Could you retire earlier than planned?
By Ross Glanfield
If you were told you could retire tomorrow and assured you could afford to, would you be excited, relieved, sceptical or something else? If early retirement is one of your goals for this year, we may just be able to help you!
As financial planners, we’ve met hundreds of people who could afford to retire but never realised it. And even if they did know, their employment contract is a comfort blanket they find difficult to throw off. In most situations, the principal reason for holding onto that security is simply a lack of understanding of the income that could be generated from accumulated wealth. Given the difficult situation we’re currently living through, what better time to explore the unknown.
In order to decipher the retirement conundrum, the potential retiree needs to understand what income they’ll need, and the first mistake is to equate this to their salary, which has been taxed at source. Retirement income can be drawn from many sources and, with a little ingenuity, it can be largely tax-free.
Another factor, which is often missed in retirement planning, is the cost of convenience for the employed: holidays are taken at peak times, travel costs, lunch, coffee breaks, convenience shopping, dog walkers etc. All these can fall away in retirement and are often replaced by an obsession with bargains, such as switching energy suppliers and sale shopping. The net effect is that the headline income that most think they’ll need in retirement is much less.
So how much do you need to retire? A simple way to get an initial indication is to add up your total liquid asset base – pensions, cash, investments, rental properties and equity that could be released from a property on downsizing – and deduct any debts. Then divide that figure by 100 minus your current age so, for someone who is 55, 100 – 55 = 45. If the resulting figure gives an annual income that would allow you to retire, it is worth a more detailed look.
The next logical step would be a retirement planning interview. Everyone has an interview before they start a job so why not go through a similar process at the end of a career bearing in mind that, after a period out of the workplace, retirement can become an irreversible decision. The interview would include a complete cash flow analysis looking at assets, expenditure, tax, and risk. It would also include an examination of disaster scenarios, such as a market crash. If the interview is successful, it may take another year to 18 months to become fully committed to the process, but at least the retirement process would be underway.
So, if the idea of early retirement resonates with you, we’d love to chat!