How to retire early in the UK: a step-by-step guide
How to retire early in the UK, work out how much income you'll need and how to build it up in this step-by-step guide
If early retirement is a goal that appeals to you, it’s worth taking a closer look to see what it means in practice.
This step-by-step guide to retiring early sets out the main things you’ll need to think about and some recommended ways to address them.
We'll flag up the pitfalls to avoid and the opportunities to watch for, and also show you how you can estimate your final private pension income - no matter what age you are now.
To retire early you need to consider how to become financially independent.
Becoming financially independent usually includes paying off your debts, your mortgage and working out your expected retirement income.
It's possible to predict roughly how much income you might be able to generate from your private pension pots.
A financial adviser can help you work out how much you need to retire early.
What do you mean by early retirement?
The first question to consider is twofold: what exactly counts as ‘retirement’, and what is ‘early’? Retirement usually means finishing work, but that doesn’t necessarily mean you want to just play golf for the rest of your life.
Perhaps you still want to work and earn in some way – just not in the way you have been.
So for this guide, we’ll assume that ‘retirement’ means ‘financial independence’.
It means you don’t have to lie on a beach doing nothing – but that you could if you wanted to.
Learn more: Can the FIRE movement help you retire early?
What about ‘early’? Well, traditionally retirement has been from the age of 60 to 65, as reflected by the state pension age (though this is now rising).
You can consider ‘early retirement’ to be any retirement before the age of 65, but we’ll focus mainly on a retirement that happens at some point in your 50s.
Pensions vs investing: what's best for me?
If you’re in your late 50s and considering retiring in the next few years, ask yourself whether your current pension (or pensions) is enough for the type of retirement you’d like.
If it’s looking like you won’t have enough for your ideal retirement, you should prioritise paying into your pension.
Even if your retirement is not immediately on the horizon, boosting your pension is worth considering because you’ll get an extra boost from tax relief.
What do I need to retire early?
Since we’ve said that retirement = financial independence, the question becomes: what do I need to become financially independent? (i.e. not having to do a job I no longer want to do).
Financial independence doesn’t necessarily mean being rich.
All it means is that your outgoings over the rest of your life don’t exceed your income plus your savings.
Once you put it in those stark terms, you can break your ambition down into goals.
What you need to achieve financial independence
Being financially independent usually requires:
| Requirement | Why it matters |
|---|---|
| Pay off debts | Interest costs outweigh savings returns |
| Pay off mortgage | Reduces outgoings, frees up cashflow |
| Income for daily needs | Covers essentials in retirement |
| Additional funds | Supports lifestyle and enjoyment |
| Emergency savings | Provides safety net for unexpected costs |
This doesn’t necessarily demand a huge level of wealth – but it does require living within your means.
The more modest your intended lifestyle, the less you’ll need in the way of assets.
Here’s our Unbiased step-by-step guide on how to retire early:
1. Pay off debts
Prioritise paying off debts above building up savings, since the interest on debts will far outstrip any savings interest you might earn.
If you have multiple debts, always pay at least the minimum payment on each one, to avoid the debt snowballing.
After that, pay off the debt with the highest interest rate first.
You can also sometimes transfer the balance of one credit card to another.
Clearly, it’s a good idea to move as much of your debt as possible to the card with the lowest interest rate.
Any outstanding debt from student loans can usually be left until last.
2. Pay off your mortgage
It’s usually good to make overpayments on your mortgage if you can afford them.
The upshot is that you’ll pay off your mortgage sooner, but also pay less overall.
Generally, this is a better use of money than building up savings (though an emergency fund is still useful).
Just beware of mortgage providers charging excessive penalties for early repayment of the loan.
Ask your mortgage broker to check the terms of your mortgage in this area, if you’re not sure.
3. How much income do you need in retirement?
Now you need to work out the minimum you’ll need to spend each year to have an acceptable lifestyle.
The Pensions UK Retirement Living Standards give a rough guide of what you would need for different standards of living in retirement.
The figures focus on post-tax income and assume you have no housing costs.
Here’s a summary.
| Income needed in retirement | What this means | Income needed for a single person | Joint income needed for a couple |
|---|---|---|---|
| Basic/minimum lifestyle | Covers basic needs with a little left over for fun | £13,400 | £21,600 |
| Moderate lifestyle | Gives you more financial security and flexibility | £31,700 | £43,900 |
| Comfortable lifestyle | Allows more financial security and some luxuries | £43,900 | £60,600 |
Of course, how much you actually need varies significantly and depends on your lifestyle and financial commitments.
Here’s a summary of what you should consider when working out how much income you need.
| Essential survival costs | Discretionary spending | Potential reductions in costs |
|---|---|---|
| Mortgage/rent | Holidays and travel | Commuting, work clothes and lunches |
| Council tax | Hobbies | Costs to support children |
| Other bills and food | Discretionary home maintenance projects | Income protection insurance |
| Basic home maintenance | New cars or upgrades | More time to save costs |
4. Work out your basic income needs in retirement
To work out how much you need, the first stage is to focus on your basic survival budget.
It’s sensible to suppose your basic needs won’t change much – you’re still going to be the same person in ten years’ time.
However, you should be able to deduct regular expenses such as mortgage repayments and servicing debt (assuming you’ve dealt with those issues above).
You can also discount any necessary expenses that specifically related to your working life, such as daily travel costs to and from work.
Similarly, if you have children they will (probably) be grown up by then.
Though they may still need financial help from you, this will count as discretionary spending – so deduct child-related costs for now.
You should aim to arrive at a single monthly and/or yearly figure. Call this ‘Essentials’. Remember that costs will rise gradually with inflation year on year.
Also consider that in your final years you may need to find money to pay for care.
5. Work out your discretionary spending in retirement
This may be the hardest figure to estimate.
You’ll need to think in detail about your plans for retirement: where you want to live, how many holidays you’ll take, what interests you’ll pursue, even what vehicles you want to own – do you crave your own boat, or is a bike enough for you?
Call this figure ‘Discretionary spending’. Again, assume that your costs will rise with inflation over time, but also that your lifestyle may modify in later life as you slow down.
6. Estimate your total costs over retirement
Make a note of the two figures, Essentials and Discretionary spending.
You now need to judge whether your assets can meet two different targets:
Essentials only
Essentials PLUS Discretionary spending
Now estimate the length of your retirement. If you’re retiring aged 55, then 30 years is a reasonable figure.
The next step is to find out whether your assets can cover those levels for spending for such a long time.
7. How to fund the retirement gap
The biggest hurdle in planning an early retirement is bridging the gap before the state pension kicks in.
Here’s a summary of the challenge.
The challenge: Bridging the gap between early retirement and receiving the state pension.
Financial impact: £12,547 annual income deficit - your own pension must be bigger to make up this shortfall.
Timeline: Previously - state pension age was 66 and you could start withdrawing a private pension from age 55. Currently - state pension age is rising in stages to 67 by 2028 and the minimum private pension age is rising to 57 (it is still 55 until April 2028). Future - state pension age is rising again to 68 by 2046.
What to do: Evaluate your income needs and your finances to see if you’re on track. A financial adviser can help with this.
8. Calculate what income you can achieve in retirement
Make an inventory of all your assets, to see where your retirement income could come from.
Assets and income may include the following.
Pensions (private or workplace pension pots): Estimate how much you can achieve via drawdown, an annuity, or a blend of both. You may need to consult a financial adviser about this, but our guides will help.
Final salary pension: Find out how much income you will receive - you may receive a lower amount if you take your pension early.
Savings and investments: Your savings and investments can supplement your pension. You could also consider using your savings to top up your pension, as they will benefit from a tax-relief boost.
Other assets: Your home can be a source of income. You could consider subletting a room to a lodger, downsizing or releasing equity.
As we’re talking about early retirement, state pension income is not included in this list.
However, you can start to factor it in from your state pension age onwards.
Now you can work out whether your combined assets will be enough to generate sufficient income over the length of your retirement.
Is your pension on course to let you take early retirement?
No matter what age you are now, it's possible to predict roughly how much income you might be able to generate from your private pension pots.
The free Unbiased Pension Calculator lets you work out (based on certain assumptions) the size of pension income you could reasonably take from your pension pot over an average retirement, based on how much you're saving at the moment.
Though it can't make firm predictions, it will give you a good idea about whether you need to increase your pension contributions, or whether you can indeed retire sooner than expected.
Will your money last if you retire early?
As noted already, retirement can be a long time – and an early retirement will hopefully be even longer.
Retiring early places a triple strain on your funds, because not only does your money have to last long, but you’ve also had less time to build it up.
Every extra year of early retirement means:
One year more spending
One year less earning
One year less compound interest
Compound interest is the interest earned on both the initial amount and any accumulated interest.
This allows your savings to grow faster as the interest is added to the principal amount daily or monthly, increasing the total amount on which future interest is calculated.
Use our free UK compound interest calculator to find out how your weekly, monthly or annual savings and investments can increase.
In short, every year of early retirement will cost you significantly more than an ordinary year of retirement.
Get expert financial advice
A financial adviser can help you work out exactly how much more, and whether you can really afford it. For more tips on this, check out our article on how to retire at 55.
If you found this article useful, you might also find our articles on the best places for over 60's to live in the UK and equity release vs downsizing informative, too!
)