When can I retire and what is the Great Retirement?
When can I retire and what is the Great Retirement?
If you have been keeping an eye on the media in recent months, you will no doubt have heard a new buzzword; ‘the Great Retirement’. What does this phrase mean and when can you retire?
How is the working population changing?
Over the last few years, a lot has changed. The uncertainty of the pandemic has caused the population as a whole to reconsider their priorities and make often significant changes to live the life they want to lead. Examples of these changes include:
Large swathes of the population leaving cities and moving to the countryside, where they have more space and lockdowns are less oppressive.
People of working age changing career paths and seeking out more flexible and fulfilling employment as part of ‘the Great Resignation’.
People near the age of retirement deciding not to go back to work and retiring early as part of ‘the Great Retirement’.
In this article, we will focus on the Great Retirement.
What is the Great Retirement?
The Great Retirement is a term used to describe the actions of the older population during, and in the aftermath of, the Covid-19 pandemic. More specifically, as many workplaces shut down or implemented remote working mandates alongside the older population’s increased health risks associated with Covid, many workers had more time to reflect upon their life and decided to finish work altogether. Those that were forced to take time out but wish to return to work are finding it increasingly difficult to find jobs; particularly those with more complex health requirements. Equally, the long-standing problem of ageism in recruitment means that older people are often overlooked for jobs, even in a tight labour market.
Why is the Great Retirement an issue?
Without the older, more experienced workers remaining in work, the possibility of a skills-gap emerging increases. Essentially, a whole generation of skilled expertise, memory, organisational knowledge and problem-solving ability may not be passed down to the next generation, resulting in knowledge gaps, declining productivity and increased training costs for employers.
From an employee’s perspective, many older workers find that their work gives their life meaning, their positions give them a sense of pride and they also enjoy the social interaction side of work in addition to the financial security that comes with working. Giving up working too early or not being able to find work may result in loneliness, reduced confidence and the loss of an income.
Is the Great Retirement here to stay?
With the current cost of living crisis starting to bite, even before we head into winter where fuel bills will play an even bigger part in a household’s finances, there are some suggestions that the Great Retirement may actually tail off and become the preserve of either the wealthiest or lowest skilled retirees. Those that are fit and able may find that they will have to come out of retirement as their incomes that may have been sufficient to live on last year are no longer enough.
To put this into context, the previous household energy price cap was £1,400 per year and current estimates expect it to rise to over £3,600. This means that a household will have to find an additional £2,200 each year without any increase in the standard of living. With inflation now into double digits, retirement investments will have to follow suit just to retain their value.
A fund of £100,000 will have to grow by £10,000 each year just to keep pace with a notional 10% inflation AND produce a further 2.2% on top to deliver just the £2,200 extra required for home energy bills - that’s a total of 12.2% growth on £100,000 simply to maintain capital values and cover the increase in energy bills. This is before any consideration is given to a general retirement income that covers a household’s day-to-day living expenses.
When can I retire?
It’s clear that we have become used to low inflation and low interest rates over the last 20 years, however, those thinking of retiring really need to consider their financial resilience before finally giving up work. For example:
Are you planning on retiring before your mortgage is paid off? Will your income projection cover a substantial increase in mortgage repayments?
If you take a tax-free lump sum from your pension when you retire what will you do with the money? Could this money be needed at a later date to bolster your retirement income?
Have you factored double-digit inflation into your investment choices? An annual return of 6% means your money is losing 4% of its purchasing value if inflation is 10%. In this example, you will need a return greater than 10% just to provide a profit for the year.
Do you have the right allocation of cash savings set aside for a rainy day? As per the above, if you have too much cash that’s providing a low return, your money will be eroded in times of high inflation.
Have you considered using the value in your home to provide an income in retirement via equity release? You can use our calculator to get an idea as to how much cash you could withdraw.
How will you pay for care fees in the future?
Unless you live very frugally indeed, in a house that costs nothing to run, the state pension is unlikely to provide sufficient income for you in retirement, particularly if you live on your own and have to shoulder all your cost of living expenses personally.
Conclusion.
In our experience, we rarely meet a client that says they have too much money saved for retirement and stopping work early means you are effectively stopping your opportunity to continue building your retirement fund (unless you already have other sources of passive income). Equally, if you are considering taking early retirement in your late 50s and your sole source of income was your employment, you could have another 50 years to live and decades before your state pension kicks in. In this case, inflation should be one of your primary concerns. If you had £100,000 50 years ago (in 1972), your capital sum would need to have been invested and worth around £950,000 today just to have the same level of purchasing power. This is before you have taken an income and paid any fees associated with the investment.
Essentially, unless you have serious health challenges or are used to living an extremely frugal lifestyle, a comfortable retirement probably needs to wait until you have paid off your house and amassed a substantial retirement fund that is in excess of what you need today. Nobody can predict the future, but having excess funds available to you means that you can reduce the risk in your investments, reinvest excess growth and shoulder more of whatever life throws at you. Equally, with excess income, you can help out family members and support the charities of your choice.
What’s next?
We have several other articles on both retirement and inflation that you may find useful:
A guide to understanding pensions and retirement in the UK - this is the gateway to our articles on pensions.
If you need help or advice on your personal or business finances or if you want to consider investing to make your money work harder, you can get in touch with one of our advisors for independent financial advice. We offer a free initial consultation and although we are based in Tunbridge Wells, we advise clients across the UK.
Don’t forget, this article offers information about investing and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.
This article offers information about financial planning and should not be taken as personal advice. Equity Release will reduce the value of your estate and may affect your entitlement to state benefits. Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.