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Don’t make the early retirement mistake

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Wednesday August 13, 2014 at 11:31am
I am surprised at the number of people I see for whom the concept of retirement is a myth that does not withstand too much scrutiny. Most of the people I work with run their own business, by definition they tend to be self-actuated and motivated.

For some early retirement is a negative concept

This group of people see retirement as a negative step and far from being the holy grail of work they find themselves wondering what they will do with their time, how much they will have to reduce lifestyle to fund their reduced income. Some have already generated more wealth than they will spend in their lifetime but still many of the same niggling questions remain. Often they have built up a lifetime of specialist skills and do not really look forward to the day when they will never use them again. They often enjoy work, for some it defines who they are and so they don’t want to give up the challenges and access to like-minded people that work brings. On reflection they have to admit that hard work makes them happy and after a few months of enforced holidays they are going to have to find something to replace it.

Often for these people what they want is not retirement at all, it is financial independence and so the choice to not work, without actually having to stop work. For others they want to ensure they have organised their financial affairs in the best way to pass on to their family or avoid tax. I see more and more clients who like the idea of working less but are not really ready to stop. This is such a contrast with the traditional concept where you are working full-time one day and then find yourself in retirement the next day.

For others early retirement is confused with a desire to do more worthwhile work

Some of the people I work with talk about early retirement but what this really means to them is financial independence. When you question this concept it turns out they really want to do something more personally fulfilling with their lives. They don’t want to retire at all, they simply want to do something different. Often for these people the cost of financial independence is sticking at something they don’t like for years in order to gain the independence they think will allow them to do what they really want to do.

When making life changing decisions you want to approach the problem as analytically as possible and take the emotion out of the equation. For many individuals the solution is found through the financial planning process. As long as you get all of the financial inputs for the plan right it is very difficult to dispute the conclusions. The rigors of viewing life in pure financial terms is often literally life changing.

An interesting outcome of working together can be the reality that the years needed to achieve independence are not worth the wait, because life is simply too short. However annual expenditure is often the best definition of lifestyle. Once you know how much you spend you can then look at what you are prepared to give up and what income you need to cover a maybe revised lifestyle. Often simply being more tax efficient with savings and income can make a plan work. It may turn out the new life is achievable after all, or at least you will know what sacrifices you will need to make to get there.

So don’t equate early retirement with happiness. If you are longing for early retirement, seriously questioning your motives may not be such a bad idea.

Andy Parker
Chartered Accountant and Chartered Financial Planner, Solihull

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here