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A Step-by-Step Guide to an Early Retirement

In the current economic climate, early retirement is considered a far-fetched dream. In fact, the average retirement age for the UK-population is increasing year by year. Currently, men qualify for retirement benefits at the age of 67, whereas women can retire by 66. With that said,

the retirement age is expected to increase in the upcoming years.

However, despite the odds, the concept of early retirement is not just a fantasy. If you remain dedicated to your goals and plan ahead, you can achieve all your professional milestones and retire at the ideal age. If you wish to retire early, you can follow this step-by-step guide for early retirement.

What is Early Retirement?

For most people, the concept of early retirement means reaching the age when they no longer have to work. However, retirement does not necessarily mean adapting to a vacation-driven lifestyle. Conversely, when you retire, you can allow yourself to invest your time and efforts into other opportunities as well.

With that said, retirement can also mean gaining financial independence. Essentially, reaching this milestone symbolises liberation from your daily, 9-5 job. You can experience this freedom around the age of 50 or any age for that matter.

Although considering the state of the economy, early retirement is not always easy. Therefore, you must thoroughly learn about the pros and cons of early retirement before making a decision.

Disadvantages of Early Retirement

Early retirement has numerous benefits. However, due to the individual differences in personality, early retirement may not be as beneficial for everyone. Here are a few disadvantages of early retirement.

You may feel uneasy

When you work for the majority of your life, a free schedule can make you feel uneasy. Following their retirement, most people are inclined to feel depressed, bored and anxious. However, this issue can easily be resolved if you induct a passion project after your retirement.

You would have to work with a reduced income

While retirement does not stop the income, it does reduce it significantly. If you are not eligible for a strong pension plan, early retirement can result in financial anxiety. This is largely attributed to a flawed retirement strategy, which does not account for any unexpected issues that may arise in the future. Considering this, it is imperative to create a meticulous retirement plan with contingencies integrated into the budget.

You might run out of money

Even with the contingencies planned, you can still run out of money after your retirement. There could be medical costs, an unexpected illness, or any unanticipated issue that exceeds the planned contingency budget. Additionally, if you live longer, the chances of exhausting your savings would be higher.

You may be penalised for early withdrawals

If you already have a retirement fund, you might not be able to access the money instantly after you retire. Some saving accounts have a set date for the time duration for which you can make withdrawals. Therefore, if you take out money at an earlier stage, a fee may be charged. Considering this, it is essential to have a back-up plan for the early years of retirement.

Advantages of Early Retirement

While there are some good reasons to avoid early retirement, there are some even better reasons to support it. Take a look at some advantages of early retirement.

Pursue your passion projects

As stated earlier, retirement doesn’t always mean that you no longer have to work. In fact, once you retire, you can begin a new professional life that aligns with your actual interests. Most people work at a job that they do not enjoy but still work for it for the sole purpose of making money. However, once you have saved enough to retire early, you can take all the necessary steps to do the job you love.

Start a new chapter

Early retirement frees up your schedule. This new-found free time can be utilised to start a new business venture. Although it comes with a risk, the retirement budget can be used to invest in a new business idea. This way, you would not have any regrets about your professional achievements when you grow older.

Enjoy life

Following your financial independence, you are free to do everything on your bucket list. Visit countries of the world that made you curious, or you always wanted to visit. With an early retirement, you won’t have any physical restrictions that prevent you from pursuing your dreams.

Eliminate your regrets

As they grow older, people tend to experience more regrets. According to Eric Erickson, a developmental psychologist and psychoanalyst, people over the age of 65 experience a conflict titled “Ego-integrity vs. Despair”. This means that when a person reaches that stage in life, they reflect on their achievements and experience either of the two emotions. If they are satisfied with their life’s achievements, they feel proud and benefit from the virtue of wisdom. However, if they are unhappy with their lives, they grow resentful and bitter. Considering this, if you achieve early retirement, you can take all the initiatives that enable you to eliminate your regrets before you reach this developmental stage.

Get rid of Debts

If you wish to retire early, even after considering the pros and cons, a few steps can be taken to ensure that the objective is met. Subsequently, the first step for pursuing early retirement is repay all the money you owe.

Therefore, you must start by creating a plan to pay off all your debts, in addition to saving up for your retirement fund. The interest charged on the loans can transcend all your savings, hence, it is imperative to strategize a plan to get out of debt. There are a few strategies for getting rid of debt, including the following.

Pay off the most expensive debts first – The Debt Avalanche Method

The debt avalanche method requires you to make minimum payments to all of your debt collectors, and pay the remaining amount to repay the debt with the highest interest. With the avalanche method, you can benefit by making the larger payments of the debt -with interest, so the smaller loans can be paid off easily. The avalanche method is effective, as it can reduce the anxiety and provide you with a proper plan to return your loans.

Pay off the least expensive debts first – The Snowball Method

Contrary to the debt avalanche method, the snowball method requires you to make minimum payments to all your debts and to pay off the smallest amounts first. With the snowball technique, you can easily get rid of your debts, one by one. When the smallest loan amounts are paid, you would only be left with the larger debts, which can then be prioritised.

Communicate with a Credit Counsellor

Paying off the debt can be overwhelming. Therefore, if you are looking for a proper plan to return your payments, you may schedule an appointment with a professional credit counsellor. There are several services which provide a free consultation session, such as Step Change, so you can research your options before seeking assistance.

Create a Budget

It is impossible to pay your debts without creating a monthly expense budget. With standard criteria for making payments, the possibility for missing the return date can be reduced. A budget can further help you identify the amount of money you need to take out from your monthly income, which can then be dedicated to the repayment of the loans. There are several different types of budgets that you can create. These include:

  • Envelope budget – In an envelope budget, you use a cash-filled envelope to segregate income. Each envelope includes the amount to spend/pay off each category of the expenditure.
  • The 50/30/20 budget rule – The 50/30/20 budget rule states that you are required to allocate 50% of your income on needs, 30% on wants, and dedicate 20% to savings. Here, the debt falls in the 50% category.
  • The traditional budget A traditional budget follows the idea of dedicating a varying amount of money to each category of expenditure. When you create this budget, highlight the amount of money you owe to each debt collector, and make sure that the payment is made on a timely basis.
  • Zero-based budget – In a zero-based budget, every area of spending must be allotted a purpose. In the end, the sum of your expenses must be equal to the sum of your income.

Set payment reminders on your smartphones

If your debt has a high-interest rate, it can keep increasing with time. Therefore, making timely payments is essential to pay off all your debt. For this purpose, you can set reminders on your smartphones as prompts, to remind yourself about repaying the money. Additionally, you can also schedule an automated payment to ensure that all your debts are paid precisely on time.

Your Mortgage Payments

Another factor leading to early retirement is paying off the mortgage, as soon as possible. Your mortgage includes a rate of capital and interest. In most cases, monthly payments are made to return the aggregated amount of the aforementioned. Often, the monthly payments are fixed, however, you are also provided with the option to make additional payments each month.

Taking the latter into consideration, the mortgage amount can be returned, with both capital and interest, by making overpayments. In doing so, you can easily pay off the mortgage and pay a lesser amount, as you will pay less interest compared to paying off mortgage at the end of the term. With that said, it is essential to make sure that your mortgage provider does not charge a penalty for early repayment of the mortgage. Make an inquiry with your mortgage provider to eliminate this problem.

Another technique to repay your mortgage quickly is to make fortnightly payments, instead of the monthly returns. When you repay the amount every two weeks, you can save a large amount on the interest, as the money would be returned rather quickly. Additionally, you would be able to complete the repayment process in almost half of the usual time.

Moreover, taking an interest-only mortgage can also help you swiftly return the amount, and subsequently, retire early. With an interest-only mortgage, you are only required to pay interest that is due on the amount you have borrowed each month. This way, your monthly payments would be less than the amount you would owe if you opted for the traditional method.

With that said, you would still be required to pay the money that was borrowed initially. However, this amount can be repaid towards the end of the mortgage term by selling the property. In this method, you have the option to fix the interest rate over time or pay it back at a variable rate. It is recommended to choose a method that works for you.

Create a Retirement Budget

In addition to paying off all the money you have borrowed, you need to plan ahead for your future spending. Therefore, strategizing a plan to handle the retirement expenditure is essential. Fundamentally, you need to start with establishing a threshold for spending each year after your retirement. It is essential to deduce a minimum amount, for each year, which could allow you to enjoy a satisfactory lifestyle. At this stage, you need to focus on creating a survival budget, which only includes the essentials.

To establish an appropriate budget, it can be assumed that your basic needs and spending areas would not alter much in a few years’ time. Considering this, you can use your current budget as a baseline for the retirement budget. However, the areas of debt and mortgage repayments can be substituted for the unexpected medical and medicinal costs that you may encounter in the future.

Another aspect that you can eliminate from the retirement budget is the cost of commuting to work. For most people, commuting takes up a large chunk of their monthly budget. Parallel to the commute, you may also get rid of the cost of spending money on your children (if you have any), as they are more likely to grow up and start their own independent ventures.

At this stage, you are required to calculate a figure for a monthly or annual basis. This amount should only cover the fundamental areas of spending. However, it is important to make sure that you consider the rate of inflation and the increasing costs that come with it. Additionally, you can also plan for additional care costs, which may be required during your later years in life.

Identify Voluntary or Leisurely Spending

When it comes to financial planning, you can never come up with an exact figure. Taking this into consideration, it is imperative to have contingency plans for your early retirement. Once you have created the budget for the essentials, you would need to plan for the unexpected costs that you may encounter. These may include medical costs or the amount spent on home renovations or major home repairs. This planning would ensure that you do not run out of money, once you retire.

In addition to a contingency plan, it is further recommended to calculate, and set aside, an amount for voluntary or leisure costs. This might be more difficult to calculate, as you would need to plan the number of vacations you wish to take, following the retirement.

At this stage of budget planning, you need to comprehensively think about the plans for the leisure activities after retirement. For instance, consider the number of holidays you want to take, the places you wish to visit, the overall costs of those vacations, as well as the cost of maintaining the vehicles that would facilitate these travels. For example, if you have bought a boat, you would need to include the expense of boat maintenance in the voluntary expense budget.

Another factor that you need to consider, in the voluntary spending, is the cost of assisting your children when they find themselves in a financial rut. If you want, you can set aside a certain figure to assist your kin with their financial issues.

If you wish to start a business or to pursue a passion after your retirement, you must set aside a small amount to instate that journey. This way, the retirement fund would not be compromised.

This budget can be titled as the “voluntary spending”. Parallel to the essentials budget, you must consider the rising rate of inflation, as well as the changes in your lifestyle after retirement.

Enumerate on the sources for retirement income

Once you have highlighted the cost of living after retirement, the next step would be to consider whether you have enough money to make the ends meet. Therefore, you must calculate the total income you can generate after your retirement. The most common areas include:

Pension

If you are eligible to receive a pension, you can add that amount to your retirement fund. The pension can be acquired from the state, a workplace, private savings account. Regardless, estimate the amount of money you would receive, and add it to the total retirement income.

Savings

Your savings are another source of income after your retirement. If you have a savings account, calculate the total amount of money you would be able to access after retirement.

Investments

Similar to the savings, your investments can become a huge source of income after the retirement period. With that said, you must consider transferring your savings and investments to the pension, prior to the retirement. This way, you can benefit from the increase due to tax relief. If you have a large amount of savings, it is recommended to take this step before you access the pension amount, as this initiative can reduce the amount you pay into a pension.

Rental Property

If you have any properties that you do not reside in, renting out that space can increase funds available at your disposal for retirement. Rent can be a consistent method for earning a monthly income. However, if you do not have a property, renting a guest room at your house can be beneficial. In doing so, you can benefit from having a steady source of income.

Downsizing

While the aforementioned methods can be used to generate an income, downsizing can assist in saving money. By shifting to a smaller home, you can save a large amount on unnecessary expenses.

Is early retirement the right choice?

After establishing the total retirement budget and the total income after retirement, you can gather an idea of whether it is possible for you to make an early retirement. In addition to considering the numbers, you must also think about the pros and cons of early retirements to decide whether this venture is appropriate for you.

If the total income surpasses the cost of the retirement budget, early retirement can be ideal for you. On the other hand, if you are struggling to match the figures (with the costs transcending the income), you may need to increase your sources of income to make the early retirement possible.

Conclusion

Early retirement, although difficult, can be attained by your 50s. Before you dive in, considering the advantages and disadvantages of early retirement is important. While retiring early can enable you to relax or pursue your dreams, it can also place you at risk of running out of money in the later years of life. However, the latter issue can be circumnavigated by proper planning.

To make it happen, it is essential to increase your income, pay off your debts, as well as your mortgage, to ensure that you no longer owe any money to an institution or debt collector. Additionally, to certify whether early retirement is right for you, it is essential to calculate the retirement budget. This budget includes the essential costs, as well as voluntary spending. Moreover, you would also be required to calculate the total income that is generated, after the retirement period has started. Compare the total cost with the aggregated income to decide whether or not early retirement is right for you.

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