The State Pension could have you working until 67. Here’s what I’d do to retire early

The State Pension age will hit 67 by 2028. This three-step plan could help you retire earlier than that.

Edward Sheldon, CFA

Based in London, Edward is a freelance investment writer/analyst who has clients all over the world. Prior to launching his own investment writing business in 2017, he spent 15 years working in private wealth management and institutional asset management, both in the UK and in Australia. Edward is a passionate investor himself and manages his own global equity portfolio. This contains a mix of large-cap growth stocks, large-cap dividend stocks, and small-cap growth stocks. His stock-picking strategy combines ‘growth’, ‘quality’, and ‘thematic’ approaches. Edward holds a Commerce degree from the University of Melbourne, as well as the Investment Management Certificate (IMC) and the Chartered Financial Analyst (CFA) qualification. You can find him on Twitter @EdwardSheldon7

Published 14 December, 2019 11:24 am GMT

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Do you plan to work until your late 60s? I know I don’t. Yet if you’re planning to rely on the State Pension – the income the UK government pays to those who’ve hit State Pension age – in retirement, you may have no choice but to work until this age.

The State Pension age is rising

You see, the State Pension age is gradually rising. Previously, it was 65. However, by 2028 (less than a decade away now) it will hit 67 for both men and women. This means if you don’t plan ahead for retirement, you’ll could have to work until your late 60s. When you consider that the average life expectancy in the UK is 81 years (it’s actually 79 years for men), this is certainly not ideal.

The payout is peanuts

Making matters worse is the fact the State Pension payout is peanuts. Currently, it’s just £168.60 per week if you qualify for a full payout (many people don’t). That equates to just £8,778 per year which is well below the £10,200 threshold that the Pensions and Lifetime Savings Association (PLSA) says a single person requires to live a ‘minimum’ lifestyle.

While it will continue to rise marginally in the future due to the ‘triple lock’ (which ensures that annual State Pension increases are decided by whatever is the highest out of price inflation, average earnings growth, or 2.5%), don’t expect it to ever provide for a comfortable lifestyle.

How to retire early

If the thought of working until your late 60s (and then living on beans on toast) keeps you awake at night, it’s probably a good idea to take matters into your own hands and start building up some retirement savings. Put a retirement savings plan in place early, and you could potentially retire years before you turn 67.

If your goal is to retire early, I’d focus on doing three main things:

Spending less than you earn.
Putting your money into a tax-efficient savings vehicle such as a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP) so that it’s sheltered from the taxman.
Getting your money working for you by investing in growth assets such as shares and funds. Over time, shares tend to produce far higher returns than cash savings meaning they’re likely to make you wealthier over the long run.

In my view, it’s the last step which is the most important. Save £10,000 per year into a savings account or Cash ISA earning 1% from age 45, and by 60, you’ll have around £160,000. However, save £10,000 per year into stocks from age 45 and earn 8% per year on your money, and you’re looking at savings of around £270,000 by 60.

That’s a huge difference. Ultimately, that extra £110,000 could help you retire early, or live a much more comfortable lifestyle in retirement, free of State Pension worries.