It’s a good idea to have goals I retired early, about 4 years ago now. It wasn’t really really early, and I’m not sure if you could say I followed the principles of FIRE (Financial Independence, Retire Early), but I had always wanted to stop working by the time I had reached the age of 55, and so I did. Because I had given myself the deadline of 55 years young for retiring, I guess that focused my mind a little during my working life. The state pension isn’t available to me until I am 67 years old, and even then, it’s not really enough for me to have the sort of lifestyle that I want. So to achieve my goal I would need to be able to fund myself from 55 to 67 years old and then further supplement the state pension from 67 onwards. Throughout my life, I never felt that I was doing without, or living especially frugal, but having my goal probably helped me to make some ‘better’ financial decisions. Having goals can do that for you. It’s a good idea to have goals for all sorts of things in life and goals around finance are particularly important as money really CAN make you happy, despite what some might have you believe. I should have tracked my investments closer In my late 20s I started a pension scheme, initially a personal one and then a company one. I also started a stocks and shares ISA (it was called a PEP then, but essentially the same thing). An ISA is a U.K. product and it stands for Individual Savings Account. However, there are a number of different varieties of ISA and the stocks and shares ISA enables you to invest up to £20,000 per year in the stock market and all gains and income are completely tax free. I didn’t know much about pensions or ISAs at the time and I just invested regularly in the default funds. When I say regularly, I mean monthly, either through work or direct debit. I hadn’t thought about the concept of ‘compound interest’ or carried out any forecasting to see how much I should put away each month to achieve my goals; I just put away small amounts that I could afford at the time and increased them as I could afford more. It felt like a strategy that made sense if I wanted to be able to accumulate wealth and retire early. Every few years I would have a look at what I had accumulated in my investments and although I wasn’t looking at total net worth, I could see that accumulated wealth was increasing over the years. In hindsight I should have tracked my investments closer, tracked net worth over time and monitored progress towards my goal a little better. Putting money into my pension and ISA was a habit I then worked for around 30 years, focussing on my career and family, and didn’t think much about my investments. Putting money into my pension and ISA was a habit. I put in what I could afford and when my company offered to match a higher pension contribution it seemed like a good idea, and so I increased my contribution to the maximum they would match. Here’s a tip; check your company pension scheme and if they will match your contribution at a higher level than you are currently contributing at, then this is free money you should be taking. Decided to consolidate a number of company pensions In my late 40s and early 50s I started thinking about my retirement goal of 55 a little more seriously. I started to focus on the value of my investments and how realistic my goal to retire early was going to be. I decided to consolidate a number of company pensions that were spread across a number of pension providers. I checked first that I could do this without penalty and then moved them all to Hargreaves Lansdown where I then had complete control over what they were invested in. This also gave me greater visibility and understanding of how much I had and helped me to start thinking about what I needed to do, to enable me to reach my retirement goal. I needed my funds to produce an income Previously, all of my investments, both in my pension and my stocks and shares ISA were in the default accumulation funds. When you are looking to grow your investment, an accumulation fund is fine. This type of fund will automatically reinvest any dividends or interest back into the fund, and this is what helps it grow and gives you the compounding effect over time. However, I needed my funds to produce an income for me during retirement, and so I started to move my investments into income funds. With income funds, any money the fund produces through dividends or interest is paid out as income. Increased the level of diversification I also wanted to reduce any potential volatility within my investments as I approached retirement and so I increased the level of diversification within my fund holding. This meant that in practice I moved from holding 2 or 3 funds to closer to 25 funds split across asset types (shares and bonds) and across geographies. I made all these changes over a number of years; I don’t like to make large scale changes in one go, I make lots of small changes over a long period of time and check that everything is working as planned before taking the next step. Diversification reduces volatility of your investments because if one asset type or geographic area isn’t doing well, then another asset type or area may be doing better, which balances things out somewhat. Always been tempted by property Also as a part of my diversification I started to look at other types of investment. I had always been tempted by property but had never really found the time to pursue buy-to-let properties whilst working. I was still quite hesitant about buy-to-let when I happened to come across a new company called Property Partner. With Property Partner you can buy shares of a property along with other investors and then receive your portion of the rental income each month. After 5 years there is a vote to decide on whether or not to sell the property or keep it for another 5 year term. There is also a secondary market if you need to sell your shares earlier than the 5 year term. From an investors point of view, owning property through Property Partner is a much easier option compared to owning your own buy-to-let property, as it allows you to diversify across a wide range of properties without the worry of property management, as this is all taken care of by Property Partner. It hasn’t been all plain sailing however, and over the last few years, returns have not been as great as expected. However, the company has now been bought by a U.S. mortgage company called Better which has already resulted in some improvements such as lower fees. This along with the post covid recovery could see investor returns improving over the next few years. Currently the rental yields I am receiving are around 3% - 4%, but with the few properties that have gone through the full five year cycle I have made just under 14% return as the bulk of the profit has been through the increase in property value between purchase and sale, rather than through rental yield. Continue to look for new opportunities Recently I have also started to look at a newer company called Proptee. This works in a similar fashion to Property Partner, but uses the power of NFTs (Non-Fungible Tokens) that are associated with real rental properties. It’s an interesting concept that lets you benefit from rental yield and growth in property value, but again with none of the management issues you may have with traditional buy-to-let. As this is a newer start up company built on a newer technology, there is probably a greater risk associated with investing through Proptee than through Property Partner. However, it highlights that as newer technologies develop, so do the opportunities for investors. I continue to look for new opportunities to invest in, but always start cautiously and carry out my own due diligence. Generating un-taxed passive income Soon after my 55th birthday I handed in my notice at work and ‘retired’. In the U.K. you are allowed to withdraw 25% of your pension fund without paying any tax and so this is what I did. This enabled me to buy a car to replace the company car that had to be returned, and the rest went straight back into investments. It couldn’t go straight into my stocks and shares ISA as it exceeded my annual allowance (£20,000), but it was invested in general investment accounts, and over the next few years was gradually moved in to my stocks and shares ISA, invested in funds generating un-taxed passive income. Following a natural yield approach My remaining pension went in to a drawdown account as I believe that the value you get from an annuity is very poor. I’m following a natural yield approach both with my pension and my stocks and shares ISA, which means that I only draw off the income that is produced though dividends or interest and the capital is left untouched. Hopefully in this way, my investments will last throughout my retirement, maybe growing slightly in value and continuing to produce enough passive income for me to have the lifestyle I want. Personal finance is just that; personal This is my story, which I am sure is very different from your story. Personal finance is just that; personal. There isn’t one way that is the right way, just a set of general guiding principles. I didn’t start to gain a real interest in finance until quite late in life. Up until that point, I stumbled along and followed my own gut feelings of what felt right to me. It didn’t work out too bad and I achieved my goal of retiring by 55. But I am sure I could have done things better, invested more, invested smarter and retired with greater wealth than I now have. Please remember, what I have written is not investment advice. But if it makes you stop and think, or if it gives you a new way of looking at things, then I have done my job.
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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. |