How to avoid working longer

Retiring early is fast becoming a luxury many of us won't be able to afford. But follow this advice to help you stop working sooner rather than later.

Retiring early really is nothing more than a pipe dream for most of us. In fact, if you can stop working at state pension age with a decent level of income, then you should probably consider yourself one of the lucky ones.

But even that's looking like an impossible task, especially if you fail to save hard during your working life. There are over a million workers in this country who are already beyond normal retirement age. Many of them have been forced into semi-retirement to supplement their income.

Research from Standard Life reveals that the 'real' retirement age of people in the UK, who have no retirement savings, falls anywhere between 74 and 86! That range is many, many years beyond the current state pension age, which is 65 for men and 60 for women.

Your real retirement age is the age you would need to carry on working until before you can retire on an 'ideal' income of two-thirds of your salary. Take a look at the real retirement ages depending on your age now:

Real retirement age

Source: Standard Life. Assumptions: Figures based on state pension age for a male earning the median wage of £25,800 pa. State pension increases by 6.4% above earnings for each year it is deferred.

So, let's say you're a man aged 27 now and you earn an average salary of £25,800 a year. You won't reach state pension age until you're 68 (more on that later). If you retired with no pension savings of your own, the state pension of £170 per week would represent just 34% of your earnings.

Remember that state pension benefits increase when you defer them. So, if you decided to delay taking your state pension to boost your income to two-thirds (66%) of your earnings, you won't be able to stop working until you have reached 79. That's your real retirement age.

Standard life also calculates that real retirement ages could be even later for higher earners.

Avoid working longer

I really don't fancy working till I drop. I imagine you don't either. But is there anything you can do to stop it from happening? Well, one way is to pump as much money as you can afford into your pension now to give yourself a bigger pension pot when you retire.

The younger you are now the lighter on the pocket that's going to be as the figures below show:

How to retire at state pension age on two-thirds of salary

Source: Standard Life. Figures based on a male earning the median wage of £25,800 pa. Target retirement pot is the amount required to meet income shortfall from an annuity. Annuity rates provided by FSA tables for a male at SPA (65 to 68) single life with level income. Contributions are paid annually. Net investment return of 2% above earnings. Calculations assume no current pension savings.  

Once again let's say you're a man age 27 with no private pension savings of your own. You would find you had a shortfall of £161 per week at state pension age. In other words, your weekly income is £161 below where it needs to be for you to enjoy an income of two-thirds of your former salary.

So, to make up this shortfall, you would need to start contributing £1,850 a year - or 7.2% of your salary - to provide a pension pot of £118,000 at 68. As long as the pension performs well enough, the pot should provide enough income to meet the weekly shortfall when you buy an annuity. (An annuity converts the pension fund into an income.)

This sounds achievable, but making up the shortfall becomes more difficult the older you get. At 54, you would need to put aside a whopping £9,250 a year or 35.9% of your salary, to maintain an income of two-thirds of your salary in retirement.

But before you panic over the size of the contributions, think about how much you would personally like to live off in retirement. Two-thirds of your salary may actually be more than you need to be comfortable. When you think about stepping up your contributions, it helps to work out your own target first to give you a figure to aim at.

State retirement age is changing

On a final note, if you want to retire early, new government rules are making it even more difficult to achieve. After all, state pension age is rising which means younger workers will have to wait longer before they'll be able to draw state pension benefits.  

State pension age is currently 65 for men and 60 for women. But all that is set to change. The table below outlines how it will increase in phases over the coming years:

State pension age: 2009 - 2046 and beyond

State pension age for women will rise gradually from 60 to 65 years between 2010 and 2020. After that, the additional increases are set to be phased in over two consecutive years in each decade. Once all the changes have been put in place anyone - male or female - who stops working after 2046, won't reach state retirement age until they are 68.

You can work out your own state pension age using this calculator.

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