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Is early retirement a wise choice?

Cameron Walker examines what retirement means today, and considers whether early retirement or remaining in work for longer is the wisest option.
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Published 15 September
5 mins

In the history of man, retirement is a relatively new concept. Looking up the term in a dictionary, it defines a state in which people retire as they have either reached a predetermined age or are not healthy enough to continue working. This definition naturally leads to a huge number of different scenarios, but this divergence is amplified further given we probably have our own personal timeline as to when we will retire as well.

Whatever that timeline is, we then need to look to the standards that society sets out. In the UK, as an example, that timeline has changed over the last few years, pushing the current state retirement age of 66 (up from 65 in October 2020) gradually up to 67 for those retiring between 6 April 2026 and 5 April 2028 – adding a month to the current date for every month.

There is a further incremental increase planned to push the date out to 68 if you retire between 2037 and 2039. And, although this won’t be confirmed until July 2023, there are no guarantees that there will not be further changes – after all, the age of 68 was only originally due to come in between 2044 and 2046 – seven years later.

Even if you will not be planning to live off the state pension, it can be useful to cover the bare basics, not least given the current age of 55 (when you can start to access a private pension scheme) is also set to change to 57 on 6 April 2028, meaning the gap between private and state pension ages reverts back to 10 years.

But people have very different views on when they want to retire, and while you may have accumulated sufficient wealth, there may be concerns that the lower level of activity – mental and physical – are valid reasons to retire sometime in your mid 60s. Conversely, post the pandemic, many have thought through what they want from life and decided they want to stop working as soon as is practicably possible, even if it means adopting an extreme saving and investment formula, known as Financial Independence, Retire Early (FIRE), which sees people put away 25% to 50% of their income.

For those keen to retire early, a 2017 study from the University of Amsterdam will be welcomed as it suggested those retiring early could enjoy a longer life. The study focused on Dutch civil servants, with those taking the option to retire early 42% less likely to die within five years than those that chose to remain in work. I am sure that those who have felt pressure from work-related stress, which in turn can lead to hypertension and the risk of associated conditions, such as strokes or cardiovascular disease, can see the upside.

However, there were flaws as the sample for the research was predominantly male. While various other European studies have supported some of the perceived health benefits of retiring early, there is a considerable weight of conflicting research.

These studies flag the potential downside of leaving a stimulating, demanding and well-paid career, to ‘starting’ a life with less focus and, possibly, limited means of earning new income. Many people’s social lives revolve around work and once that timetable is removed, it can be more difficult to remain active and involved socially, and, in turn, avoid the resultant pitfalls of depression and low self-esteem.

In addition, the extra hours of newfound freedom need to be filled and there are often financial implications tied to the need to find something to do for the 168 hours there are in a week.

The reason there isn’t a definitive conclusion from research is partially due to the sheer volume of potential scenarios, and we can all dismiss the results since many view research as lies, damned lies and statistics. It also links back to my first point that having a choice on when to stop working and embrace a life of leisure is a relatively recent concept.

The UK state pension and an official state retirement date were only introduced in 1908 with The Old Age Pension Act. In that year, only one in four people reached the age of 70, and people tended to die on average 23 years before ever reaching the official retirement age!

The current system was introduced in 1948, when a 65 year old could expect to spend 13.5 years receiving the benefit.

By 2016, people were spending an average of 24 years in retirement. And, although the figure for 2018 showed a slight drop to an average of 21 years on a pension, this was due to the UK state pension age being equalised at 65 years for men and women in 2018.

The chart below shows the official state retirement age and the years of anticipated pension pay out based on life expectancy at birth.

Average years spent in retirement

2021.09 Years In Retirement

Longevity is also difficult to pin down as life expectancy doesn’t stand still. A 65 year old in England could expect to live on average to almost 84 if they’re a man, while if they’re a woman they could expect on average to live to 86. However, the longer you live, the longer you’re likely to keep on living. If our 65 year old man was 70 today, he could expect to live to nearly 86.

So what does this mean for you?

The earlier you start to think what you want from your retirement, the sooner you can put in place a plan to achieve it. In addition, it is worthwhile seeing retirement as a new phase in life with new challenges and opportunities, and determining how to make the most of these. With this in mind, we believe you need to ask yourself three simple questions:

  • What does retirement mean to me?
  • How do I want to live?
  • How much income will I need to achieve this?

The question missing here is how long will I live in retirement – a question no one can accurately answer, even with lots of data about your lifestyle and your family’s longevity. In reality, there is nothing you can do to guarantee a longer life, although there are steps you can take to ensure you get the retirement you wish for, however long it lasts.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand to answer your questions and help you make more informed financial decisions on what is right for you, or call +44 (0)1624 645000 to speak to our client services team. Our cashflow modelling software helps you plan and adapt to real life events by highlighting whether your future income, from investments or other sources, will cover your anticipated financial needs.

 

If you would like to find out more about how we can help clients manage their wealth, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Any examples of investments and structures used are for illustrative purposes only. This article does not constitute an invitation or inducement to buy any financial investment or service. None of the information constitutes advice or a personal recommendation.

about the author

Cameron Walker

Cameron Walker

Cameron began his career with Nedbank Private Wealth as a private banker in 2002 and has more than 25 years of industry experience.

 

In his current role as head of private banking in Jersey, Cameron has responsibility for our team of wealth management professionals on the island, building long-term relationships through delivery of excellent client experiences. He is also responsible for leading our relationship with Nedbank Private Wealth in South Africa, a key strategic partner for whom we provide international custody, managed investments and banking services. Cameron continues to maintain a number of client relationships, ensuring our services evolve with clients' changing needs.

 

Cameron is a Chartered Member of the Chartered Institute for Securities & Investment.

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