How much do I need in my pension pot to retire at 55?
How much do I need in my pension pot to retire at 55?
How much money do I need in my pension pot to retire at 55?
With the state pension age moving ever closer to 70, taking early retirement at 55* is often considered by many to be living the dream. By age 55, many are bored of their career, have reached their peak or just fancy taking things a bit easier by spending time with their families or travelling - is planning to retire at 55 an option?
Early retirement doesn't just happen by itself and retirement planning and pension saving should start as early as possible. The question is, how much money do you need in your pension pot to retire at 55, well before the normal state pension age?
*The pension rules are always changing and in 2028, the 'Pension Freedom Age' is set to rise to 57. This minimum pension age is the age at which you can start to access money held in a pension. Therefore, wherever this article states 55, just assume this could also be 57+.
How much do I need in my pension pots to retire at 55?
In terms of retirement planning, If you choose a retirement age of 55, you must be able to meet all of your income needs from private investments and/or the pension benefits from your pension pot and retirement accounts as you won't be entitled to your state pension top-up until you reach 'normal retirement age' in your late 60s (the state pension age changes regularly and it depends on when you were born).
As discussed in our previous article that answers the general question of how much do I need in my pension pots to retire, we established that a pension pot of around £500,000 is typically sufficient to provide a retirement income of around £20,000 each year, which many will find acceptable and others may find this is not enough. It all depends on what your version of a comfortable retirement is. Many people will consider £1,000,000 a good pension pot target as this may be able to generate around £40,000 each year, which will provide a higher standard of living in retirement and provide a greater level of longevity, particularly if you retire at 55.
If you want to retire at 55, it's important to understand that a pension, whether it's a workplace pension or a personal pension (private pension), is just a form of investment with the aim of providing an income in your retirement (also known as retirement saving), ideally (but not always guaranteed to) for the whole of your life expectancy.
High income, final salary pension schemes, with excellent retirement benefits are few and far between these days, so it's more important than ever to make the most of the pension benefits you have accrued over your working life. Examples of final salary pension schemes are a local government pension scheme and the NHS pension scheme.
With non-final salary pensions (also known as ‘defined contribution’ pensions), the capital sum in your pension fund can be used to purchase a secure income product like an annuity, or invested to give you more flexibility over the income you want based on the level of risk/reward you are comfortable with.
How can I increase my income in retirement?
Regardless of the type of pension scheme you are a member of, it's important to remember that a pension is not the only form of income in retirement. Other forms of income in a flexible retirement include:
Other savings and investments (ISAs, shares, premium bonds, cash savings etc.).
Paid work or consultancy.
Income from your business.
Income from rental properties.
Renting out a room in your home.
Clearly, the more income you are able to generate and the lower your cost of living, the more comfortable retirement will be and the better chance you have of being able to retire at 55. Speaking to our clients, it's very rare for anyone to say they have too much income in retirement.
Be warned though, people looking to increase their income in retirement are prime targets for pension scams, so be sure to seek financial advice from an authorised and regulated independent financial adviser before giving anyone access to your pension information.
How your income needs may change in retirement.
When looking at how much income you will need in retirement, especially if you retire at 55, it's important to not underestimate your income needs when you retire. And for obvious reasons, many will not opt for retirement until their mortgage has been paid off to reduce their monthly commitments, or wait until they have reached state pension age for the additional income.
If you are thinking about early retirement at 55, have you considered the cost of ongoing care in the future as this cannot be overestimated?
Equally, with more time on your hands (especially if you retire at 55), you may wish to travel more often than you used to when you were tied to a job. Clearly, there is a cost implication for doing this and you will need an appropriate income to support your plans. It would be a real shame to retire at 55 only to end up staying at home every day because you can't afford the activities you retired to do.
The best thing to do is calculate a detailed budget of the income you will need in retirement, decide if you have enough in your pension fund to do so and set the appropriate retirement savings goal.
Additional capital costs to consider if you take early retirement at 55.
Even though you may have paid off your mortgage and worked out a monthly budget for your living expenses, have you factored in the larger capital costs you may face if you opt for early retirement at 55? Including:
Repairs and replacement of your car, caravan or motorhome.
The cost of more frequent holidays.
Wedding gifts for the younger members of your family.
The cost of helping out other members of your family, such as with their education or getting started on the housing ladder.
Adapting your house for greater accessibility.
What is the cost of early retirement at 55?
To retire successfully at 55, rather than say 65, there are a number of financial factors that will affect the overall balance of your retirement fund. You will need to overcome a combination of:
10 years when you won’t be making contributions into a pension. This means no employee contributions from your salary, no free employer contributions and no pension tax relief.
10 years reduced compound interest, which can make a massive difference in the final 10 years as the investment balances should be at their largest. A percentage of a small amount of money is a small amount of money, the same percentage of a much larger figure has a much greater financial impact – money makes money.
Drawing down on your investments 10 years earlier, which may affect how long your funds will last.
Let’s use the example of a 40-year-old, earning £40,000 a year with a current total pension pot of £100,000. Retiring at 55 gives them 15 years left to build a retirement fund, whereas continuing to work until 65 means there are 25 years left to build a retirement fund.
£40,000 a year equates to a gross (pre-tax) income of £3,333 each month. If this person contributed 15% of their gross income via employee/employer/SIPP contributions and any tax relief they are entitled to claim, they will be adding about £500 each month to their retirement pot.
By plugging these figures into a compound interest calculator and assuming 8% annual growth, the £100,000 is forecast to become over £305,000 by the time they are 50 and nearly £486,000 by the time they are 55. However, add those extra ten years of contributions and compound interest into the mix and the pension pot is forecast to be worth in the region of £1.1 million by the time they reach 65. This is a great example of how compound interest really starts to kick in when you combine large balances, regular contributions and time.
Clearly, there is a definite impact on a pension pot if you choose to retire at 55 rather than 65, which is going to offer a reduced income. The obvious thing to do when looking at these figures is to just contribute more each month from age 40.
However, by doubling the monthly contributions from £500 a month to £1,000 in the compound interest calculator, the pension pot is forecast to increase fairly modestly in the short-term to be £396,000 by age 50 and will reach £654,000 by age 55. However, the final ten years of compound interest would increase the fund to an unbelievable £1.5 million by age 65 if you chose to delay retirement, keep the funds invested and keep contributing.
As a result, the cost of early retirement, in this case, is about £650,000 in sacrificed capital if the monthly contribution was £500 and £810,000 if they contributed £1,000 each month until age 65.
Applying the 4% annual withdrawal rate that balances preservation of capital with income (although not guaranteed) - that £650,000 of missed opportunity is worth about £26,000 in gross annual retirement income and the £810,000 is worth about £32,400 in reduced retirement income each year. Both of these figures clearly illustrate the financial cost of taking early retirement at 55.
In both of these illustrations, waiting the extra 10 years to retire at 65 gives you over double the monthly gross income in retirement.
|
Age |
Monthly Contribution |
Pension Pot |
Annual Income at 4% |
Monthly Income at 4% |
|
55 |
£500 |
£486,000 |
£19,440 |
£1,620 |
|
55 |
£1,000 |
£654,000 |
£26,160 |
£2,180 |
|
65 |
£500 |
£1,139,000 |
£45,560 |
£3,797 |
|
65 |
£1,000 |
£1,464,000 |
£58,560 |
£4,880 |
The financial cost of retiring at 55 if you had £100k at age 40.
Consider taking a phased approach to retirement at 55.
As we’ve all found over the past couple of years, working from home is possible for many and taking a phased approach to retirement is a great option to consider. We’ve spoken to many clients that decided to take things a little easier in their 50s and have reduced their work to 3-days a week. This gives them a long weekend every weekend for travel, plus they continue to earn income, contribute to their pension and continue to get the benefits of both sick pay, paid leave and, where offered, private healthcare.
Even if you decide to change jobs and start work in a completely different field, you may find learning new skills or an easier pace of life enjoyable, with the added bonus of giving you a reason to get up in the morning alongside social contact. Retirement can be isolating.
How to retire at 55 - 8 steps to early retirement.
If you are still keen to retire early at 55 and you know the financial impact it may have on you, work through our checklist to get yourself in the best possible financial position.
Start making a regular pension contribution as early as you can - every year counts.
Contribute as much as you can every month - you can add to a private pension (like a personal pension or a SIPP) each month and automatically claim the tax relief.
Make sure you select jobs where your employer contributes generously to your pension (this is free money after all).
Work with a financial adviser to make sure your pension is invested in accordance with growth requirements and risk tolerance.
Find the details of any private pensions (defined contribution ones) you may have from previous employers and transfer them into your main account (although be careful to check you won't lose any valuable benefits by doing this - the best thing to do is speak to a an independent financial adviser).
Consider how your capital is spread between pensions and ISAs. Moving cash into your pension allows you to claim the tax relief, however, the income and capital gains from an ISA are tax-free.
Maximise passive income-producing investments.
Regularly meet your financial adviser to ensure you are on track to retire at 55.
Money isn’t everything.
From a purely financial perspective, unless you have amassed a significant retirement fund by age 55, taking early retirement will cause you to have a lower level of income when compared to working/saving for another 10 years. However, money isn’t everything and the extra 10 years of retirement could be a wonderful addition to your life. As ever, there is a balance to be struck between work and life, but you do need to pay attention to the figures and take every opportunity to save and invest over your working life. The sooner you prepare and plan for early retirement, the better chance you have of making the figures work for you.
Use our Pension Pot Calculator to forecast your own income in retirement.
We have recently launched a Pension Pot Calculator in partnership with the Money Advice Service that enables anyone to see how much they will need in retirement and model the possible incomes available from individual pension pots. This tool takes only a few minutes to use but can be a real help to starting your early retirement plan.
What's next?
Make sure you use our Pension Pot Calculator to model your own retirement plan. You can also speak to an expert, independent financial adviser about retirement planning. Part of our advice includes full retirement cashflow modelling that looks at your specific financial needs, covering a range of scenarios. Based in Tunbridge Wells, we serve clients across the UK and we are authorised and regulated by the Financial Conduct Authority (FCA).
Don't forget, this article offers information about pensions and investing and should not be taken as personal advice. Remember that investments can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.
Retire at 55 FAQs
How much do you need to retire at 55?
The amount you need to retire at 55 depends on various factors, including your desired lifestyle in retirement, your anticipated expenses, your other sources of income, and your investment returns. There's no one-size-fits-all answer to the question of how much do you need to retire at 55, as everyone's financial situation and early retirement goals before the normal pension age are different.
However, if you want to hit your retirement goal of 55, start by asking yourself how much retirement income you need to maintain a similar standard of living as you had before retiring (your pre-retirement income). We have written a separate article called “How much income do I need in retirement?” and it is well worth reading that first.
In that article, we explain that the amount of income needed in retirement ranges from about £10,000 at the lower end to over £50,000 for a couple wanting a comfortable retirement. You may desire a larger retirement income than that, or you may believe that you can get by with less - only you can decide
Once you have an idea of the level of retirement income you will need, you can then turn that into a capital sum to answer the question of how much do you need to retire at 55. To do this, we like to use the "4% rule," which suggests that you can withdraw 4% of your retirement savings each year to make your savings last during your retirement. This rule provides a rough estimate of the initial amount you might need in your retirement fund.
For example, if you want to have an annual retirement income of £40,000, following the 4% rule would mean you'd need a retirement fund of around £1,000,000. This is because 4% of £1,000,000 is £40,000. Your retirement fund can be made up of cash, investments, workplace pensions, private pensions, defined contribution pensions, defined benefit pensions and so on.
To look into this a little further, if you want to withdraw 4% of your retirement savings each year and for your pension pot capital sum to just stay static, you have to achieve an overall growth of 4% to cover your income, plus 2% to cover your annual charges each year and a further amount to cover inflation, which is around 10% at the time of writing. This means that your total annual return needs to be in excess of 16% each year. Any less than than this and the value of your retirement savings will be eroded by the difference. Remember that for every 1% of this target you miss, a £1m pension pot and life retirement saving will be eroded by £10,000.
With a retirement age of 55, you are retiring more than a decade before the normal pension age and you could potentially have another 50 years to live with the increase in life expectancy for healthy people. Therefore, unless your retirement savings are invested appropriately, you may find your pension income will run out sooner than expected and/or be eroded by inflation. An uninvested cash sum of £1m will allow you to withdraw 4% (or £40,000) each year for just 25 years. Today, you will need in excess of £73,000 to have the same purchasing power as £40,000 would have had 25 years ago, in 1988.