Want to retire early - where to begin??

Money_Saving_PhD

Hello all, I have been lurking for some time on many of the boards here and wondered if I could ask for some advice please?
Like many people on here, I have come to the decision that I certainly don’t want to be working full-time, over even part-time right up until state pension age, whenever that may be by the time I get there. I also am not drawn to a largely consumerist lifestyle and have begun to take on many OS and frugal techniques to further reduce my outgoings. I’ve been really looking at my values and wish to spend as much my of the time on quality interactions with family and friends, not on ‘stuff’ or damaging my health to pay for said ‘stuff’ as have been off work due to stress in the past.

I confess that I know very little about pensions even though I paid into one for 5-6 years, and whilst I have read up recently on Stocks and Shares ISAs and a bit about different kinds of pensions, I have yet to wrap my head around a lot of the jargon and how to read the plethora of conflicting advice out there with regards to investing. I’m hoping that if I share my situation here, some of you might be kind enough to point me in the right direction to begin my education in financial independence. I should also mention that I currently have an optimistic figure of 45 for my retirement age! Trying to aim high, and make sure I ‘load and fire that gun’ sooner rather than later, to use a very apt metaphor I read on here, but I also know that life may yet get in the way, but the sooner I start, the better.

A bit about me if that helps: I’m 30, female, in a newish relationship so single in financial terms atm, no children and have owned my own house, with mortgage which I am overpaying, for almost 5 years. I have £8k in savings as an emergency cushion, and am about to take on a lodger again for extra income.

My preserved benefits statement from my LGPS pension for 6 years’ service is a pot of just less than £50k, or £2466 annual pension. I’m not clear whether I can chose to access this before 68, as although I was a member after April 2014, I was on a career break and not paying anything in, but it seems they have included this time in the calculations. The rest of my adult life I have been in University and not paying into a pension. I am now doing a PhD and my income is a tax-free scholarship of £14k, plus tax-free lodger income, and a few hours paid work per week which doesn’t reach the personal limit for income tax. As I don’t pay any tax, but can afford to save/invest I find some of the advice hard to apply to myself as a lot of the benefits of pensions, stock and share ISAs etc, are based on being a tax payer now, as well as having to pay tax later. But I will be a tax payer again in 2 years when I graduate and hopefully get a job, with the option of a University pension scheme.

I will be looking for a role in academia after I graduate, but am also training to have a second much smaller income from self-employment, which I hope will become the job I love and will continue on a small scale after ‘retiring’ from full-time work. In the next five years I also hope to be settled and beginning a family, which will also impact my earnings, but perhaps be offset somewhat by not being single any more and sharing some costs.

I’ve been looking at S&S ISAs, and using a platform like iWeb to invest in some national and global funds, but scared to take the first step. The MSE article on this gets bashed on the forum discussion, so my usual font of knowledge doesn’t seem like a good place to look. I’ve also read comments recently on not overpaying your mortgage if you want to retire before 55, but overpaying this has also been a strong drive for me and will be hard to give up without much convincing or seeing the clear benefits of the alternatives, but I'm willing to be convinced! It's all very confusing and I feel a little bit late to the party, although it could be worse!

Many thanks in advance for any comments, these forums are so inspiring and helpful to me.

xylophone

http://www.lgps.org.uk/lge/core/page.do?pageId=101769

LGPS is a funded scheme.

http://www.thisismoney.co.uk/money/pensions/article-2700019/Key-points-Governments-pension-freedom-plans.html

If you have no earned income, you can still contribute up to £2880 to a pension scheme and receive tax relief from the govt to bring your contribution up to £3600. You might use a stakeholder perhaps?

example http://www.cavendishonline.co.uk/pensions/stakeholder-and-personal-pensions/scottish-life/

However if you want to retire at 45, you are going to have to save very hard - using your ISA allowance would seem to be the way to go.

Not having a mortgage at 45 would also be a comfort, so overpaying does not seem to be a bad strategy.

kangoora

I admire your optimism but aiming for retirement at 45 when you hopefully intend to start having kids in the next 5 years at 30 years old is, shall we say, improbable. Short of marrying a millionaire, becoming very successful with your own business or you are due to inherit a seriously large sum of money......

An often seen figure for retirement purposes is £24k/year for a couple but that generally assumes no mortgage and kids flown the nest, yours may be lower or higher. Usually a 4% drawdown figure is calculated so as not to exhaust any pension pot although, if you join academia you'll presumably get another final salary pension similar to LGPS.

£24k x 25 = a pot of £600,000 (assuming 4%) - you could subtract any FS pensions from the required income but unless they are available early you need enough to live from 45 to 68 or whenever your pensions kick in. £600k/15 years working time left = you have to contribute £40k/year to a pension, after tax relief at 20% then only £32k/year.

Often the advice is to contribute to a personal pension that you can take from 'NRA-10 years' to allow you to draw your FS pension without any actuarial reductions.

Nothing wrong with thinking about this now, for example, even as a non-earner you can contribute £2880 a year to a pension (grossed up to £3600 by HMRC). If you are earning, you can contribute up to 100% of your earnings (which also includes the HMRC contribution) e.g. if you earn £6k you can contribute £4,800 which will be grossed up to £6k by HMRC.

Hope this helps to give you an idea of scale and how to get started. There's a few here with experience of the USS and LGPS pension schemes who may be able to offer more specific advice.

I think you need to come along with more targeted questions also.

gadgetmind

Money_Saving_PhD wrote: »

I currently have an optimistic figure of 45 for my retirement age!

Yes, ambitious.

It seems to me that you'll have four main phases.

1) Accumulation phase to age 45. You basically have 15 years to put as much away as you can, with pensions and S&S ISA being the two main methods, with a blend of both being advisable.
2) Period from age 45 (or whatever) to being able to access any private pension provision. This is going to be age 57, or perhaps even later. Your income during this phase with be from self employment and ISA/etc. savings.
3) Period between private pension provision kicking in and state pension age. This is likely to be around ten years.
4) After state pension age, Aim to have full state pension, perhaps some defined benefit pension, and hopefully some of your private pension and ISA savings left.

Understanding the cash flow, taxation, etc. is far more important than which provider to use etc.

BTW, as paying around £130 pa in Class 2 self employed NI gets you years of state pension, you may like to register as self employed come next April 6th.

Linton

Where to begin?

1) Determine how much at current prices you will want to spend each year.

2) Assume an income each year, amount saved, inflation rate, an investment return rate, tax rates with inflation adjusted allowances, a retirement date and whatever else you need to assume so that you can....

3) Put together an Excel year by year cash flow model going out until you are say 100. If it shows you running out of money change your assumptions until the plan works.

4) Work out how to achieve your assumptions.

Mojisola

kangoora wrote: »

I admire your optimism but aiming for retirement at 45 when you hopefully intend to start having kids in the next 5 years at 30 years old is, shall we say, improbable.

Short of marrying a millionaire, becoming very successful with your own business or you are due to inherit a seriously large sum of money......

As above - OP, unless you can do one of the things in the second paragraph, you will have to chose between having children and retiring early.

gadgetmind

Or turn your self employment into a successful company that's then acquired for a few £m.

If you're going to have dreams, have ones that involve your own endeavours paying off rather than something external and random suddenly going right.

Mojisola

kangoora wrote: »

Short of marrying a millionaire, becoming very successful with your own business or you are due to inherit a seriously large sum of money......

gadgetmind wrote: »

Or turn your self employment into a successful company that's then acquired for a few £m.

If you're going to have dreams, have ones that involve your own endeavours paying off rather than something external and random suddenly going right.

That was one of the options.

atush

Mojisola wrote: »

As above - OP, unless you can do one of the things in the second paragraph, you will have to chose between having children and retiring early.

I have to agree with this, as you are studying and not truly earning at present (ie just a few hours a week) then you wont start full time work for a few years. then you were talking about working in academia. Which isn't usually highly paid.

So even a retirement age of 55 will be ambitious- and that is w/o looking at having children each of which will cost you approx 200K per to age 18

Not trying to rain on your parade, but stopping you from setting yourself up for a fall.

So instead of choosing an out of orbit non achievable goal of retiring at 45 (or marrying a millionaire or being an entrepreneur), start by just paying something into a pension in the next few years, even if just the 3600 mentioned.

Once you are in full time employment, and know your starting salary, then you can work out how much you need to save to achieve the dream of early retirement.

enthusiasticsaver

If you want to retire early you need some targets in mind - ie what income will you need for you to live the sort of life you want to live.






Once you know that figure you can decide how to get there. We have kept spreadsheets with pension forecasts for the last ten years and that is a good way of seeing if you are heading in the right direction.


From experience though I would say retiring at 45 is optimistic given you are 30 now and haven't yet gone down the expensive route of having children.


Our strategy for retiring early was first pay off all debt, then the mortgage ( plus saving an emergency fund).


At the same time we overpaid as much as we could into our pensions to get as much tax relief as possible.


In the last five years we have built up a considerable sum in fixed term cash isas and national savings index linked certificates and just started on stocks and shares isas.


You will probably need a combination of all of those to fulfil your dream of retiring early. We said in our 20s we wanted to retire in our early fifties but our actual planned retirement is now when husband is 60 and I will be 58. Two children, me working part time for ten years and not working at all for three years plus lots of holidays and moving to a bigger house all delayed our retirement date but we do not regret any of those decisions.


I would say do not get too hung up on the date you actually want to retire as it will undoubtedly change as life gets in the way.

Marine_life

if you want to retire really early then ignore the traditional logic, you need to do the following:

- cut your expenses to the bone (no more frothy coffees, cycle to work etc.)
- maximise your income
- take on some risk in your investments (the more you are able to stomach the earlier potential retirement date you have - but beware the risk of losing it all)

If the question is where to start then the best thing you can do is have a plan .....and some speadsheets.

Have a read of:

http://www.mrmoneymustache.com/

I like his philosophy but not his disciples.