To achieve early retirement, it all starts with a plan. 

Unless you have a plan, you are not going to know what you’re aiming for. There will be no structure or steps for you to follow.  

You will just be hoping for the best and probably focusing on things you can’t control. 

So, in this article I’m going to talk through the steps you need to take and the things you can control in order for you to be in a position to retire early. 


How to build your early retirement plan  

The first part to building your early retirement plan is to come up with some reasonable assumptions.  

How long will the plan last? Your financial plan should cover not only the period up to retirement but also the period after. As in the rest of your life. What happens in your retirement will dictate where you need to get to before you retire.  

So, you need to make a judgement as to how long you will live. Of course no one knows but you can look at what the average life expectancy is and use that as a starting point. I would always extend the plan past average life expectancy though, as wealth and where you live is a big factor in life expectancy. Plus you want to build in some ‘what if’ protection to your plan. What if you did live longer? You need to know what that looks like. 

I always think working to age 100 is a nice round number and keeps things simple. 

Next you need to consider what rate of inflation you are going to use.  

The cost of living generally rises over time at around 2.5% per year so that’s a good starting point to use.  

Finally, on the assumptions front you need to use a reasonable growth rate for your cash savings, pensions and investments. The rate you use will depend on the investment strategy you choose. More on this later. 

At this point it would be a good idea to find out when you are due your State Pension and what amount you are forecast to get.  

Now you need to pull together all your financial information including: 

  • Your income. 
  • Your spending. 
  • Your cash savings. 
  • Your investment values. 
  • Your pension values. 
  • Monthly savings or pension contributions. 
  • Income due in retirement like State Pension or defined benefit pension. 

The process of gathering all of your information is a very valuable process in its own right as it allows you to get organised. You might be able to start to cleanse yourself of certain accounts and tidy things up, so it is much easy to manage.  

For example, do you need multiple pension pots from different jobs? Could you combine them into one? 

Have you let different bits of money build up in savings pots with some earning little or no interest? Could you combine them into one? 

Your expenses are a particular area to really focus on and spend some time on.  

You need to work out your expenses pre and post retirement. Some outgoings might reduce such as your mortgage being paid off. While others might increase such as holidays.  

I find most people underestimate their spending in retirement and some struggle to comprehend what it will be.  

As a starting point I would always suggest focusing on what you spend now as you will at least want to maintain your current lifestyle going into retirement.  

Also, a good resource is the Retirement Living Standards research which puts a ‘minimum’ retirement for couples at costing £22,400 per year. For a ‘moderate’ retirement it’s £43,100 per year and for a ‘comfortable’ retirement it’s £59,000 per year. 

Whatever spending figures you use, remember to factor in inflation and increase the spending each year. 

Once you have got all of this data into a spreadsheet or financial planning software you may find your dream of early retirement is not realistic.  

Your money may look like it runs out before you do which is not a situation you want to be heading into retirement in.


The things you can change and control to achieve early retirement  

So, if it is the case that your early retirement dream doesn’t look like it’s possible don’t despair. 

There are a couple of levers you can pull to improve the situation.  

Firstly, you might be able to adjust your spending in retirement. What’s more important to you in retirement, the fact you can be free from work sooner rather than later or that you get to do all the things you plan to in retirement? Is there a holiday you can cut out each year? 

If your spending plans are really important to you and there is no flexibility for cutbacks, then one thing you could consider is working a little longer but not in the same way as you are now.  

For example, you might be able to go part-time at work just for a few extra years just to take some of the spending strain as you enter retirement. Or if this is not possible you could work in some other part time capacity. It could be as simple as getting a bit of extra money from dog walking, house sitting or renting out your own house on Airbnb while you are away on holiday. 

Another lever to pull is the amount you’re saving before you reach your preferred retirement age. 

Can you afford to contribute more to your pension? Will your employer also increase their contribution giving you a double boost? 

The earlier you can start just a slight increase in your monthly contributions will make a massive difference due to the compounding return. 

It’s also worth being really clear on your State Pension position. For many, they are due a lower State Pension because of being ‘contracted out’ some time ago. You may have the opportunity to pay a one off lump sum to top up your State Pension. 

It’s usually well worth doing as the new full State Pension will now provide around a £23,000 per year base income for a couple in retirement. 

The third major lever you can pull to increase your chances of retiring early is by changing the fundamental investment strategy of your plan. 

A few extra percentage points in return can compound up and make a massive difference over the lifetime of your financial plan.  

It’s common to think that you should be taking less risk with your investment choices as you approach and are into retirement. However, you need to remember that your pension, savings and investments may need to last you 30 plus years. Based on results from the last 20 years, do you want them invested in something growing at an annualised rate of 8.39% or 2.74%? As this is the difference between the global equity and UK gilt fund sectors. 

A higher rate of return, whilst it may be more volatile in the short term, will potentially allow you to spend more in the long run as your investments go further. 

It’s also important to consider how much cash you hold in retirement. It is definitely a good idea to keep some cash and have access to an emergency fund. But keeping too much in cash will lower your overall returns. So, you may need to consider investing more of your money to help it last longer. 

The final major change you make to improve your chances of early retirement is your withdrawal strategy.  

Taking money out of different accounts at different times and making the most of the tax-free allowances available to you can ensure you keep more of your money. Which means you then have more to spend. 

For example, if you are planning for early retirement, this probably means you will be retiring before you reach State Pension age. If you have no other income at this point you can make ‘taxable’ withdrawals from your pension up to the Personal Allowance (currently £12,570 at the time of writing) and not actually pay any tax on it. Even if you don’t need this money and are living off other savings you can still recycle these withdrawals into an ISA.  

Other examples could include making use of Dividend and Capital Gains Tax allowances. Double the opportunity if you are a couple as you have two sets of allowances to use. 

Although difficult to do without specialised financial planning software, it is important that you stress test your withdrawal strategy in retirement using realistic investment returns.  

In most basic plans you will use the same linear annual return for every year of the plan to reflect average returns. However, we all know the market doesn’t go up in a straight line. Some years stock prices can rise and fall significantly. If you are unlucky and live through poor market returns during the early part of your retirement it will have a big impact on your long-term financial plan. 

So, you need to model different return periods onto your withdrawal strategy.  

At the end of the day early retirement is achievable for most people with a few tweaks. You just need to decide what’s most important to you. 

Contained within this article should be a video where I walk through a live early retirement planning scenario which goes through all I have discussed in this article. 

Happy planning! 

If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.  

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.