Retirement Advice Tristan on 30 Apr 2009 02:26 pm
Early Retirement Planning
Early retirement is still a concept in use today, primarily to describe the ability to retire before the standard retirement age of 65 in the UK, though these days people tend to talk more about financial freedom as opposed to saying they want to take early retirement.
If you are looking to achieve financial freedom or take early retirement, then you will need to do some planning, it won’t just happen otherwise. First thing that you need to do is set yourself a goal. When I used to work as a mortgage broker, I was lucky enough to receive some good advice from fellow financial advisors about how to help clients get the most out of their financial planning. The technique that was passed onto me is called “The Broad Concept”.
Apparently it is a strategy planning tool that was first conceived during the Vietname war by the Americans. The idea being that if you want to achieve a set of objectives, you must first follow these four simple steps:
- Work out what objective you want to achieve, or work out your retirement goals.
- Work out where you are now (with respect to achieving your stated goals).
- Work out all the various different ways you can achieve your goals.
- Lastly, analyse and decide upon the best way to achieve your goal by discounting each route in turn.
So how does this work in practice?
Well, the first thing to do is work out step 1. For example, let’s say your objective is to retire at age 50 with an income (in today’s terms) of £25,000 a year.
The next thing to do is work out step2, where you are now (in relation to achieving that goal). So for example, if you are 25 years old and you have no retirement planning, you have 25 years to acquire £500,000 (£25,000/5%) - I’ve assumed a fairly typical 5% return on investment. Clearly this example doesn’t take into account inflation, so to do this correctly, you would have to tweak to allow for the impact of inflation etc.
The third part is the bit where you can have a little bit of fun! Step 3 you need to work out the various different ways to achieve the stated goal of acquiring a pot of £500,000 in 25 years. You could work out that if you invested a few thousand pounds each year into a pension fund, you would achieve the goal.
You could also look at investing some money into property, with the intention being that in 25 years, the capital appreciation, as well as the mortgage being paid off could provide you with the amount of capital required to retire on. Though, I would potentially just look at investing in property with the intention of holding onto it for the income that it would generate. Remember that with property, if you sell it to release the equity, you will pay capital gains, so it is sometimes better to hold onto it indefinitely.
Another option could be to start a business with the intention that over the next two and a half decades you will have built up something of value that could be sold. The proceeds of the business sale could then be invested in an annuity to provide you with the requisite income.
The safe option, in many eyes would be to find an employer who would provide you with a nice comfy “company final salary” pension scheme, and hope that by the time you get to retirement age, your salary is fairly high, thus affording you a decent retirement income.
There may even be a few other options, but I’m not going to go into them at this stage. Let’s move onto stage 4 which is the analyses of the various different options that can be taken to achieve your stated goal.
You may look at the option of starting a business with a view to selling it at retirement age and decide that’s not for you. That’s fine, at least you’ve explored the possibility. Similarly, if you’ve no interest in becoming a landlord, you may well discount that option too. And lastly if you don’t fancy being responsible for your own pension planning, it may be wise to discount that option and look to go and get a job with an employer that pays a nice final salary pension, and hope that the scheme will still be going when you come to retire.
Whatever you do with your retirement planning, you can be sure of one thing - you need to do some, and it won’t necessarily be the right type, but unfortunately, you won’t know until it’s too late. The most precious asset we all have is time, and no amount of money can buy any more, so it’s best to put some serious thought into what you will do about retirement when you are young, rather than just hoping that it will magically just work out all right in the end!
