a reasonable limit using these two figures. If you can keep to these limits each month whilst continuing to grow your income, then the amount of ‘me money’ you have each money will only increase. Make sure not to live above your means! Don't borrow what you can't repay This rule is simple. It shouldn’t really require a lot of explanation. These days there are multiple credit options on offer to the British public. Often, you will be approved for these flexible credit options despite having a poor credit score. This can be tempting and can promise to pull you out of a sticky financial situation, but this is not always the reality. If you can’t afford something right now, and intend to use credit, then ask yourself what will be different in the future? What will be different in 6 months from now that means you will be able to pay off the debt? If you aren’t certain that you will be able to pay off the debt, then don’t borrow that money! Think before you buy - will future you regret this purchase? This is self-explanatory. Try to avoid buying things that you will regret buying a few months down the line. Of course, this is easier said than done. So, I pass down a rule of thumb I was told a while back… open the notes app in your phone or if you’re old school, get out a notepad and pen. Now, write down that thing you really want to buy, that thing which (right now) you’re sure you can’t live without. Okay, now, the hard bit… don’t buy it. Allow 3 months to pass. Do you still want it? Have you even remembered that you wanted it in the first place? Do you even know where that notepad and pen is? If the answer to these questions is no, then you would have saved yourself some money. Money that would have been spent on something which you wouldn’t use, something that would only depreciate in value. Instead, you will now have some more ‘me money’ which can be invested in your future! And by the way, if the answer to those questions was yes and you do still desperately want to make that purchase then good for you! You’re all set and ready to buy something you actually need and desire. I can only hope that these rules stick with you and that you implement them in your life. I truly believe that in the world of personal finance, these are rules to live by. They are principles. Foundations of a financial philosophy. When it comes to planning for your financial future, now is always the best time to start... For more insight regarding all things personal finance visit sterlingwithsterling.com and have a read of our blogs! Until next time, Jordan |