By LESLEY GREGORY
There was a time when the idea of retiring at 55 became a popular aspiration. Then the global financial crisis put a hole in savings, delaying early retirement for some people. The low interest rate years that followed haven’t helped either. Now the economic disruption from COVID-19 means many are again rethinking plans to escape to the seaside, let alone more exotic locales.
Even without major crises the rosy picture of people retiring at 55 – often reinforced in TV advertising – relied on a number of assumptions and ignored a few hard facts.
It ignored the reality that those now nearing retirement are likely to have paid high prices for housing, leaving them with debt later in life than other generations experienced. This will have affected their ability to top up retirement savings.
The generation retiring now didn’t have the benefit of early education about the need for retirement savings, or the access to good financial planning advice we benefit from today. So they may have made a later start on their retirement plans.
They are also the “sandwich” generation, looking after parents who are now living into their late 80s while also trying to assist adult children who may leave home later or help with the costs of university education or high house deposits.
It raises the very big question: when should I retire? A financial planner will be able to offer specific advice, but here are some things to think about before you have a discussion with family and trusted advisers.
The official number
The official age of retirement is creeping upwards in many countries as governments deal with the fact that people are living longer, and there are more of them entering retirement. The oldest members of the baby boomer generation are now in their mid-70s and the youngest in their late 50s. That puts greater pressure on the public pension system.
In the UK, the state pension age is the earliest age you can start receiving a government pension. It depends on when you were born, and you can check it here. This isn’t a compulsory retirement age – you can keep working if you want and are able.
While many governments now want us to work until we’re 67, the age people actually retire tends to fall short of that. The latest OECD data shows that the average retirement age in the UK is just under 65. That compares with 61 in the late 1990s, and 63 just before the GFC.
What’s more, a growing number of people think they’ll never retire – one of out of 20 people according to this survey – either because they want to stay active, or because they don’t believe they’ll be able to afford full retirement.
The long horizon
Even retiring at 60 can involve a bit of a reality check, considering your money is likely to have to last 20 to 25 years. The current life expectancy in the UK is 81.4 years, and rising each year.
It’s also a long time in the garden (if that’s your thing). The anecdotal evidence is that people who “retire” at 55 find the gloss wears off pretty quickly, with that relaxed lifestyle sometimes turning into boredom. And health research shows that staying mentally as well as physically active is important for our brains.
A bigger buffer
A very rough rule of thumb is that for every year someone works beyond 55, they can extend their retirement capital by about three years (this depends on variables such as investment returns, of course). That’s because of the double benefit of not drawing on the funds you’ve accumulated so far, while adding more on top.
To put it simply: At 55 you’d need enough capital to generate an income of, say, £25,000 a year for 30 years. At 65 you’d need enough capital to generate £25,000 for 20 years.
Working for a few years longer can mean the difference between a “’modest”’ lifestyle in retirement and a more comfortable retirement. The question is whether you’re prepared to trade off lifestyle now for lifestyle later. That’s a personal decision.
A gentle transition
Of course, these days you don’t have to take the “gold watch” and sign off completely. If you don’t want to continue to work full-time, consider whether you could drop back to part-time or take on contract work.
Experience suggests that transitioning out of work is better than making a sharp break, psychologically and financially. As one retirement researcher told me: “’Once you pull the pin, it can be quite difficult to get back in.”
Ask your financial adviser to model some scenarios for you, such as retiring – fully or partially – at 55, 60 or 65. Think about what sort of lifestyle you want in retirement. And plan ahead to make it a reality.
LESLEY GREGORY is an experienced personal finance and consumer journalist. She regularly writes for TEBI money and personal finance issues that aren’t directly related to investing.
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