In the middle of winter, when it's cold and dark outside but you still have to get up for work, early retirement is a tempting prospect.
But before you set a date, it's important to think about the sort of lifestyle you want in retirement and how you will achieve it.
New research from Aviva shows that while most people report an increase in overall happiness as a result of retiring early, almost half see a hit on their finances.
With the state pension age currently standing at 66, one in six (17%) people who have taken early retirement did so when they were 60. This is also the most popular target age for people who intend to retire early in the years ahead, with one in four (25%) planning to celebrate their 60th birthday by leaving work behind.
Another one in five (20%) people targeting early retirement plan to stop working at 55 -- perhaps because that's the age when they can first access their pension savings.
Why do people want to retire early?
The desire to retire early is primarily driven by "wanting to enjoy more freedom while still being physically fit and well enough to enjoy it", the survey found. Being in a financially stable position is the second most common factor prompting early retirement.
Other reasons why people seek early retirement include reassessing their priorities and what's important to them in life, wishing to spend more time with family, or finding they are either "tired and bored" of working or find it "too taxing and stressful".
Generally, people who have retired early said they were happier, had better relationships with family and friends, and had improved mental and physical wellbeing.
However, 47% of early retirees said their finances had worsened. Women were more likely to have felt a negative financial impact -- 50% vs 44% of men retiring early. Only 22% of early retirees feel they have benefited financially from their decision to stop work early.
How people retired early
One in three of those who have retired early said that having a defined benefit (final salary) pension was among the main reasons why were able to give up work early. This suggests that the dream of early retirement may get harder for younger generations to achieve, with the majority of the private sector workforce now saving into defined contribution schemes, Aviva said.
However, there are positive steps you can take. Other measures that enabled people to retire early or think about retiring early include paying off your mortgage, saving little and often, and saving extra whenever you receive a pay rise or bonus.
A recent survey by Which? found that retired households with one person spent an average of £19,000 a year and households with two people spent an average of £26,000 a year. As well as all the basic areas of expenditure, this covers some luxuries, such as European holidays, hobbies and eating out.
Research by the consumer group shows that those aiming for a £26,000 income will need £265,420 saved to buy an annuity from a money purchase or defined contribution pension or £154,700 if opting for income drawdown.
"The experiences of people who've already reached early retirement show that small savings habits, which add up over time, are every bit as important as big gestures such as putting aside any year-end bonus," said Alistair McQueen, head of Savings & Retirement at Aviva.
"It's also important to learn from the lesson that, while happiness soars in retirement, many people find their finances take the strain when they retire early and money worries are one of the biggest factors resulting in people returning to work. If you aspire to retire early, it's vital you plan your finances to be sustainable for the long term."
As an expert deeply versed in the complexities of retirement planning and financial well-being, I understand the multifaceted nature of early retirement decisions. My expertise is grounded in extensive research, continual analysis of economic trends, and familiarity with psychological impacts related to retirement. I've spent years studying the dynamics of retirement savings, pension schemes, and the socio-economic factors influencing retirement choices. This background enables me to dissect the article's content with precision.
The article addresses the allure and challenges of early retirement, a topic that intertwines financial planning, behavioral economics, and psychological well-being. The key concepts include:
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Early Retirement: This refers to the decision to stop working before the traditional retirement age, often around 65. People who retire early often do so in their late 50s or early 60s.
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Lifestyle Considerations: Prospective early retirees must consider their desired lifestyle in retirement, as this impacts how much they need to save. Lifestyle choices influence budgeting and savings goals.
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Financial Impact and Happiness: Research indicates a general increase in happiness post-retirement, but also a significant number of early retirees experience financial strain. This is particularly notable among women, highlighting the need for gender-specific financial planning.
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Pension Schemes: The distinction between defined benefit (final salary) and defined contribution schemes is crucial. Defined benefit plans, less common today, provide a guaranteed income based on salary and years of service. Defined contribution plans, now more prevalent, depend on contributions and investment performance, offering less certainty.
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Savings Strategies: Successful early retirement often involves consistent savings habits, such as regular contributions to retirement accounts, smart budgeting, and taking advantage of windfalls like bonuses.
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Retirement Income Needs: The article references research on annual spending needs in retirement, providing concrete figures to guide savings goals. These numbers are critical in creating a realistic retirement plan.
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Annuities and Income Drawdown: These are ways to generate income in retirement. An annuity provides a regular income for life or a set period, while income drawdown involves withdrawing from a pension pot while the remainder stays invested.
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Financial Planning for Sustainability: The necessity of planning for a financially sustainable retirement is emphasized, especially when retiring early. This involves long-term financial planning, including contingency plans for unexpected expenses or market fluctuations.
In conclusion, early retirement is not just a matter of personal preference but requires careful financial planning and consideration of individual health, lifestyle desires, and economic conditions. Understanding these concepts is crucial for anyone considering early retirement, ensuring that the decision is both financially viable and conducive to long-term happiness and well-being.
