Many people dream of being able to retire at 55. With the state pension age rising to 68, it isn’t too surprising that so many of us want to retire early and enjoy the retirement lifestyle of our dreams.
The good news is that there is no longer any set year that retirement must happen. You no longer need to retire only at the traditional age of retirement.
If you wish, you can retire as early as the age of 55 or, if you’d rather, continue working long after the traditional retirement age. Employers can no longer legally force you into retirement once you reach state pension age except in certain circumstances – i.e. if the workplace requires a certain level of fitness.
Of course, it would be wonderful to retire at 55 and enjoy a comfortable retirement spent with family, friends and loved ones, going on holiday and living the high life. But when it comes to reality, it may not be possible to enjoy that lifestyle with the retirement income you’re likely to receive if you decide to retire so early.
As life expectancy is increasing year-on-year, your pension will potentially need to last you a long time. So, if you’re retiring at 55, that’s many years over which your income needs to stretch.
How much will it really cost you to retire early?
Do you know how much you need in savings to cover all those years of expenses?
How long will the money that you’ve been saving really last?
And, most importantly, can you really retire with only what’s in your pension pot at 55 years of age?
Let’s say that your pension pot at the time you retire at 55 contains £300,000. Would this give you sufficient retirement income to cover the remainder of your life expectancy? Or is retiring at 55 with only £300K in your pension pot represent terrible retirement planning?
Is £300K a good pension pot at 55?
If you’re planning to retire at 55, you may have around £300,000 in your pension pot, and yes, you could technically afford to retire as you’d have just enough retirement income to get by. But it certainly wouldn’t give you the comfortable retirement lifestyle you’ve almost certainly been dreaming of.
£300K isn’t what you’d really call a good pension pot. Realistically, it would give you a pension income of around £9,000 to £12,000 per year if you stuck to the recommended safe withdrawal rate of 3%-4% per year.
But as you can see, that isn’t a large amount at all. It will barely cover the minimum income standard in the UK, and it’s nowhere near the amount of money you’d need in retirement if you want to have a secure and enjoyable lifestyle.
Of course, you may be able to afford to live on just £10,000 per year. However, for most people, their annual expenses are far higher. It’s therefore important to think in the long term when it comes to retirement planning.
Ask yourself how much do you need to spend each year to continue enjoying the lifestyle you have now. You’re probably spending on average at least double that amount at the moment as you have a regular income from your job.
Could you really afford to live on half that amount of income? £10,000 isn’t much money when you factor in all your daily living expenses! While retiring early will cause some of your costs to drop – for example, travelling expenses – it will also cause some of your costs to go up.
For example, you’ll spend more on utility bills, and you may also lose some of your work related benefits, such as free lunches or your company car. With this in mind, how much you need to spend each year could be far more than you imagined. Also, let’s bear in mind that inflation will almost certainly make the cost of living higher by the time you’re ready to give up work.
Now, let’s imagine that you want to enjoy a comfortable retirement on a similar income to that you’ve become accustomed to during your working life. With only 330K in your pension pot at the time you retire at 55, you would run out of money in just 5 or 6 years if you’re planning to take out £50,000 per year. Clearly, that’s some very poor retirement planning.
It’s clear to see, then, that planning for early retirement requires a lot of thought and some professional advice from a financial adviser to make sure you’re making the right decisions for your needs.
How do I decide if I’m able to retire at 55?
If you’re planning to retire at 55 and have a pension pot containing £300K, you need to ask yourself the following questions:
- What amount of money do I need every year to cover the basic cost of living?
- What are my outgoings and financial commitments that will continue after I’ve retired?
- Do I have any other sources of income?
- Have I made an investment in stocks or shares that I’ll be able to cash in?
- Will I continue working part time?
- Do I have a rental property that can bring in some extra money?
- How much will my state pension add to the total?
- What kind of life do I want in my retirement?
- Do I want to live the high life, or am I happy living a more modest lifestyle?
- How long does my pension fund need to last?
What amount of money will I spend each year in retirement?
If you’re considering early retirement, the first thing you should do is sit down, perhaps with an independent financial adviser, and work out your financial outgoings and commitments both today and in the future.
Generally, you’ll need more money if you retire at 55 because you’ll be younger and more active. You may also have dependent children and a mortgage to pay as well as sports and hobbies that you enjoy spending money on.
During your 60s, you may find your costs reduced. You may have paid off your mortgage, and your children may have left home, but in the not so distant future, those costs will go up again because of potential higher medical and insurance costs.
It’s been estimated that a single person needs, as a general rule of thumb, around £20,000 of income each year to enjoy a comfortable retirement, i.e. if they want to go on holiday, have leisure time and buy new clothes. So if you want to retire at 55, you need to figure that income level into your calculations – you may need to save a lot more if you are planning for a 30 year retirement before you can retire for good.
Other sources of income
When you only have a pension pot of £300K as your early retirement income, your retirement plan of how to spend will be very different to that of somebody who is only using that pension as their “top up” money.
To retire at 55 with £300K, you really need to have some other sources of income available to you.
This may include money from savings or investments, earnings, downsizing your home or inheritance. It may even include tax breaks. Doing your research is, therefore, vital. Speaking to an independent financial adviser who is authorised and regulated by the financial conduct authority to get some professional financial advice is the best thing to do if you want to make the most of your pension savings.
Will I have tax to pay on my pension withdrawals?
Not all pension withdrawals are tax free. You need to be aware of the tax rules when you drawdown pension funds or when it comes to taking money out of your pension fund to avoid paying a lot of income tax.
Can I start preparing now to retire early?
If you’re determined to retire at 55, there are a few things you can do to start preparing as soon as possible:
- Make a list of all the things you want to do during your retirement. When you speak to your financial advisers, they will then get a good idea of how much guaranteed income you’re going to need.
- Work out your savings and prioritise adding as much as you can to your fund. Just a few years of saving could make a difference to your retirement.
- Speak with a financial advisor. Financial advisers registered in England are highly experienced and are best placed to advise you about how much pension you’ll need to retire comfortably and how you can go about achieving your goals. They can also advise about tax relief on your pensions and how to make a wise investment for your autumn years. A financial advisor can minimise your risk of running out of funds when you need them most.
Will changes in the state pension impact my pension pot?
At the moment, you can retire at 55 in the UK and access the money invested in your workplace pension scheme straight away (although you cannot claim your state pension for many more years). But that is set to change soon. By 2028, the age at which you’ll be able to access workplace pensions is going up to 57. That may sound disappointing, but look at the positives – you’ll have two more years to save the money you need to retire comfortably.
How long must my pension pot last?
None of us can see into the future, and nobody knows how long they’ll live or how much money they will need. Furthermore, nobody knows what problems they’ll face as they get older. This is why proper retirement planning is so important, especially if you’re keen to retire at 55.
Discussing your situation and getting professional financial advice from independent financial advisers who are regulated by the Financial Conduct Authority is the best way to minimise your risk of a miserable retirement and also to get the best pension advice for your retirement savings.
What would be a good pension pot at the age of 55?
Based on current UK life expectancies, you’ll probably live, on average, for about 30 more years after your retirement if you choose to quit working at 55. Your income for those 30 years will be made up of not only your pension fund but also any extra investments you’ve made, savings you’ve accrued, your state pension and any other sources.
For anyone wanting to retire at 55, a good pension pot would be between £500,000 and £700,000 if you’re part of a couple, or between £450,000 and £550,000 if you’re single.
This is the amount of pension fund on average you need to retire and live the best quality of life. However, not everyone will spend the same amount of money, and not everybody will have the same goals during their retirement. A financial adviser would therefore be in the best position to look at your finances and plans and to give you professional advice that will answer the question, “how much do I need to retire comfortably?”
Whether you’re approaching the time when you’re considering retirement or whether you’ve still got decades to go, it’s never too late or too early to take some pension advice.
If you’ve just started your working life and are already thinking about retirement, there’s no better time to consider the question, “how much do I need to save to live the life I desire in retirement?”
Finding out as much as you can about the different types of pensions, what an annuity is and whether it could be right for you, how your funds may be invested, the impact of inflation on your investment, whether any tax relief would be available, and what kind of risk you could face could stand you in good stead when it comes to planning a bright and happy future once your working life has come to a close.