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The State Pension could have you working until 67. Here’s what I’d do to retire early

Edward Sheldon, CFA
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Do you plan to work until your late 60s? I know I don’t. Yet if you’re planning to rely on the State Pension – the income the UK government pays to those who’ve hit State Pension age – in retirement, you may have no choice but to work until this age.

The State Pension age is rising

You see, the State Pension age is gradually rising. Previously, it was 65. However, by 2028 (less than a decade away now) it will hit 67 for both men and women. This means if you don’t plan ahead for retirement, you’ll could have to work until your late 60s. When you consider that the average life expectancy in the UK is 81 years (it’s actually 79 years for men), this is certainly not ideal.

The payout is peanuts

Making matters worse is the fact the State Pension payout is peanuts. Currently, it’s just £168.60 per week if you qualify for a full payout (many people don’t). That equates to just £8,778 per year which is well below the £10,200 threshold that the Pensions and Lifetime Savings Association (PLSA) says a single person requires to live a ‘minimum’ lifestyle.

While it will continue to rise marginally in the future due to the ‘triple lock’ (which ensures that annual State Pension increases are decided by whatever is the highest out of price inflation, average earnings growth, or 2.5%), don’t expect it to ever provide for a comfortable lifestyle.

How to retire early

If the thought of working until your late 60s (and then living on beans on toast) keeps you awake at night, it’s probably a good idea to take matters into your own hands and start building up some retirement savings. Put a retirement savings plan in place early, and you could potentially retire years before you turn 67.

If your goal is to retire early, I’d focus on doing three main things:

  • Spending less than you earn.

  • Putting your money into a tax-efficient savings vehicle such as a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP) so that it’s sheltered from the taxman.

  • Getting your money working for you by investing in growth assets such as shares and funds. Over time, shares tend to produce far higher returns than cash savings meaning they’re likely to make you wealthier over the long run.

In my view, it’s the last step which is the most important. Save £10,000 per year into a savings account or Cash ISA earning 1% from age 45, and by 60, you’ll have around £160,000. However, save £10,000 per year into stocks from age 45 and earn 8% per year on your money, and you’re looking at savings of around £270,000 by 60.

That’s a huge difference. Ultimately, that extra £110,000 could help you retire early, or live a much more comfortable lifestyle in retirement, free of State Pension worries.

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Motley Fool UK 2019