This Is How You'll Retire Early

Published in Investing on 8 June 2012

It's official: we're retiring later. Here's how not to.

Another day, another gloomy survey into the parlous state of the nation's pensions provision. And according to research released today by Prudential (LSE: PRU), almost half of us now believe that we won't have enough for a comfortable retirement.

The anticipated retirement incomes of men and women have been plummeting, in short, and have now reached a five-year low. Taken together -- and including private, company and state pensions -- retirees' anticipated income is just £15,500. Put another way, that's over £1,000 lower than expected income levels this time last year.

Chiefly to blame? Plunging annuity rates -- which have been affected by factors including the credit crunch, low gilt yields brought about by the government's quantitative easing programme, and longer life expectancies. Oh yes, and the demise of the 'final salary' pension scheme, government cutbacks, and state pensions linked to the Consumer Prices Index, not the (more realistic) Retail Prices Index.

Welcome to the treadmill

All of which means, of course, that for many the dream of early retirement has turned to dust.

Indeed, earlier this year, another survey from Prudential revealed that more than one in ten of the 550,000 people who were due to retire this year had changed their plans. While some had done so because they enjoyed working, the vast majority were putting it off because they couldn't afford to retire as planned.

What's more, official figures from the Department of Work and Pensions showed that in 2010 -- the latest year for which data is available -- the average age at which men left the labour market rose to 64.6 years, up from 63.8 years in 2004. For women, it rose from 61.2 years in 2004 to 62.3 years in 2010.

Put another way, across the two genders, people are retiring almost a year later than they were just six years earlier -- with the charts showing no sign of the trend reversing or slowing down.

Don't do this

What to do? Clearly, if you hope to retire early, you'll need to do more than just hope. You'll need to put in place hard, concrete plans.

And to my mind, here's what those plans shouldn't entail.

Private pension plans, for instance, often have high charges. Even stakeholder pensions still take a slice of your money -- and in a low-return environment, 0.6%-0.7% of your fund value is quite a hit. Cash ISAs? Well, net real interest rates are currently negative, so no joy there then. Property? Popular, yes, but illiquid. And so on.

In fact, as far as I can see, there are only two sensible courses of action if you're looking to seriously improve upon the date at which you could ordinarily expect to retire.

* Save for retirement in a stocks and shares ISA, benefiting from the higher returns that the stock market offers.

* Save for retirement in a SIPP. A low-cost SIPP offers tax relief, currently at your highest marginal rate. Which is especially attractive if you're a higher rate taxpayer now, but likely to be a basic rate taxpayer in retirement.

What to buy?

Either way, though, those looking for early retirement need to think about a lot more than just the choice of wrapper. Frankly, the choice of investments will be much more important.

A selection of funds, perhaps? Fine if you can stomach the charges, or don't feel up to managing things yourself. But the charges, let's face it, will soak up a fair-sized slug of your investment gains.

A low-cost index tracker? Again, there are charges, although tracker providers HSBC (LSE: HSBA) and Vanguard are driving these down. And I've several trackers in my own retirement-planning portfolio, to be sure.

But these days, the bulk of the new money that I put aside for retirement goes into what to my mind is an altogether superior investment -- individual shares.

Several, as it happens, are companies that appear in a special free report from The Motley Fool -- "Top Sectors Of 2012" -- although in some cases I bought the shares some years ago. But in the last month, I've bought into two further companies, directly informed by reading the report. Why not download a copy yourself? It's free, and there's no obligation.

Rich rewards

Now, shares aren't for everyone. Some people, frankly, are nervous about taking matters into their own hands, and prefer the world of advisors, high-cost funds, and wishful thinking.

Others, thankfully, take a more rounded view. And while I wouldn't counsel anyone to splurge their pension savings on a raft of resources picks such as Dragon Oil (LSE: DGO), Xcite Energy Limited (LSE: XEL), or Soco International (LSE: SIA) -- even though they've done the business -- I'm much more sanguine about extolling the merits of solid FTSE 100 and FTSE 250 shares with decent managements and equally-decent prospects.

How to find such companies? As I wrote last week, here at The Motley Fool we regard that as our mission. From our discussion boards to articles like these, our goal is to educate and enrich.

And with an eye to being enriched, you'll certainly be able to retire earlier if you've got a million pound portfolio. An unattainable dream? Not necessarily, as a special free report from The Motley Fool -- "10 Steps To Making A Million In The Market" -- explains.

There's no guarantees that you will end up with a million, of course -- but heck, even with half that you could still quit work early. So if you've not yet read it, why not take a look? It's free. 

Want to learn more about shares, but not sure where to start? Download our latest guide -- "What Every New Investor Needs To Know" -- it's free. The Motley Fool is helping Britain invest. Better.

More investing ideas from Malcolm Wheatley:

Malcolm doesn't hold shares in any of the companies mentioned.

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Avalaugh 08 Jun 2012 , 8:50pm

Good article, we need more of this sort,
More articles to explain why the boring companies will do great over the long term with divi growth

goodlifer 08 Jun 2012 , 9:31pm

I agree 100% that it makes a lot of sense for a beginner, and for anyone who hasn't the time or inclination to give his portfolio the care and attention it needs, to put some of his money in a tracker.

But surely a serious or professional investor who can't do better than a tracker has to be pretty bad?

And if you were to find you really couldn't cut the mustard, wouldn't it be better to put all your money there?

Wuffle 09 Jun 2012 , 6:38am

If I were to suggest that working longer probably has more effect than scratching about for a better growth rate, would I have missed the point?
Working one extra year puts loads in the pot (compared to nothing) and reduces the time it has to last by about 4%. Also what you have saved so far grows a bit more.
Yes, optimizing your growth rate is common sense, but is obsessing about 'early retirement' really the problem?


MDW1954 09 Jun 2012 , 10:08am

Hello goodlifer,

But surely a serious or professional investor who can't do better than a tracker has to be pretty bad?

You said something pretty similar in an article comment a week or so back. Take a look at this:


Malcolm Wheatley (author)

Robert1963 09 Jun 2012 , 10:21am

Hi Malcolm.
I am new to this so forgive me if this is a silly questionbut having read with interest what you have said I put money into a cash ISA with Barclays this year (full amount) and also my other entitlement into a stocks and shares ISA, could I stop the Cash ISA and put that money into the current years Stocks and shares ISA and but companys paying good dividends instead as stated above that is a good thing to consider....Thanks

Hannibalis 09 Jun 2012 , 10:29am

Malcolm, I agree with you on your main point that people need to take action, and most importantly, think about buying securities directly - what I call DIY investing.

However, I'm not sure about trackers. Although they do work in a rising market, they are not much use when share prices are falling generally. My choice is to focus on passive income (from investments such as divi shares and fixed-income securities), and work to increase this gradually to replace your active income (from a job). In parallel you need to bear down heavily on expenditure. This can actually be fun, believe it or not.

I'm now retired early and loving life (doing what I like) - realising what a con the rat race as a work slave is!

Jidder 09 Jun 2012 , 11:26am

Hi Rob,

If you want to move your Cash ISA money into your Stocks & Shares ISA, you'll need to transfer the money. Don't "stop" or "withdraw" the money from your Cash ISA because you'll lose its tax free status and won't be able to put it into an ISA of any sort until next tax year.

Your Stocks & Shares ISA provider will manage the transfer. Check their website or give them a call for instructions on how to do it. Remember, "transfer" is the magic word!

PS: If you are transferring this years Cash ISA money, I'm pretty sure you need to transfer the whole lot, not part of it. Please double check this though. (I've rung HMRC with queries in the past and they have been helpful.)

goodlifer 09 Jun 2012 , 3:59pm

"If I were to suggest that working longer probably has more effect than scratching about for a better growth rate, would I have missed the point?"

Yes and No.
I'm well into my eighties, and lucky enough to be able to carry on doing work I enjoy.
But I think I'm in a minority - as usual!

Many people, including quite a few Fools, seem to hate their jobs and to have been living for "the retirement of their dreams" ever since they left school.

Wishing their lives away.

goodlifer 09 Jun 2012 , 4:20pm

Thanks Malcolm.

Yes, it's not the first time I've asked these questions.
I shall probably go on asking them until some Fool gives them a straight, clear and satisfactory answer.

Your link's an entertaining read, and confirms my impression that quite a few professionals are, in fact, pretty bad.
Doesn't really answer my questions though.

Try, if you like that sort of thing.

goodlifer 09 Jun 2012 , 4:32pm

My link doesn't seem to work any more, so FWIW here's the text.

"Dear investor,
At ABC Asset Management we are pleased to report that we have once again outperformed our benchmark, with the fund earning top quartile returns. (Translation: Over the past three months we have lost 15% of your money, but our rivals did even worse than us. Hopefully you won't notice the performance fee we're going to pinch from your fund.)

We are currently experiencing exceptional market volatility (the stock market has fallen) and sentiment remains negative (we think it's going to get worse). Given the headwinds facing global markets, it is likely that investor returns will undershoot expectations (your fund will carry on falling in value).

The market's re-rating and stock downgrades do, however, present opportunities in portfolio construction. (Shares have fallen in price, and now we're wondering which ones we should buy or sell.)

We have reduced our overweight position in financials. (We had bought lots of shares in banks thinking they were going to recover, but got it wrong.) We maintain a low conviction on domestic stocks but are long-term believers in fundamental value. (We are no better than you at guessing what's going on in the UK market, but we have our fingers-crossed that things will get better.)

We believe investors will optimise returns through a properly diversified investment strategy. (We are just going to buy shares that mirror the movements of the FTSE 100, so we won't do better or worse than anyone else and you can't blame us if things go wrong.)

We believe that maintaining high levels of liquidity is essential. (We sold some of our really rubbish shares and have left the money in cash while we decide what to do.) We remain long-term believers in equity. (What else are we supposed to say? The stock market has been lousy for a decade now but we have to keep saying that it will pick up.)

Price/earnings ratios (P/Es) are currently attractive, both historically and on an absolute basis. (Actually no one knows for sure how much the "E" – the profits of a company – will be this year, so we don't know if it's attractive or not.) Ebitda and price-to-book valuation measures are also attractive. (No, we don't really know what that means either, but it sounds good.)

In the coming months, we anticipate markets will continue to be dominated by top-down macro factors (no one has a clue what's going on) but our focus on stock-picking will reward investors. (We will carry on putting bets on shares in the hope that some of our horses will come in.)

Finally, we would like to remind investors that a multi-strategy approach in a diversified portfolio will over the longer term generate superior returns. (See all of the above.)"

ANuvver 09 Jun 2012 , 6:25pm


I'm a fool and I'll have a stab it it. A lot of the problems are satirised nicely in the Groin quote - one of Phil Collinson's finest hours, if I recall correctly.

Professional investment management has three major flaws:
1) They have to hug a benchmark and be competitive, so are forced into short-term rabbit chasing even though their remit is advertised as long-term. They are driven by the wisdom of the now.
2) They are regulated at government whim, so a lot of managers who would probably currently love to be loading up on riskier yet better value assets are forced into asset quotas - the concept of safety and historically low sovereign borrowing costs conveniently stacked together (one man's carrot is another man's stick). So they are also subjected to the wisdom of the now.
3) Costs. A full-blown fund-of-funds wealth management product can run you as much as 2% pa (often cunningly timed to be levied at times of the year when your holdings are traditionally most valuable). So they are largely happy to go along with the wisdom of the now.

Most people are either too scared or too busy to run their own finances. How ironic then that they merrily entrust their future financial security to the experts - who are institutionally and culturally discouraged from both incentive and responsibility. In fact, since the financial services industry is so crucially profitable, both investors and experts are actively herded into this situation by state policy.

Track by all means, but know what you're tracking. If you don't like the prospects for financials, oil and commodities, leave the FTSE100 alone.
Trackers are getting more diversified and popular, and arguably the rise of ETFs is starting to have the same effect the rise of the internet did on high-street travel agents. Hannibalis's DIY policy in action.
But keep an eye on costs. The institutions that run ETFs have to make a living, and that's fine by me. As long as it's a living, not a killing.

goodlifer 09 Jun 2012 , 9:56pm

Many thanks ANuvver,
I'm with you all the way.

Can I now tempt you to have a go at the questions everybody loves to duck?

Surely a serious or professional investor who can't do better than a tracker has got to be pretty bad?
I mean seriously bad.

And if you were to find you really couldn't cut the mustard, wouldn't it be better to give up active portfolio management, and just put all your money in a tracker?

ANuvver 10 Jun 2012 , 1:30am

Okay, in again with both foolhardy boots...

Yes. To my way of thinking, a serious or professional investor who can't beat a tracker is missing something by way of seriousness, professionalism or both. But it really isn't easy, this lark, and the major difficulty isn't understanding balance sheets, market behaviour, macroeconomics, etc, but understanding yourself.

I hold to the old-fashioned notion of equity as a stake in a business, not a poker chip. But I accept that securities often get treated as tokens in a game and occasionally you can get them on the cheap.

Ask me the same question when I've seen 50% or more wiped off capital value and income is crumbling as and if Europe goes phut, war breaks out in the Middle East, China becomes the new Costa del Sol and the Kardashians get elected in the US. Then we'll see how serious and professional I really am!

Wuffle 10 Jun 2012 , 7:41am


As you say, some people have made up their mind about work before they start. It is not admirable.
I've had good and bad jobs, but I do bow to the power of the maths. Most will bow to the power of temptation.
Ironically, Greek mythology indicates that tying oneself to a mast to avoid temptation and disaster has merit.


jaizan 10 Jun 2012 , 1:16pm

I see a third sensible option to save for retirement, but only to be used in ADDITION to at least one of the other 2 options.
That's using a normal share trading account.
If you have already utilised your annual ISA allowance AND have remaining income that falls below the 40% tax threshold, why not put it in an ordinary share trading account?
OK, the annual capital gains tax allowance is the only tax break, but when you retire, you are not compelled to put the money in some dreadful annuity. By my maths, avoiding annuities more than makes up for a basic rate tax break.
Obviously, SIPPs are a good destination for money that would be otherwise taxed at 40%.

Robert1963 10 Jun 2012 , 2:26pm

Thanks for the advise I will start making phone calls tomorrow as have my stocks and shares Isa with Selftrade and cash Isa with Barclays to get it transferred across.
In my stocks and shares ISA I currently have Lloyds, Tesco, National grid, Arm, BP and Avanti Communications (an interesting one for you all to have a look at) if I can Transfer the £5000+ across what shares would you advise to buy with this, this is going to be towards my retirement, I am 48 now so a good few years yet before I can retire appreciate you advice as always Thanks


tru2me 10 Jun 2012 , 3:58pm

"By my maths, avoiding annuities more than makes up for a basic rate tax break."

Spot on jaizan.

goodlifer 10 Jun 2012 , 5:38pm

Thanks again, ANuvver.
Once again, I pretty well agree with everything you say...

"It really isn't easy, this lark."
Is it really all that difficult?

I would have thought the main problem for most people is finding the money to get started - sad to say, you need money to make money.
Perhaps that's one of the reasons there always seem to be so many more people eager to tell you - at a price - how to make money than actually make it themselves

And you mustn't be too greedy.
Wuffle.makes a very good point - if you really can't resist the Siren voices of easy money, millionairehood and multiwindbaggery it might be as well to lash yourself to the mast and force yourself to stick to a tracker.

And what if, as you suggest, our whole economy goes down the tube?

Obviously it wouldn't matter all that much if you were in funds, equities, trackers, bonds or Monopoly money.
A few gold coins might come in handy, and maybe we should diversify by buying tins of baked beans and filling our gardens up with leeks and potatoes.

Meanwhile there's nothing like a good bear market for sorting the men from the boys.


Fabius1 11 Jun 2012 , 1:22pm


In my view, I find active/passive funds are useful in those areas where we would like to have exposure but tdo not have the time or knowledge to stock pick. The other big advantage, especially with some of the new breed of ETF's which Malcolm highlighted last week, is that they enable us to move nimbly in and out of volatile markets if necessary. Horses for courses.

ANuvver 11 Jun 2012 , 3:12pm

Agreed that having capital sufficient to generate useful return is a difficult goal to achieve. Of course, this is where the bagging ideas are so appealing and also why leverage can be so lethal. More seem to perish on the foothills than the summit.

As for the doomsday scenario - well, these things do happen. Viz the early 1970s, with the FTSE30 down 3/4 in three years, historically high unemployment, public sector rampant, the widespread worry about double-digit inflation causing the breakdown of civil society and the IMF hovering. Sound familiar?

I'm not drawing a direct parallel, but some of the commonalities are interesting. Fascinating also that Healey stunned his own party top to bottom by, as he admitted, turning his back on Keynesianism and becoming in effect a New-Labour chancellor thirty years before his time...

Agreed that if doomsday is to be visited on us, equity tracking is a non-issue. I was really talking about asset class diversification. Being over equities and under fixed-income at the moment, as you and I seem to be, can be argued as either sadly old-fashioned or boldly contrarian.

I think rather in terms of "return on/of" rather than "risk on/off". A solid income keeps me well away from the buy/sell button - in fact, I last acted in August, and I'm in no hurry to pump up the ISA.

That's exactly how I use ETFs in my largely hand-picked portfolio. I regard this as outsourcing.

backdated 11 Jun 2012 , 7:07pm


I retired early.

But not by listening to the equity (risk) salesforce like TMF.

Switched 100% to quality in 2005.

I e bought an annuity.

Reading and timing is everything.

Londonbojo 11 Jun 2012 , 9:39pm

Which of the following options is best for saving for retirement:

* Making additonal contributions to a public sector work pension (Additional Regular Contributions) eg Local Government schemes

* Save for retirement in a stocks and shares ISA, benefiting from the higher returns that the stock market offers.

* Save for retirement in a SIPP. A low-cost SIPP offers tax relief, currently at your highest marginal rate. Which is especially attractive if you're a higher rate taxpayer now, but likely to be a basic rate taxpayer in retirement

MDW1954 11 Jun 2012 , 9:47pm

Hello Londonbojo,

The answer is simple: it depends on your circumstances.

Obviously, (1) is out of you're not public sector.

I'm inclined towards a hybrid solution: throw a chunk in your ISA, and then the SIPP. But the ISA first.

Malcolm (author)

MDW1954 11 Jun 2012 , 9:50pm

Hello backdated,

Well done. But here in 2012, we can't buy annuities at 2005 rates. And we are -- believe it or not! -- trying to help today's readers, not those who've got a time machine and can hop back to 2005!


Malcolm (author)

backdated 11 Jun 2012 , 10:44pm

Cheers Malcolm.

It remains my view that annuity rates are low because capitalism is struggling.

If that's a problem, then I for one am not sure that the solution is to use your money to back that capitalism.

Fool that I am, I would rather spend my money (and get at least some value for it) than risk losing it to capitalism (where I may get
very little value for it).

But everyone's assessment of risk will vary (otherwise there would be insufficient sellers to match with buyers).

You don't have a market unless you have an agreement on price but a disagreement on value.

OK - I'm far too cautious, but it has served me well over many many years.

Londonbojo 12 Jun 2012 , 3:02pm

But if you did have option 1 available, would that be the best way to save for a secure retirement?

MDW1954 12 Jun 2012 , 4:44pm

Hello Londonbojo,

Provided that the government doesn't break the final salary link, then option (1) certainly provides more certainty. Given a stock market boom, and several decades, (2) and (3) might outperform.

But why make it an either/or decision? Why not chuck a bit of money both ways?

Malcolm (author)

MDW1954 12 Jun 2012 , 4:45pm

Hello backdated,


Malcolm (author)

Xrat 13 Jun 2012 , 9:21pm

Jidder's post should be taken down.
It's way past April fools! I thought it was serious until I reached the brackets at the end, "I've rung HMRC in the past and they have been helpful."
Surely everyone knows, 'That phone is never answered.'

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