How to choose when you will retire

Sir Alex Ferguson has chosen to retire from football management. What can you do to take control of when you retire?

Sir Alex Ferguson is to retire as Manchester United manager at the end of the season, after 26 years in charge.

The 71-year-old is doing something that many others don’t, and that’s retiring on his own terms, when he chooses. Nobody expected the announcement ahead of time; indeed most fully expected him to continue working full time for another couple of years yet.

Working as a football manager is slightly different to the jobs most of us spend our days doing. Nonetheless being able to choose when you get to pack in work is something most of us aspire to.

So if you fancy taking control of your retirement date, how do you do it?

It’s all about the money

As things currently stand, I’ll be entitled to the State Pension in September 2051 at the ripe old age of 68. Chances are the Governments of the next four decades will fiddle about with that though, so I’m mentally prepared for the fact that I won’t be able to get a State Pension until I’m in my 70s.

But what if I don’t want to work until then? If I want to jack in work ahead of schedule, it’s going to take money. And plenty of it.

Pension experts reckon you need an income of around two-thirds your salary in retirement. Personally I’ve always thought that sounded a bit high and that half your salary would do the job.

Then again, maybe that’s just wishful thinking.

Starting early

The easiest way to build up a pension pot that’s going to give you the option of retiring when you choose is to start saving early.

Let’s take the example of a 25-year old male, without a penny in pension savings, and an annual salary of £24,000. Like me, he’ll be able to get his hands on the State Pension at the age of 68, which is 43 years away.

But if he wants to enjoy an income of half of his salary, how much does he need to pay into his pension to retire at different points? I’ve based the table below on his employer contributing 3% of his salary via a workplace pension.

Source: Hargreaves Lansdown pension calculator*

So cutting a couple of years off his retirement age is not impossible – just an extra £50 a month. That said, it’s still a significant chunk of his salary each month.

It becomes vastly more difficult to do so if you don’t start your pension saving so early, though.

Below are the contribution levels required for a 35-year-old male with no previous pension savings.

Source: Hargreaves Lansdown pension calculator*

These figures are just impossible for most of us – you’d have to put aside almost half of your annual salary to retire at 56!

Where is your money invested?

Investing early is a start, but making sure it’s invested in the right places is incredibly important too.

Make sure you keep on top of where your pension money is invested and how it’s performing. You don’t have to check on a weekly basis, just every couple of months to see what’s happening. And if your pension is underperforming, don’t be afraid to move it. For a guide on how to do it, read Why you should transfer your pension.

The sad fact is that the vast majority of fund managers fail to beat the performance of index trackers, which simply invest in every firm listed in the index. So while it’s not such a glamorous investment, you may be better off simply sticking your cash in a few trackers.

For more read The cheapest index trackers.

What charges are you paying?

It’s all very well investing early and well in your pension, but if you are paying a fortune in fees for the privilege then your pension pot will be taking a serious hit.

Let’s take the table above for a 25-year-old man again, which was based on an annual charge of 1%. If he instead had to pay a fee of 2%, here are the contributions he’d need to make in order to hit the £12,500 annual income target for various retirement ages.

Source: Hargreaves Lansdown pension calculator*

That’s a significant increase. So make sure you aren’t paying over the odds for your pension investments! Again, if you feel you’re being overcharged, don’t be afraid to move your money.

Alternatives to pensions

Saving your money in a pension is an attractive idea, since your contributions get bumped up with cash from the Government and (eventually) your employer. However, there is plenty of distrust of pensions, for all sorts of reasons from previous controversies to the complexity of some pension schemes to the charges involved.

Of course, saving for retirement doesn’t have to mean a pension. You might prefer to put your cash in an ISA. The plus point here is that you can get your hands on it in an emergency too, which you can’t do with a pension pot.

Many also turn to property as part, or in some cases all, of their retirement planning. This was fine during the boom years but it strikes me as more than a touch risky these days to rely on a housing bubble to help cover the costs of your retirement. Downsizing is fine and will – hopefully – release a bit of cash. Personally, I want to make sure I have some other cash set aside too.

*A number of assumptions are made in the calculations of these tables, including 7% annual growth rate before fund charges, annual management charges of 1% and inflation of 2.5%.

More on retirement

How to get a State Pension forecast

How to top up your State Pension

Become a pensions expert in five days

UK to end pensions for overseas spouses

What is income drawdown?

Bad news for investors and pensions as dividends dive 25%

Your pension could be automatically moved when you switch job

The company pension propped up with 20,000 tonnes of cheese