Tuesday 25 October 2016

You can retire at 50 - but are you ready to spend the rest of your days in the garden?

John Cradden

Published 28/06/2015 | 02:30

If you’re seriously considering an early retirement, you’ll need to be good in the garden — but even better with your investment strategy
If you’re seriously considering an early retirement, you’ll need to be good in the garden — but even better with your investment strategy

For nearly all of us, the dream of retiring at 50 is just that: a dream, despite all those motivational articles that would tell you otherwise.

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The age of 50 used to be regarded as the gold standard, the earliest age at which some people could feasibly step off the work treadmill.

But of course, not every one of us might want to stop working at 50 anyway, particularly as we're all living longer and with the retirement age due to rise to 68 in the years ahead.

So is it time to start raising the unofficial early retirement age a little higher to 55 or even 60?

"We have quite a number of clients looking to retire from 50, but it is an extremely difficult thing to do," said David Quinn of financial advisors Investwise.

"Retiring at 50 requires a big fund to start with, and a very strong and well defined investment portfolio. A well-managed 'post-pension' investment portfolio or an ARF (additional retirement fund) can offer a 5pc per annum return over the long term that would cover income drawdown, but this takes discipline, research and a good process."

The only clients he has who get close to retirement at 50 are those company directors who have built up successful businesses, he said.

"Company directors have very flexible pension funding rules and can fund a large pension very quickly out of company profits through employer contributions. If they are in a position to do this, and also sell their company early, it can leave them in a position to retire comfortably."

For everyone else - employees, the self-employed and public sector workers - a large cash windfall is the only sure route to early retirement. The limits on personal pension contribution means that even those who save to the maximum from the day they first start working would not build a large enough fund by 50 or even 60, said Mr Quinn.

"For the vast majority of clients I recommend a realistic retirement age of 57 onwards."

Michael Bradley of Clear Financial says that in his experience, no one other than politicians and successful sportspeople talk about retiring at 50 or 55.

"Even at 60, it is usually the preserve of those in well-funded defined benefit private pension schemes, which are thin on the ground, or employees taking early retirement from the public sector."

Before the crash, there was plenty of discussion about "getting out" early - which meant between the ages of 45 and 60 - to spend more time in the little place in the Algarve, "but this was all based on a property portfolio built on quicksand".

"Between the falling bond yields you'd need a multimillion euro pension fund to retire at 50," said Mr Bradley.

Some public sector workers can qualify for early retirement packages from the age of 55, while Aer Lingus pilots - who usually have to retire at this age - did very well from such packages between five and 10 years ago.

But if you are offered early retirement, you'll need to figure out just how your expected pension benefits and tax-free lump sum will be affected by leaving your employer before the statutory retirement age.

As well as that, early retirement benefits are further reduced to allow for the additional costs of paying benefits early and for a longer period.

But if you determined to retire at, say, 60, what's the magic formula?

"Those considering retiring in their early 60s are usually utilising an ARF and investing in something that will generate a fixed income of at least 5pc," said Mr Bradley.

However, he adds that the only people currently trying to get access to pension benefits early are not doing so to plan their retirement, but to pay their outstanding debts or possibly mortgage arrears.

Even if you are minded to retire early, you will still have to plan for what kind of a lifestyle you will lead as well as your finances.

"Without a good busy plan, early retirement can have its problems with a lot of free time to fill and a peer group that are probably all still working," said Mr Quinn.

Some form of semi-retirement may well provide the answer.

"I think that is the option most people take," he said. "The pension income helps, and then some form of work to supplement pension income without the pressure of a nine to five.

"A lot of middle and upper management clients tend to get some work as consultants, often for their old employer.

"Others will work reduced hours, and some clients have set up small consultancy companies or work as self employed, and make themselves available for project work. This keeps them occupied, sharp and busy, which is often more valuable than the extra cash."

And if this works for you, it's a good idea to keep on making further contributions to a pension fund because of the valuable tax relief, says Mr Bradley.

"No matter how old you are, there is generally no good reason not to contribute to a pension plan while you have the income to support the payments.

"After all, your pension will only give back what you put into it. If you put very little in, how can you expect it to sustain you in retirement when you no longer have an income?"

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