Who wouldn’t like to pack in the day job and head off on extended holidays at home or abroad, spend more time with family, or in the garden?
The problem is, finishing up work earlier than the mandated age of 65/66 is not easy, given that it inevitably means smaller pensions and longer life expectancy in retirement. So, it requires careful planning. After all, leaving your job at 55 may mean funding yourself for a further 40 years.
Here are some common traits financial advisers say those who do achieve it share.
1: They’re switched on
Do you know how much is in your pension and how it is invested? How much of your eligible tax relief for retirement savings you’re using? What term is left on your mortgage and what rate you’re paying? What return you’re earning on your savings and investments?
RM Block
These are simple things, but if you’re going to give up work early you need to have a clear view on your finances.
“Being switched on when you’re younger is massively helpful,” says Michael Cunningham, managing director of GSB Capital Ireland.
It also helps you to recognise periods in your life when you can “go for it” and bump up pension contributions as well as those more expensive times when simply making any pension contribution is enough.
Some people take this awareness to extreme levels – the Fire (financial independence, retire early) movement, for example, is about living frugally in order to save as much as you can for an early retirement. But more of us will try to look to a bit of canny saving without forgoing all luxuries in life.
“They have all their money working for them,” says Colin Hudson, a certified financial planner with Bray-based Opes Financial Planning, of these canny people, adding that maximising pension contributions is a “no-brainer” due to tax relief.
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They also keep a firm eye on how their pension and other investments are performing.
“The most important thing of all is being in the right investment fund. There are lots of poor ones in the default space,” says Cunningham, adding that you can often get a better return without taking on more risk by picking the right fund.
“You might be up 6 per cent a year and think that’s great but if everyone else is getting 9 per cent, it’s not so good,” says Cunningham.
So don’t just go for default options – pick what suits you best. “You need to tailor everything in life.”
2: They don’t overpay their mortgage, or not exclusively so
For many homeowners, the comfort that comes from overpaying their mortgage is priceless. But doing so may not be the best financial decision. And it might even make retiring early that bit more difficult.
“If your mortgage rate is less than 5 per cent, then people shouldn’t really rush to overpay,” says Cunningham.
After all, markets typically return more on an annual basis – since 1957 the S&P 500 has been averaging annual returns of about 10.4 per cent, for example.
Not only that, but you could also be leaving tax relief on the table by putting your money into your mortgage rather than your pension. And it could offer your pension fund the rocket fuel it needs to be able to support you for a longer period of time.
“It’s a balancing act of life,” says Cunningham.
3: They model their future financial needs
If you’re thinking of stopping work early, you’re going to need to plan a roadmap – and this means working out your future financial needs.
“You can’t really make any decision without modelling what expenses are coming in, and when, and what your current assets are worth,” says Hudson, adding that many people may be paying into a pension, but “they don’t really know what income is coming down the line”.
And staying somewhat flexible is also important.
“It’s always a goal for a lot of people but you do see those goalposts move a bit as they get closer to retirement,” says Hudson, adding that this is typically because people underestimate how much they spend.
“They think their living costs are less than their means,” he adds, but when expenses such as travel, home renovations and helping children out with house deposits are factored in, “pension pots are stretched much more than they thought”.
Inflation can also hurt, as can being over-optimistic.
“People can also overestimate how much their pension will return,” says Hudson.
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Bear in mind also that the early years of retirement may be some of the more expensive, given typical desires to go travelling, etc,
For some in their 50s or early 60s, a redundancy package on offer from their employer might precipitate the decision to take early retirement. But with this, too, you’ve got to do the sums to make sure you have enough to last you until your pension kicks in.
“You’ve got to do your modelling to make sure it’s sustainable,” says Cunningham. “You might find that you’re not in a bad position to retire early, but maybe you should work another two or three years to improve it.”
It’s also good to keep a couple of options in your back pocket, such as downsizing.
“We find people think about it but in practice not many people actually do it,” says Hudson, adding that it can be a plan B for people in the future, if they need to release cash.
4: They might bank on still working a bit
Where once, early retirement typically meant walking off into the sunset with a lump sum and a defined-benefit pension, which all but guaranteed a few months in the sun every year type of retirement, the landscape has significantly shifted these days.
“Early retirement is not the same as it was for our parents,” says 40-something Cunningham.
A reliance on defined-contribution pensions where the retirement income depends on the investment performance of what you put into the fund rather than the traditional defined-benefit pension which paid up to a half or two-thirds of your final salary depending on years of service, means closing the financial gap is going to be trickier.
For many, early retirement is really about starting to taper down the amount they work, rather than stopping altogether. That may mean dropping from five days to three, for example, or doing consultancy work.
This may be needed in the early years. If you take retirement at 60, for example, and are waiting for the State pension to kick in at 66, “there can be a period there, when pension pots can be depleted quite rapidly”.
“We tend to see the first seven or eight years as being quite expensive – and then again, later in life, due to long-term care costs,” says Hudson.
Many early retirees will look to keep working even after they give up their day job. This could be on an ad hoc basis, such as consultancy or freelance work, or even part-time work in a new industry.
Bearing this in mind, if you want to give up full-time work earlier than the State pension age, start thinking about some kind of work to which you can transfer your skills.
This might also mean you will be keeping your PRSI record active as you move towards State pension age. Remember, you will generally need 40 years of contributions to qualify for a full State pension.
If you are aged under 66, you will be paying PRSI at Class S (4.1 per cent) on all your withdrawals from any approved retirement fund (ARF) into which you have moved your occupational pension on early retirement, provided you draw down at least €5,000 a year. This can also help towards your State pension record.
5: They have flexible pension products
You’re going to need to know your difference between a PRB, a PRSA and an ARF if you want to plan effectively for an early retirement.
This is because you can access certain pension products only at certain ages. So it’s “massively important” to understand how the various pension products work, says Hudson.
You can start drawing down a PRSA (personal retirement savings account), for example, only from the age of 60, but a personal retirement bond (PRB) can be accessed from age 50.
“The ‘go to’ for clients we find is the PRB,” says Cunningham, adding that “having a few different pots is really attractive”.
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It can also make sense from a tax planning perspective, as drawing down enough to keep you under the higher income tax rate (currently €44,000 for a single person) may make sense.
While you might find it cumbersome keeping several different pension pots in play in the years running up to retirement, remember that once you access them, your funds will most likely move into one approved retirement fund (ARF).
A PRSA can be used to split into different pots – some of which you might be able to access from the age of 50, if you’ve retired. It also means that you can tailor investment strategies to when you are going to draw them down – taking more risk in the longer-term pots, for example.
It’s also important if you dream of moving abroad.
“If someone is thinking of moving abroad, it’s really important that they’re in the right pension structure,” says Hudson, noting that some products, such as PRSAs, cannot be moved overseas.
