Early retirement is changing — here’s what to consider, according to the experts

• Early retirement is becoming more prevalent amongst wealthier people, while those with average earnings tend to work to retirement age, an IFS report showed.
• Lifestyle, savings, investing and housing are just some of the factors in play when it comes to early retirement, experts say.
• Many employees are currently “complacent” about pension savings, especially younger generations, according to IFS economist Heidi Karjalainen.

Retiring early is a dream for many, but can often appear impossible unless you’ve made millions throughout your career.

“Twenty years ago rates of early retirement were fairly similar across different wealth levels,” Heidi Karjalainen, a research economist for retirement, saving and aging at the Institute for Fiscal Studies (IFS), told CNBC.

But this has now changed, according to an IFS report on retirement trends in the U.K. that was released last month, with “retirement before state pension age is increasingly concentrated amongst the wealthier population.”

Meanwhile, those who hold average levels of wealth in their late 50s and early 60s are most likely to be employed, and work until they hit pension age, the report showed.

In the U.K., people can currently claim the state pension at 66.

Can more middle-earners retire early?

The key factor in whether early retirement is possible is, of course, money, Karjalainen said.

“It appears that the increase in employment among people with average levels of wealth is largely driven by financial necessity, as many, for example, still have an outstanding mortgage,” she said.

For Gary Smith, a partner in financial planning and retirement specialist at Evelyn Partners, the key question then becomes whether people can afford “the life they want.”

Various factors play a role in making the answer “yes,” and many of them relate back to saving, Smith said. This is especially important in the U.K., as many pension-specific savings cannot be accessed until the age of 55.

In some cases, accessing these funds to retire early may be a good idea, but caution is needed, Karjalainen noted.

“It is important for these individuals to consider the implications of using a pension pot to fund immediate needs in the lead-up to the state pension age, as it may impact their long-term financial security and income in retirement,” she said.

Anyone who wishes to retire even earlier “will have to have non-pension savings in place that they can use in the intervening years,” Smith said. Retiring early also means the retirement pot needs to be bigger so it lasts for longer.

Saving money as early as possible is crucial for anyone considering early retirement, he said, even if this means implementing lifestyle changes such as skipping holidays abroad and not buying expensive items like new cars frequently. This will also ensure savings last longer, he added.

Another factor that can impact whether early retirement is possible is unavoidable costs, like housing, Smith said.

“One important outgoing is housing costs as high mortgage payments will help to deplete pension savings rapidly,” he explained. Those without mortgages might consider downsizing their home to minimize costs and use the extra cash to fund early retirement, he said.

Alongside saving, investing is another key way people can position themselves for early retirement, Smith noted.

“A saver can get active with their workplace pension by getting under the bonnet, seeing how it is invested and determining whether they can improve on the default fund,” he explained.

Taking more risks early on can see people play stock market growth to their advantage, Smith suggested, advising people to get more protective as retirement nears.

‘Complacency’ around pension savings

Regardless of whether people are planning to retire early or not, many are not paying enough attention to their retirement funds, Karjalainen told CNBC’s “Squawk Box Europe” recently.

“I think there is this, kind of, sense of complacency when it comes to pension saving, especially among younger people,” she said.

A key reason for this is that deciding how to plan for your pension and how much to pay in is a difficult decision with many variable factors like future earnings and how long the pension will need to last, she explained.

“Because it’s such a complex decision, people just put it off, they just go with whatever their employer kind of tells them is the right contribution rate. And I think that’s really the issue,” Karjalainen said.

Employers in the U.K. are required to enroll workers into pension schemes, where the default contribution set by the government is 8% of qualifying earnings. People also often assume this is enough — as it is set by the government — when in fact, Karjalainen said ideally people should be saving between 12% and 15% of their total earnings.