One key thing which many don’t realize is that they are unlikely to need the same level of income in retirement as they did in their working life. For some individuals once they retire, they will be paying significantly less income tax, have no National Insurance (NI) or pension contributions to make, mortgages and loans may be paid off, and children could be financially independent. Some may actually achieve the same disposable income levels in retirement or at least similar, even if their pension income is for example, half what their salary was when they were working.
Some individuals want to retire early to do the things they have dreamt of whilst they are still in good health, but don’t think that they can afford to before their state pension kicks in. Income requirements are widely believed to follow a ‘u shape’ in retirement with the first ‘active’ phase being the most expensive. Spending seems to fall after a while in what is known as the ‘passive’ phase, as people become a little less active and perhaps cut back on areas such as travelling.
But costs then may go up later in retirement in the ‘supported’ phase, if extra care is required. One way to fund the ‘active’ phase before the state pension kicks in is to use the tax-free pension lump sum to boost income during this time. But individuals should also make sure that they have a plan in place to see them all the way through retirement.
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