Forget summer holidays! Retirement is no longer a one-size-fits-all affair. Since the pension freedoms brought in with the 2015 reforms, people are structuring their retirement in different ways to build the kind of lifestyle they really want to live.
With changes to working arrangements, private pensions, business ownership and lifestyle goals, there’s been a huge shift in the types of retirement that people are taking. If you’re thinking about how much money you need to provide you with a comfortable retirement, or if the idea of an early retirement appeals to you, then it might be worth considering these 5 awesome types of retirement:
As popularised by Tim Ferris in his best-selling book The 4 hour work week, Mini Retirement involves taking regular time out to enjoy new experiences and recharge your batteries, like a series of sabbaticals taken throughout your career. Mini-retirements are more suited to those with flexibility in their work and a taste of adventure.
You’ll find it easier to do mini-retirements if you’re a freelance worker, contractor or conduct your business online, but if you read the 4 hour work week, you’ll find plenty of examples of people who have negotiated flexible working conditions to enable them to take mini-retirements.
We met a master of mini-retirements on our travels to Thailand in 2014. Our friend is a Nurse, writer, photographer and artist – she works for a few months at a time to fund her worldwide travels, In the last 4 years she has visited elephant sanctuaries and Buddhist temples in Thailand, walked the Camino in Spain, visited Iceland, Canada, Guatemala, Bolivia, Chile, Belarus, India and that’s just a few of the travels I can remember. You can follow her Instagram to see her awesome travels. She’s living proof that you don’t need to be a multi-millionaire to travel the globe.
How much does a mini-retirement cost?
The idea with mini-retirements is that your regular income from work pays for your mini-retirements. You never actually give up working, you just work less frequently and take more time out for R&R.
In essence – Work. Play. Repeat.
Of course, the cost of your mini-retirement, depends what you want to do, if you’re imagining luxury travel for months on end, you could be looking at a hefty sum.
Don’t forget to budget for the day to day costs of living too. Especially if you rent or own your own home, you’ll probably still have to cover these costs whilst you’re on your mini-retirement.
And it’s worth remembering that you might not be able to work forever, so you’ll want to start saving for full retirement too.
If you’re in good health and you can negotiate flexible working practices, this is a great way to achieve early retirement without having to have a huge savings pot to fund it. Just be sure to have a back-up plan as there may come a time when you can’t continue to work.
Don’t wait until you’re 66 to enjoy yourself. Mini Retirements could be the way forward.
2) Early retirement
Early retirement used to be the preserve of the wealthy and the age-old dream of many a London stockbroker. The idea being – make your money early, then you live off the spoils – you never have to work again.
This appeals to those who can make their money young and then spend the rest of their life living the dream, but often results in burning out young and a complete lack of work-life balance during your younger years.
It’s not a particular family-friendly approach and given the large sums of money you’d need to do this, it’s not realistic or achievable for everyone.
Cost of Early Retirement – the FIRE way
The cost of early retirement really depends on the kind of lifestyle you intend on living once you retire, but the old-school ‘get rich quick and retire early’ approach put early retirement out of reach for most.
Early Retirement has seen a resurgence in popularity due to the FIRE movement. FIRE which stands for Financial Independence Retire Early encourages its devotees to execute extreme frugality and leverage investments to achieve complete financial independence in order to retire as early as possible.
Fuelled by the promise of financial freedom, people around the world are adopting FIRE principles in order to retire early. So how much could it cost to retire early?
Let’s imagine you’re a Company Director earning on average £100,000 a year who wants to retire at 50.
Experts estimate you’ll need around two-thirds of your current income in retirement, so our Company Director will need to have £66,667 a year to sustain their current lifestyle in retirement.
The rudimentary ‘two thirds’ rule is based on having paid off any mortgages and not having to worry about childcare costs, university fees or other standard living costs associated with being 40-66 (and not normally associated with retirement).
Imagining an average UK life expectancy of 81, our Company Director’s retirement pot will need to last for 31 years. They’ll need to accrue assets that would pay out £66,667 a year and keep them invested to provide an income.
As a rule of thumb if you multiply your desired annual retirement income by between 25 and 30 you should get your required pension pot size. So to have a pension income of £66667 per year you’ll need a pension pot of around £1.67million to £2million.
If you were born after April 1968 you won’t be able to claim your State Pension until you’re 68 and to get the full amount you’ll need to make sure you made enough contributions.
Of course, you may also be able to fund early retirement through rental income from a property, equity from downsizing, an inheritance or redundancy package.
Find out if your Pension Pot is likely to last your Early retirement with our Pension Drawdown Calculator:
Or try our Early Retirement Calculator
3) Phased Retirement: The new Early Retirement?
The Pension Freedoms introduced by George Osborne in 2015, which allow people to access their private pension from the age of 55, have opened up the possibility of an Early Retirement at 55 for many, who would previously have been unable to afford early retirement.
Being able to access 25% of your Pension tax-free at 55 means that for some, they can use the cash to bridge the gap between accessing their private pension at 55 and receiving their State Pension at 66.
‘Phased retirement’ may allow a pension holder to gradually cut back on their working hours and replace the associated loss in income by partially accessing their private pension fund.
Given a more flexible approach to accessing your Pension, funding a phased early-retirement may not be as difficult as you imagine but it does come down to how much your pension pot is worth, how much you need to sustain the type of lifestyle that you want, any debts or financial commitments you might have etc.
We work with clients to work out a sustainable rate of withdrawal from their pension pot and we review this on an ongoing basis.
If complete capital protection of assets is a priority, that is, if you want your total pension pot amount to stay the same through retirement, then we would normally recommend withdrawing no more than 3% of the value of the pension pot/ investments per year.
This means if you average a net annual return of 3% per annum over the longer term, then the value of the pension/investment can be maintained**. Obviously, each investment strategy is tailored to the client’s needs and more importantly, their appetite for risk. – It is really important to ensure your investment strategy is able to meet your growth objective.
**All Investments carry risk. The value can go down as well as up.
Important note: The Government are reviewing the age at which you can access your private pension. It’s proposed that the age at which you can access your pension (and tax-free cash) will rise to 57 in 2028, in line with the planned State pension age increase to 67.
The Pension Freedoms introduced in 2015 are enabling people to enjoy a more flexible approach to retirement
4) Permanent Semi-retirement
Taking a long-term – half on/half off approach to work is being touted as a viable future to retirement, which can also deliver some great health benefits.
Researchers at the Melbourne Institute of Applied Economics and Social Research found that a three-day working week was optimal for the over-40s’ offering improved cognitive function, reduced stress and a better overall wellbeing. There are claims that that delaying retirement can potentially help reduce the deterioration of cognitive functioning because of the continued intellectual stimulation that working provides.
The research also showed that the sweet-spot for a positive impact on cognitive function for those in old age was working around 25 hours a week, any more than that was found to have a negative impact on cognitive function.
Permanent semi-retirement, aside from the health benefits it may provide, reduces the strain on individuals financially, to fund increasingly longer retirements as average life expectancy increases. Regular income through employment helps to offset the cost of retirement.
But it does rely on the individually being able to continue to work past retirement age – for some, especially manual workers, this just isn’t practical. But there are plenty of jobs that can be done on a part-time basis, take a look at 7 ways to make money in your 60s for inspiration.
Part-time work is a trend that is already the norm in some countries. In Holland, for instance, 26.8 percent of Dutch men and 76.6 percent of women of working age spend less than 36 hours a week working.
Can i semi retire at 55?
Since you can now access your private pension from age 55, it’s opened the door for many more people to semi retire at 55.
You can take your private pension at 55 and still work. If you have a defined contribution pension you can access up to 25% of your private pension tax-free at 55 to fund semi-retirement, or you could opt to start taking money from your pension to subsidise your income.
You can work and receive your private pension at the same time, but it’s important to remember that your pension will be taxed as income and the added pension income may push you into a higher income tax bracket. You could also trigger the Money Purchase Annual Allowance which could have implications for building your pension pot.
It might be that as people begin to live longer and fund longer retirements, the idea of stopping work at 66 becomes less rigid.
Since the UK Government is planning to raise the State Pension age from 66 to 67 between 2026 and 2028 , perhaps a more flexible approach could work better, not just for the individuals seeking reduced hours but the companies employing them.
Want to know more? Read: Can I take my pension at 55 and still work?
Research found that a three-day working week was optimal for the over-40s’
Melbourne Institute of Applied Economics and Social Research
5) Traditional retirement
If none of the other options appeals to you, there’s always the Traditional Retirement route. The traditional notion of retirement involves working the majority of your life and retiring at 66 (or whatever retirement age the government set for you or your private pension allows). You collect a regular income from your pension and relax and enjoy your golden years.
However, as the cost of living, and the state retirement age increases the prospect of traditional retirement is getting further and further away for some as they find themselves financially unprepared for retirement. Many people will rely heavily on the state pension, which currently pays £168.60 per week or £8,767.20 per year. The good news is, that with sensible planning, you could still save for and enjoy a comfortable retirement, but the earlier you start saving, the better.
How much does a Traditional Retirement cost?
It’s estimated that to sustain your pre-retirement standard of living you’ll need about two-thirds of your current salary. Based on the average UK salary of £30,800 the average person will need £20,328 per year to sustain their pre-retirement lifestyle.
If you qualify for the full state pension around £175.20 a week (£9110 a year as of Jan 2021) you’ll still need to find around £10,000 of income from other sources i.e. private pensions or investments.
Our in-depth guide How much do I need to retire? provides 3 different ways to work out how much money you’ll need in retirement, whether you are single or in a couple.