Can you afford to retire early?

Early retirement – retiring any time before the state pension age of 66 – is the dream for many.

The pandemic focused many people’s minds; making them think about what they want out of life – and for many in a position to make big changes, early retirement was the big one.

The House of Lords Economic Affairs Committee has recently been looking into what’s driven an increase in economic inactivity over the last three years, and found that the key factor is 50- to 64-year-olds choosing to retire early.

In fact, the number of people taking up this option since 2020 is higher than the number of people who’ve left work because of long-term sickness.

But a particularly interesting finding of the report is that many of those choosing to retire early were already self-employed or working part-time, and therefore already winding down their careers.

That suggests that many of these people were confident that they had the financial means to retire before the age of 66.

Early retirees in a strong financial position

The House of Lords committee collated a number of recent studies, including ONS figures showing that two-thirds of 50- to 64-year olds who have left work since the pandemic began, own their homes with no outstanding mortgage.

Peers also looked at data from the Financial Conduct Authority, which showed 92 per cent of 55- to 64-year-olds who had retired, or whose partner had retired, in the year to May 2022, owned their own home. Some 78 per cent of this group owned their property outright and had no outstanding mortgage debt.

As the committee notes: “This evidence supports the view that over-55-year-olds who have retired early during the last year are, on average at least, relatively well resourced.”

It’s an interesting trend, given that Chancellor of the Exchequer Jeremy Hunt recently called for older people who have left the workforce to come back, as this would help to “fix our productivity puzzle”.

In a keynote speech, he said: “To those who retired early after the pandemic or haven’t found the right role after furlough, I say: ‘Britain needs you’ and we will look at the conditions necessary to make work worth your while.”

Whether Mr Hunt’s rallying call succeeds remains to be seen, but he may be wise not to get his hopes up, particularly as the House of Lords report shows that many people who have retired recently have a mixture of funding sources, ranging from savings and private pensions to investments.

Gaining a level of financial freedom, enough for you to finish your working life early, is a very common and understandable goal, so is it realistic for ministers to ask people who’ve accomplished this to go back to the daily grind?

The House of Lords committee isn’t optimistic, saying: “The fact that so many recent retirees express no desire or expectation to work suggests it is unrealistic to base policy solutions on persuading or facilitating these people to re-enter the labour force.”

Will this trend continue?

Although the UK narrowly avoided falling into recession at the end of last year, ONS figures showed there was zero growth in Q4 2022.

This prompted Jeremy Hunt to point out that while the figures showed the “underlying resilience” of the economy, we are “not out of the woods”. Indeed, the Bank of England is still forecasting a recession at some point in 2023.

So if you’re among those exploring the option of taking early retirement, what could this mean for you and your lifestyle choices?

According to forecasts by the National Institute of Economic and Social Research, fewer workers will be able to afford to retire early over the next few years, and more 50- to 64-year-olds will return to the workforce.

This, it believes, is because high inflation is leading to people’s savings “being run down”, and could lead to the participation rate for the working age population soon going back to its pre-pandemic level.

Increasing the size of the labour force might be good news for the Chancellor, but if you dream of retiring early and want to make sure your plans aren’t knocked off course by economic headwinds, now could be the perfect time to get a professional financial planner to look at your finances.

With a regulated specialist in this area offering you guidance and support, you’ll be in a much stronger position to work towards your goals, make the right financial decisions and get the retirement you deserve.

Please don’t hesitate to get in touch if you have any questions.