How To Retire By Age 58

Published in Investing on 12 October 2011

Or perhaps even earlier.

Another day, another bucketful of bad news on the pension and retirement front. We're all, it seems, heading for a poorer old age -- and retiring later.

The latest AXA Wealth Pension Index data, in fact, suggests that while the average age people in the UK would like to retire at is 58, the average age they can afford to retire at is 71.5 -- a gap of some 13.5 years.

But it doesn't have to be that way.

Early retirement is still possible, by following some simple guidelines.

1. Plan ahead

Time and again, I see people who are very vocal in announcing their intention to retire early -- but in practice are doing nothing whatsoever about it.

In short, they're on a trajectory culminating at their 'normal' retirement date -- whatever that will be by the time they reach it.

But to retire early, you've got to do something different, and additional. And that involves breaking away from the rest of the herd, and planning ahead.

2. Avoid debt

Other things being equal, I'm firmly of the belief that there's one important difference between people who can't afford to retire early, and those who can.

And it's this: those who can afford to retire early haven't borrowed from their older selves by ratcheting up debt that they must pay back tomorrow, in order to fund the good life today.

Not all debt is bad, or avoidable -- particularly in this economy. But every pound less that you borrow is a pound you don't have to pay interest on. And the money that you spend on interest is money that you could otherwise invest to provide for an early retirement.

3. Invest, don't just save

To some, the words 'invest' and 'save' are synonymous. They're mistaken.

Saving involves safe, boring risk-free bank and building society accounts, where your capital is protected -- albeit not, as now, from the ravages of inflation.

Investing in shares puts that capital at risk -- but offers a potentially higher rate of return. A return that in the long run has equated to a nice 7% a year, even if it was stuck in a bog standard low-cost index tracker.

And to retire early, make no mistake, you will need to earn the sorts of returns that the stock market delivers -- and not the underwhelming (and negative in real terms) returns offered by the bank or building society.

4. Make the most of tax shelters

Longer-term investors can take advantage of a number of forms of tax-sheltered investing.

Ignoring for the moment such exotica as Venture Capital Trusts, let's stick with the two most popular forms of tax-efficient investing: SIPPs and stocks-and-shares ISAs.

SIPPs are self-invested pension plans, which offer tax-relief at up to 50%, depending on your income. That's attractive. Less attractive is the fact that you can't access your money until you're 55. That's perfect if that's when you want to retire, but not so clever if you want to hang up your briefcase at 45 or 50 instead.

Stocks and share ISAs are tax-sheltered wrappers into which you can stick shares, investment funds, gilts, index trackers, bonds and exchange-traded funds. There's no tax relief on the way in, but there is tax relief on the way out: dividend income and capital gains are entirely tax-free.

And don't forget, with The Motley Fool's Share Dealing Service, you can buy and sell shares within SIPPs and ISAs in real time for a flat rate of just £10. Open an account for free today!

5. Invest regularly

With me so far? Well, here comes the hardest part: putting your hand in your pocket or purse and doing something about it.

Simply put, all the good intentions and armchair planning in the world won't bring your retirement forward by a single day unless you actually back those plans and good intentions with hard cash.

And rather than making sporadic payments as and when, or at the end of every tax year, it's best to budget for early retirement, and every month put some money aside to pay for it.

And if you can't afford to do so right now, you face two stark choices: deferring your early retirement, or doing without something now, so that you can afford to retire early later on.

Put like that, what are you waiting for?

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Comments

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curedum 12 Oct 2011 , 3:21pm

To retire at 57 you have to do all the above....

PLUS

Have a "gold-plated" public sector main pension

OR

Win the Lottery.

jaizan 12 Oct 2011 , 7:54pm

Retiring at 57 should be quite easy for people earning 50% more than the national average income.
Just live on 90% of the national income & carefully invest the remaining 60% for 35 years or so.

Buy yourself a house at one of the low points in a cycle. Live in it and rent the remaining rooms out.

DIYIncome 13 Oct 2011 , 8:38am

I've retired at 57 (although in the end pushed); it's great!

All the above steps are important but the key to me is to consistently reduce expenditdore - this. gives you a 'double whammy' of more savings to invest AND reduces the level of passive income that you need to aim for.

DutchSenior 13 Oct 2011 , 8:48am

Malcolm - your editors seem to have published your same article from yesterday under a different headline. Is the Fool so short of copy??

forrado 13 Oct 2011 , 1:21pm

DIYIncome – I’m very much on your side. Like you, I was effectively paid off a near decade ago. Though, I have to admit that at the time I was offered a pretty good deal after 25 years of faithful service.

And, as you say, the key since then has been expenditure reduction – not so much what is coming in but rather what is going out. To be honest, I couldn’t wait to get my free bus pass and senior railcard. Because when I did eventually get them I couldn’t get rid of my car fast enough. During the last five years I’ve saved myself a veritable small fortune in associated travel expenses and costs. While I am fully aware that being carless is not a practicable state of affairs for everyone, in my particular case it has led to a beneficial reallocation of resources.

Another valuable expenditure reduction factor is the internet its very self. By the nature of having lots of free time coupled with a curiosity to explore, I have been able to seek out many a money saving deal that otherwise would not have been available to me by previous orthodox means.

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