When you are creating a retirement plan, the longer you can let your investments grow, the more options you have. This is because delaying your retirement gives compound interest more time to work its magic.
By playing with various retirement calculators, you can see how postponing the happy day can ratchet up your eventual pension.
Planning to retire later is very handy if you’re saving all the money you can and yet you’re still falling short of your target.
The question you really need to ask then is not “when can I retire?” but rather “at what age should I retire?”
Don’t regret not spending more time at the office
I’d love to retire early (tomorrow would be nice) but I’m a late starter when it comes to saving for retirement, so to establish a realistic finishing post, I initially plumped for retirement at 65.
Triangulating your retirement age, target income, and savings rate on a retirement calculator gives you an initial hand to play. You can then stick or twist from there:
- If you want to retire earlier, how much more do you need to save?
- Alternatively, how much bigger could your income be in retirement if you stay on the hamster wheel for longer?
Few people need to hear reasons to retire early, but to avoid a long, impoverished post-work existence, make sure you consider both sides of the equation.
Who wants to live forever?
Finally, remember that your time horizon isn’t entirely within your gift.
You might want to work for longer, but catch a corporate bullet and find it impossible to get another position at your previous level. You may get ill or become a full-time carer.
The list of things that can go wrong is as long as your imagination.
Equally, many of us don’t appreciate just how long we might live for, which can also be a bleak outcome if you don’t have sufficient money in your very old age to keep you in Zimmerframes and bribes for the great-grandchildren.
Playing with a longevity prediction tool could surprise you with forecasts of your future as a nonagenarian.
‘What if’ scenarios are hard to compute, so you need to leave room for error, as with the other key elements of creating a retirement plan.
I’ve got to echo Ermine’s earlier post and paraphrase Enoch Powell “all business careers end in failure”
For most people ending a full time well paid salaried career in your early 50s is a contingency that needs to be planned for one way or another as part of retirment planning
I find it very ironic that at the very same time that the governments is ramping up the state retirement age, being a senior executive in a commercial business is something you achieve in your late thrities to early 40s or not at all
PS. nice series of articles btw
@Neverland — Indeed! Almost feels like you have to get your entire career crammed into 20 years these days if you follow the conventional corporate career path. I’d also second Ermine’s comments, except I fled early from office life in disgust.
@Neverland
I hear you. Although I wonder will the next generation behind the boomers even make it into the 50’s before being of no use. In the modern globalised world (read that as some countries residents getting poorer and some countries getting richer, guess which…) it could be anytime in your middle life that you could be thrown on the corporate scrap heap.
That’s why I’m going for it. Save 60% or so of earnings and retire in my early to mid 40’s.
Cheers
RIT
Love the article though I disagree with the title. There’s no should about retirement 🙂 Although much about a life is variable and uncertain, most people do get older, and for most people life is about more than work. Combine these two certainties with living intentionally and it is probably possible to narrow down the retirement aim to better than ‘somewhere between tomorrow and pushing up daisies’
Some people, particularly those in self-determined work and more creative aspects, may love their work and there’s no reason for them to retire. There’s still sense in them having a buffer because technical innovation and changes in fashion can cut the business environment from under you, but otherwise no need.
A significant proportion of the population seem to want to retire before they start work. I’m not sure what can be done to help them 🙁 For the rest of us, it is the balance between jam today and jam tomorrow, and establishing that balance comes from self-knowledge, researching the externalities and coming to a conclusion about what you would like to do. Ignore the self-knowledge and you become a victim of the externalities and externally imposed assumptions, leading to the ‘should’ in the title 😉
As Neverland, TI and RIT say, the modern career seems to be compressed into fewer years than earlier. That’s not necessarily a bad thing. If you can live intentionally and spend intentionally, earnings nowadays are such that a much higher standard of living can be achieved in that shorter time if you don’t let sophisticated modern marketing bleed you dry. We are blinded to that by establishing our standard of living comparatively with a load of people who spend on tick and outsource part of their sense of self-worth to branding and what they have rather than what they are, but I’d hope readers of Monevator can do better than that.
Something I’d be interested to see is addressing the scare that people have of running out of cash by living too long. For various reasons I don’t have this issue, but I am surprised that one solution never seems to come up in the PF world.
The commonly used estimate of ROI on equities lies between 4 and 7%. Annuities have a bad name, but the return on those slowly increases as you get older. At the moment the annuity return is rotten, but there is always an age cross-point when the return exceeds equity ROI. The inflation hazard reduces as you get older too, alternatively even the lower return on inflation protected annities improves as you age.
At the moment annuities seem to beat that equity return after about 75. A phased switch into them as you get older may help those that fear outliving their cash, at the expense of course of not leaving the corresponding capital to your heirs – couples can take a joint annuity to address the obvious issues there. However, you don’t have to convert all your equity holdings – the principles of asset class diversification still hold, and indeed the principles of moving in or out of an asset class over a period of time to smooth your exposure to the temporal volatility.
@ Ermine – Love the observation, “outsource part of their sense of self-worth to branding.” A great way of putting it.
There’s a danger of retreat into self-pity if we cast ourselves as a cursed generation that somehow didn’t get all the breaks bestowed upon the baby-boomers. The race is far from run and current events make it easy for pessimists to prosper.
I wholeheartedly agree that increases in productivity give us an unprecedented opportunity to live life on our own terms, if we’re prepared to break with consumerism.
We may no longer have it easy but we do have plenty of options.
Have been thinking about this some more, and realised perhaps it was *always* true that your most important career years were your 20s and 30s (and maybe your 40s).
What might have changed is you used to climb your way to the top of the greasy pole and then feel secure — and, to keep these musings on-topic for this article, you’d look forward to a good final salary pension. Now that security has gone, but the hard work to get there in your 20s and 30s hasn’t.
p.s. I am much less gloomy about the prospects than consensus. Even if UK GDP growth does stall / limp along for decades, which I highly doubt will happen, I don’t see that a market that gets more than 70% of earnings from overseas will necessarily follow it. Whilst anything could happen, of course, my main fear is I won’t get to buy enough equities before valuations get too elevated and stay elevated for another decade or two. Right now the FTSE All-Share is yielding nearly 4%, so there’s a big chunk of the FSA’s 7% expected return right there.
I don’t know how secure anyone atop a pole feels. That’s why it’s greasy. I know my childhood was easier than my baby boomer father’s and we’ll just have to see how the end turns out. In terms of employment, travel and social opportunities, again, it’s always felt like my generation got the luck of the draw. Yep, we’re up against it now, but partly we’re shell-shocked by the first recession many of us have ever had to face while in employment. That and the fact that it’s the mutha of all recessions.
You should retire at least four times. First off when you are 55, so you can get the tax free lump sum. Legislation may change the access to this, so best get it as soon as possible and re invest in ISAs. If you are married or have kids you can probably re-invest the lot of this very quickly. Second retirement could be when last child leaves home and you stop getting child benefit or you start working part-time or you get made redundant, basically anything that means you don’t pay higher rate tax. At this point you will start to take income from your fund. Third retirement at 67 at state pension age, and fourth retirement at 75 when you stop getting tax breaks on your pension contribution. At all the retirements, keep an eye on the impact on the lifetime allowance and ensure you don’t breach the £1 million limit at age 75. Once you pass 75, just leave the pot to grow as much as you can and spend/give away all your other savings. Re-mortgage your house if you can. Nationwide will allow you to have a mortgage until you are 85. If possible (if you were married) die with a million pound house and nothing else. Do the above and your children will be very grateful if all you leave them is the pension pot.