Introduction

• Retirement, it is something which millennials often think is too far away to think or worry about. However, I think about it more than your average millennial because I want to be able to retire early.
• If you are a millennial in the UK the chances are you won’t be able to receive your national pension until you are at least 70, given most people would have started full time work between the ages of 18 & 22, that is a lot of years of consistent working.
• To many this will seem like a stupid question, but why do people want to retire early? Obviously that answer will change from person to person, but the broad reasons are usually: reduce stress, have more time to spend with family and friends, do more traveling, undertake more education, and most simply of all have the time you want to spend doing the stuff you want to.
• For me it is absolutely a mix of all the above, but the last one is perhaps the biggest. I want to be able to be safe in the knowledge that I can spend time doing the things I want to, and not feel like I must do anything. It was thinking about it this way that first got me thinking that it’s less ‘retirement’ that I want early, and more ‘financial independence’. I’m not saying I want to stop working at a particular age and then never work ever again, but I want to have enough money to support the lifestyle that I want for the rest of my life. If something I love involves getting paid then that’s a bonus, not a core requirement.
• The idea of retiring early is definitely not a new one, but with so much talk about the rise of automation, the rise of machines, and a lot more focus on greater balance in our working life, advocates for – and methods on how to achieve it – are growing considerably.
• I have broken up my thoughts and recommendations on millennial retirement saving into two posts:
• Part 1 – Below
  • Provide more insight into why the standard view of retirement is shifting
  • Share a list of simple steps you can take to improve your likelihood of retiring early
• Part 2 – Will publish next weekend
  • Share some key factors you need to be aware of when calculating the amount you might need in your pension pot
  • Share what I think I need to achieve the lifestyle I think I want
  • Share where I’m currently at on reaching that position.
• To anyone reading this and thinking there is no way, given the increased cost of health care and the increase in life expectancy, that millennials who aren’t millionaires will be able to retire early, I’ll finish the introduction with a quote from the great Mr Money Mustache, ‘If you save 50% of your take home pay and live on the remainder, your entire mandatory working career only needs to be 17 years.’ Anyone can achieve it, it simply depends on the lifestyle you want to have both today and in your retirement.

 

The View on Retirement is Shifting

• The old model of working tirelessly from the age of 18 to 60 and then do nothing but relax for the last 10-15 years of your life is changing, and there are many reasons for this. I’m sure many of you have heard the advice to save 10% of your income for retirement and if you work for 40-45 years you’ll be fine. Not any more, it’s time to rethink this traditional advice, there are a number of key reasons why:
  • The Ways of working are changing – You no longer have the stability that by working hard and keeping your head down that you’ll stay with a company for your whole career. This phenomenon is summed up perfectly by this fact: ‘Digital Natives will have 20 different jobs and 5 different careers in their lifetime’
  • We are all living longer – In 1991 the average life expectancy of a man was 73.4 years & for a woman it was 79 years in the UK, in 2011 that had risen to 79 years for a man and 82.8 years for a woman. If this trend continues we will all continue to live longer and therefore instead of having a 10 – 15 year retirement before dying, you could have 20+ years, that is an extremely long time of potentially earning no money.
  • Death of the ‘final salary pensions’ – This is highly related to the above point, in the last 10 years or so we have seen the death of the final salary pension, which bases your company pension amount on a percentage of your final salary at the company. Obviously the longer you’ve been at a company the higher your salary, so finishing with a % of your final salary is significantly better than finishing with a % of your average salary over your time at the company.
  • Why sacrifice today for tomorrow – Increasingly people don’t want to sacrifice the ‘best years of their life’ to have greater freedom in the period of their lives when they are less able, both physically and mentally. This point is also related to the fact we are living longer and are staying relatively health for longer. If I believe that I will have the physical capability to still work at age 70, why don’t I have more fun now when I’m young and fit, and work more when I’m older? Tim Ferriss famously takes a mini-retirement each year, usually a month, and believes it helps him re-charge and still do all the fun things he wants too whilst he is young enough to truly enjoy them.
• Whilst one of these factors might stand out to you individually more than the others, all of these are shifting the retirement expectations of millennials, which is having a knock-on impact on how we should be saving for our pensions.

 

How to achieve it

• Now I’ve covered why we all need to start thinking about pension saving and retiring early differently I want to highlight the key steps you should follow to get you on the path to ensuring you have enough money in your later years.
  • Step 1: Track what you are spending right now – As I recently heard Matt Mullenweg say ‘You can’t change what you don’t measure.’ Tracking what you spend will have two positive effects, firstly it will give you a monthly expenditure amount to help you calculate the amount of money you’ll need to maintain your lifestyle in retirement – more on that later. Secondly, it will help you save more now. Just tracking your spending – and I mean everything you spend money on – will automatically get you to cut out the silly things you buy as you’ll be more conscious and ask yourself if buying this item will really make a difference to you. There are lots of different tools available, but I just whipped up a simple Excel which lives in the cloud and I can access and update anywhere.
  • Step 2: Eliminate your debt – The aim of saving for your pension is to make compound interest work in your favour, by saving a smaller amount today you’ll have a bigger amount to enjoy in the future. Debt is the exact opposite, if you take out a £3,000 personal loan today you’ll have to pay back £3,500 over a period of months or years. Debt is the killer of saving and of financial freedom. Work extremely hard to eliminate debt ASAP. The only debt I still have is Student Loan debt, whilst I hate having it, the interest is so low – and it comes automatically out of my pay check – that it’s something I’m willing to put up with for the next year or so until it’s paid off.
  • Step 3: Create simple savings routines – Pay yourself first! You are likely to be paid on the same date every month, therefore set up automatic transfers for the next day to put money into your saving account and pension pot account – unless it already comes out of your pay check. This stops you spending the money on something else, and as long as you’re doing step 1 you won’t run out of money during the month. Be very careful about viewing your mortgage repayment as an ‘investment’. Whilst over the last 20 years bricks and mortar have been a great investment that isn’t always the case, you only get what your house is worth on the day you sell it, which could be significantly less than what it is today. I am currently applying the finishing touches to a long piece on investing in bricks and mortar, so make sure you look out for it.
  • Step 4: Know the figure you think you need! – Predicting the future is impossible, things happen and change all the time. However, having a rough idea what you think you’ll need to be able to retire at the age you want is sensible and not that difficult to figure out. One good rule of thumb that I like is that you should look to save 25 to 30 times your annual spending in total. Based on the assumption that your withdrawal rate per year is around 4% of your overall pension pot then you’ll never run out of money. There is a second layer of comfort in using this estimation, you are basing your calculation on your current spending, most people will spend less as they become older, using around a 20% drop.
  • Once you’ve got your target figure you can start to see what you need to save each month, and over what period, to hit that figure. For example, if you think you need £400,000 then after saving £200 a month for 40 years you’ll, based on 6% yearly return, you’ll be there. For additional £10,000 of annual retirement income, experts often say you’ll need an additional £200,000 in your pension pot. Therefore, a £25,000 annual income requires a pension worth £500,000 – based on the above figures.
  • Step 5 – Know what you have right now! – If you have a company pension at a large firm this should be easy to obtain, and they often have visuals to show what you’ll achieve in different scenarios, but knowing what you have already is a key step.
  • Step 6 – Implement the plan & stick to it – Now you know what you roughly need, what you already have and what you need to get you there the final step is to set up the automated saving routines, be it through a workplace pension or a Self-Invested Personal Pension (SIPP).
• I fully appreciate that listing out these six points makes this looks simpler than it really is. The rest of this piece will give you more information around working out how to achieve some of these, especially step 4.
• Following these steps isn’t going to get you rich quick, but they will keep you on track and give you confidence that you will reach the amount of money you think you need at the age you require it. These are steps you should follow every day, month and year until you retire.

 

Thanks for reading Part 1 of my blog on millennial pension saving, part 2 to follow next week where I’ll cover:

• Some key factors you need to be aware of when calculating the amount you might need in your pension pot
• What I think I need to achieve the lifestyle I think I want
• Where I’m currently at on reaching my early retirement

 

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