For most of us, the thought of retiring early is a far-off dream. Whether you have an age in mind or not, you could find yourself in difficulty in achieving your goal without forward planning.
The sooner you begin saving, the longer you have to take advantage of different options. iContract’s partner Contractor Financials believes that taking these few steps can help you head towards that dream of early retirement.
1. Calculate your current spending.
Although once you retire your spending will decrease, it’s a good idea to figure out how much you have outgoing on either a monthly or annual basis. Gathering all the information you have on your savings; from pensions, ISAs and other accounts will also be useful when calculating how much you must use as income in retirement.
2. Work out what lifestyle you want in retirement.
If you plan on taking up hobbies or travelling more, you’ll need more in your savings pot than if you were planning on taking things easy and spending time on simple, free or nearly free activities.
3. Start a budget and stick to it.
Once you’ve calculated your outgoings, and you’ve decided how much you’re going to need in retirement, it’s time to set down a budget. Whether that’s weekly or monthly, having a sum to track will help more in your retirement.
Financial planners will frequently use cashflow modelling (a method of accumulating as much information as possible about your current finances) to calculate whether you are on track to reach your financial savings targets. They use the process as a suggestion of how the funds you have currently will look in the future. Utilising this model allows you to track whether you’ll have sufficient funds once you stop working, whether you could afford care fees and whether your family will be financially stable if you were to pass away.
4. Start saving. Now.
Whether you’re 21 or 35 there is no better time to start saving. Obviously, the earlier you start saving, the less money you’ll have to put away each month as you become older. Taking advantage of a range of savings options from pensions to ISAs can help maximise your return over the years. The longer you leave it to start saving, the more you’ll have to put away to match the savings you would have had if you started earlier.
5. Make sure all your debts are paid off.
If you have credit card loans or even a mortgage, it’s better to pay these debts off earlier. A high interest rate credit card loan could eat away at your savings, so if you can do so, pay them off as soon as possible.
6. Invest wisely.
Investing will help you build a little extra for retirement. The earlier you start investing, the longer your money has to work for you. The overall goal of investing is a long-term gain.
Talking to an investment adviser or financial planner may be a good idea if you are new to investing as they will be able to assess your risk profile and help you choose the best options for your financial goals.
7. Consolidation of old pensions.
You may have been enrolled into more than one pension schemes over the course of your career, leaving your money dotted around. Combining your pension pots will enable you to track them easily and see how they are performing. It is important to receive advice from a qualified financial planner prior to acting upon any consolidation process.
8. Open a Self-Invested Personal Pension (SIPP)
If you have consolidated your pension schemes, make sure they are working for you by putting them into funds that are high earning but with low charges. Opening a self-invested personal pension (SIPP) will make you eligible to income tax relief on the money you deposit, with an extra £20 for every £80 you place into the pot. You will also not have to pay capital gains tax on your personal pension.
9. Consider semi-retirement.
Retiring earlier will leave your pension pot smaller and more spread over retirement, leaving you with less income each year. With the ever-increasing life expectancy, this could leave you struggling to achieve a comfortable retirement. Rather than retiring fully you could consider working part-time. This allows you to be less reliant on your pension income. And because of the income you are bringing in, you can also use it to top up your pensions as you continue to work.
10. Make pension contributions through your limited company.
If you operate as a one-person ‘Ltd’ company, you can get the company to fund a pension on your behalf. You’ll be able to draw a tax efficient salary which in return reduces your national insurance payments, without missing out on the tax savings associated with pension investments. Your company can invest up to £255,000 per annum which will significantly reduce your corporation tax bill, while still being able to transfer money from the company into your hands at retirement for personal use.
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iContract has partnered with Contractor Financials to provide mortgage advisory and brokerage services. Contractor Financials is a trading name of Contractor Financials Ltd. Authorised and regulated by the Financial Conduct Authority (FCA reg. 207478).