Seven ways to retire early

Stopping work young may seem like a distant dream, but can these top tips help you retire early?

back of couple at the beach walking
(Image credit: Jacob Wackerhausen)

While we may spend years saving up for a pension, for many of us, stopping work young and retiring early is the ultimate goal. 

Early retirement is increasingly just the preserve of the wealthy, with data from the Institute of Fiscal Studies showing almost a quarter of the wealthiest 20% of the population retiring aged 55-64 versus just 7% of the poorest fifth. 

Increases in the state pension age, the demise of generous defined benefit pensions in the private sector and the cost-of-living crisis – where bills increased sharply, are some of the factors making it more difficult to retire early.

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Meanwhile, the Financial Independence, Retire Early (FIRE) movement which advocates frugality alongside extreme savings and investments to achieve financial freedom is growing in popularity. Typically saving up to 70% of their annual income, FIRE followers often aim to retire in their 30s or 40s, living off small withdrawals from their accumulated funds. 

However, FIRE does not work for everyone. Tom Selby, director of public policy at AJ Bell, says: “The FIRE movement tends to advocate fairly extreme savings strategies which won’t be realistic or desirable for lots of people.”

So, what else can you do to help you stop the daily work grind and reduce or stop working altogether before retirement age? We look at the seven steps you can take now, plus how to invest to help you enjoy life after work sooner.

Seven ways to retire early

1.  Cut spending 

To help you save money to retire early, doing something as simple as reducing outgoings can help. 

Cutting down on a few unused subscriptions or making a shopping list are some examples to help slash your spending. Try a free budget planner, such as the one at Moneyhelper, the government educational website. Or use a free budgeting app such as Plum, Emma and HyperJar to help you categorise and review your spending by linking to your bank accounts. 

2.  Pay off your mortgage 

Not having a mortgage to worry about can help reduce financial stress when looking to retire early. 

Becky O’Connor, director of public affairs at PensionBee says: “Having a mortgage that runs into retirement can be a problem, because repayments can mean people have to take more out of their pensions in the early years.”

You might be able to pay off the mortgage using the 25 per cent tax-free lump sum from your pension, that you can take from age 55. But also consider making overpayments. Most mortgage deals allow you to overpay up to 10% of the loan each year.

3. How to invest to retire early

Making sure your investment strategy aligns with your goals is essential for anyone looking to stop work sooner than the standard retirement age.

An estimated four million workers under 40 could be losing out on investment returns because they are in low-risk pensions that do not have potential for higher growth, according to research by Opinium for Interactive Investor

If you have at least five years to retirement, equities should make up most of your portfolio. This is because although they come with higher risks, they are the tried and tested way to grow your money over time. And younger investors have the time to weather the ups and downs of the stock market. 

Over decades, the difference becomes very large. Actuarial consultants LCP calculated by investing all of your money in equities an average earner would expect to have £46,000 more money at retirement compared to a balanced moderate risk fund, that typically has 60 per cent in equities. 

Selby says: “Review your investments and make sure you are happy with the risks you are taking – don’t assume your automatic ‘default’ pension investment is appropriate.”

4.  Save more and start early

AJ Bell analysis suggests someone who starts contributing to a pension from age 22 could need to save £2,100 a year to retire at age 68 (state pension age) and enjoy a ‘moderate’ standard of living in retirement for a single person, as defined by the Retirement Living Standards from the Pensions and Lifetime Savings Association

These savings assume real investment growth (above inflation) of 4% post-charges per annum up until retirement.

But if you wanted to retire at age 60 on the same income, you could need to contribute £4,700 a year – more than double the amount. For someone who starts contributing at age 30, the contribution figures jump to £7,100 per year if they want to retire at age 60. 

5.  Make the most of ‘free money’

Don’t underestimate the power of the boost from upfront income tax relief on pension contributions. If you’re a basic rate taxpayer, every pound you pay in becomes £1.25, while for higher rate taxpayers it becomes £1.66. 

Employer contributions to your pension – usually at least 4% of salary - are also ‘free money’ that can help you retire early. Every time you start a new job, make sure you ask about the pension. Some firms offer extra employer contributions as part of their overall remuneration package. Also consider increasing your contributions when your pay goes up – if they are matched by your employer, this will boost your pension further. 

6.  Check state pension 

The state pension is a valuable source of retirement income, protected by the ‘triple lock’, which ratchets up the value, depending on earnings growth and inflation. Currently available from your 66th birthday, state pension age is scheduled to rise to 67 by 2028 and to 68 by 2046. 

You need at least 10 qualifying years of National Insurance (NI) contributions to receive any state pension at all and at least 35 years to receive the full amount, worth just over £11,500 in the 2024/25 tax year. So Alice Haine, personal finance analyst at investment platform Bestinvest says: “Check your state pension record for any gaps – filling them could be one of the best retirement decisions you make.” 

If you do have gaps, check with the Department for Work and Pensions to see if you qualified for a benefit during those periods which comes with a NI credit. Examples include Child Benefit and Universal Credit.

The government is currently allowing people to pay for gaps on their NI record all the way back to April 2006. Haine says: “This unique window of opportunity to plug up to 17 years of missed NI contributions in one go closes on April 5, 2025, so it is imperative taxpayers take advantage while they can.”

7.  Make a financial plan 

For anyone planning to retire in their 50s or earlier, it is important to note you usually cannot access your private pension before age 55. Plus, this minimum pension access age is set to rise to age 57 in 2028. Selby says: “It is possible to retire before this age, but you’d need non-pension assets, such as individual savings accounts (ISAs) or buy-to-let property, to support your lifestyle until you can access your retirement pot. The state pension age could go up even further in the future. If that happens, early retirement might be even more difficult, as you’ll need to find extra income to cover those additional years during which you don’t receive the state pension.”

So, make sure you’ve sat down, ideally with a regulated independent financial adviser, and thought carefully about your spending plans and the impact retiring earlier will have on them.

Moira O'Neill

Moira is an independent freelance investment and money writer, editor and presenter. She is a columnist for the Financial Times. Previously, she was head of content at Interactive Investor, editor at Moneywise, personal finance editor at Investors Chronicle and deputy editor at Money Observer. She’s the author of two personal finance books, Finance at 40 and Saving and Investing for Your Children and has won a Wincott Journalism Award. She read Classics at Cambridge University.