Many of us dream about the things we’ll do when we retire, but for the majority of us, those precious years are coming later in life than ever.
The average retirement age is now 65 for men and 64 for women1, compared to 63 and 59 a decade ago2. However, with a bit of planning, you could retire up to ten years earlier, giving you more time to focus on family, travel or other dreams.
Many people aspire to retire at 55. At this age, you can access all of your pension savings, but before you do you’ll need to make sure that you’ve built a sufficiently large pot to last for the rest of your retirement. You will also need to take into account when you will receive your State Pension.
If you’re 40 today and aiming to retire at 55, it’s important to remember that your own pension funds won’t be boosted by the State Pension until you’re 68. These retirement planning tips can help you to retire early.
How much will I need to live on?
Take a moment to imagine the lifestyle you’re hoping for if you stop working at 55. Think about what day-to-day life will look like, what you will spend and where you will go. Be as detailed as you can, as it will help you to put a figure on the income you will need to afford this lifestyle.
According to Which? average retired households spend around £2,200 a month3, or £27,000 a year. This covers living costs and allows for extras such as a European holiday and eating out. Your spending will vary depending on your plans and whether you expect to be mortgage-free. Your spending will also vary as your retirement progresses - most people spend more in the early stages of their retirement, and less as they get older.
Where will the money come from?
Once you stop working, you’ll need to fund day-to-day living from other sources. Recent rules around pension savings allow you to take all of your money from your pension at once or gradually.
You could also use your pension pot to buy an annuity that gives a guaranteed income for life, but it can be hard to achieve a high guaranteed income from a modest pot.
How much do I need to save?
This will depend on your expectations and other sources of income. As an illustration, though, someone hoping for £27,000 a year from the age of 55 would need to have amassed a pension pot of around £400,000 if they wanted their money to last for 20 years. That’s according to Which?’s calculators, which assume inflation of 2% a year, and that the unused portion of the pot remains invested in a moderately risky investment fund until the fund is exhausted.4
How can I accumulate an amount like that?
Generous tax breaks on pension savings can help you to achieve the pension pot you want, together with investment performance over time.
Even if you’re already 40 or over, a pension pot of £400,000 by 55 may not be as unachievable as it first seems - especially if you already have some pension savings.
Let's look at an example:
Paul is 40 and won’t receive his State Pension until he’s 68 so he needs to look to other sources if he wants to retire early. He has already saved £100,000 in his company pension with a previous employer, thanks to contributions from himself and his employer since he started working when he was 21. He needs another £300,000 to reach a £400,000 pension fund.
Paul should start by contributing to his current company pension because his employer will contribute too. If he contributes 5% of his £60,000 salary per year, his employer will contribute 3%. Assuming investment growth of 6%, inflation of 2% and charges of 0.75%, the Which? pension calculator suggests he will have almost £240,000 in his employer pension pot by the age of 55.5
This leaves a shortfall of £160,000. An extra contribution from Paul of £520 a month into a private pension for the next 15 years, would mean he could afford to retire at 55 if the same investment assumptions are made as in the above paragraph.
The calculation above includes the 20% basic rate tax automatically added to Paul’s contributions, but because he is a 40% taxpayer, he can claim back £130 of higher rate tax contributions each month as well, so, instead of £650, the cost to him of the extra monthly contribution is actually £520.
What if I live longer?
The average life expectancy at 65 is now 18.6 for men and 20.9 for women6, meaning that if you retire at 55, your money is likely to need to last for around 20 years or more.
It’s also likely you’ll have other sources of income in retirement, in addition to your pension pot. This could include the State Pension, which is currently a maximum of £168.60 a week, and any ISAs or other savings. This could help your money to last longer.7
Some people also use their homes as a source of income, either by downsizing or using equity relief in later retirement. Many early retirees also choose to take on small part-time jobs that can work more easily around travel or other responsibilities, to boost their income.
What help can I get?
A qualified financial adviser can look at your income holistically to help you decide if you can afford to retire comfortably. They will look at your outgoings and salary, and help you decide whether you can increase your pension contributions.
Past performance is not a guide to future performance. The value of investments and the income derived from them may go down as well as up.
3.https://www.which.co.uk/money/pensions-and-retirement/starting-to-plan-your-retirement/how-much-will-you-need-to-retire-atu0z9k0lw3p - headline_3