Most people let retirement happen to them. Typically, it happens following a big birthday. But it doesn’t have to be that way. These days, our jobs are often shorter in duration, and careers more flexible, with several iterations. There’s much more opportunity to control the time you’ll retire.
So what would it take to be deliberate about when you retire? Here are four facets to consider if you’re to accelerate your retirement.
1. Where will your retirement income come from?
For most people in Ireland, retirement income comes from a number of sources. There are the pensions you have built up, of course. But there are also savings, State pensions, and potentially property or other investment income.
A good financial advisor can help your forecast this. Key decisions need to be taken around the sequence to draw down pension income. You’ll want to plan a timescale which takes advantage of the tax-free growth within a pension, while supporting your income in the early years of retirement, before State benefits kick in.
Once you’ve decided that sequence, investment decisions can follow. For example, pension funds that you expect to remain in their tax-protected wrapper for many years to come can remain invested in relatively high risk-reward funds, offering the scope for continued investment growth.
2. What are your assets worth?
Next, take a hard look at the assets you have built up. Once you retire, it becomes harder to increase the overall value of your assets, as you’re dipping into it to draw down income. It’s an obvious point, but retiring early has a twofold effect on asset values: it has less time to grow, and requires to produce an income over a longer period.
There’s no magic here. Your assets can only support a certain level of income. If you sweat an asset too hard, you’ll have to run excessive risks, or deplete its value. Neither are conducive to a relaxing retirement. It’s critical to avoid running down your assets too quickly, reaching a point late in life where they can’t generate the income you require.
3. What do you need?
So much for income and assets. What about the other side of the coin: costs? If your needs are simple, you can likely retire with less pension money in place – that is, earlier in life.
Take a hard look at your financial needs – you might find you can satisfy them already. At a minimum, deliberate decisions taken today will have time to take effect and benefit you when retirement becomes achievable.
Of course your needs in retirement are more than financial. It’s worth considering what your retirement will look like day-to-day. Taking a steer from French retirees who seem to prize their ten golden years at the start of retirement, getting out early offers a chance to make a new start.
4. What can you do today?
Accelerating your planned retirement date doesn’t happen overnight. The best early retirement strategies are put in place some years in advance.
That way, investment growth can do the heavy lifting for you. For example, to assemble a pension pot of €500,000 over five years would require a payment of around €6,900 a month, even assuming fairly high annual growth of 9% before costs.
That’s a tall order for most people, even with the benefit of tax relief. Doing it over ten years, a payment of €2,150 would be required (or €1,290 after tax relief) – still an ambitious amount, but perhaps achievable if you’re serious about getting out early.
The right number will be different for everyone. The key is to take a clear-eyed look at the numbers – with professional advice as needed – and consider what sacrifices, if any, you’re prepared to make in order to hang up your boots early. That could mean cutting back now, living on less in retirement, or cutting back now, or finding a balance when exiting the workforce – for example, by working part-time later in life.
Why not take stock now? You could find you’re there already.
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