How much do I need in my pension pot to retire at 60?
How much do I need in my pension pot to retire at 60?
With the state pension age moving ever closer to 70, taking early retirement at 60 is often considered by many to be living the dream. By age 60, many are bored with their careers, have reached their peak, or just fancy taking things a bit easier by spending time with their families or travelling—is retiring at 60 an option for you?
Introduction
Early retirement doesn't just happen by itself; 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 60, well before the normal state pension age?
If you want a quick estimate of how much you will need in your pension pots to retire at 60, you can skip ahead to our quick Pension Pot & Retirement Fund Calculator. Alternatively, for the full story, read on.
Pension basics for those wanting to retire at 60.
If you want to retire at 60, it's essential 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 rest of your life. These pensions can be further supplemented by any State Pension entitlement you have accrued during your working life.
Note: The age at which you start to receive your State Pension differs, depending on when you were born. You can use the tool on Gov.uk to see exactly when you will become eligible for the State Pension.
It's also worth mentioning that your retirement fund can include general savings, cash savings, your savings in ISAs, other stock market investments, property, and businesses. It all depends on what you have earmarked your investments for. So the terms 'retirement fund', 'pension savings', 'pension fund' and similar are all generally interchangeable when talking about planning your retirement until such point as you need to access the money, and then the terms become more important.
Back to pensions specifically.
The high-income, final salary pension schemes with excellent retirement benefits are few and far between these days (known as 'defined benefit pensions'). Examples of final salary pension schemes are:
Local government pension schemes.
NHS pension scheme.
Teacher's pension scheme.
Police pension scheme.
Armed forces pension schemes.
Large company pension schemes.
Non-final salary pensions (also known as 'defined contribution pensions', 'workplace pensions' and 'personal pensions') allow you to build a capital sum in your pension fund, which 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.
There are also what's known as 'pension freedoms' to consider, where you have choices over how you can access your pensions after a certain age.
Some typical uses for your pension, alongside a retirement income, include:
Leaving the money invested in the pension.
Taking the tax-free money and transferring it to an ISA for tax-free income.
Purchasing an annuity for lifetime income.
Paying off your mortgage.
Using it for one-off expenses like a landmark holiday or similar.
There’s a lot to cover with pensions, so be sure to read our complete guide to pensions for links to in-depth articles to bring yourself up to speed.
How your income needs may change if you retire at 60
When considering how much income you will need in retirement, especially if you plan to retire at 60, it's crucial not to underestimate your income needs. 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 taking early retirement at 60, 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 60), you may wish to travel more often than you used to when you were tied to a job. Clearly, doing this has a cost implication, and you will need an appropriate income to support your plans. It would be a real shame to retire at 60 and stay home every day because you can't afford the activities you retired early to do.
One of the most important steps in your retirement planning is to calculate a detailed budget of your future income needs. This will help you determine if your current pension fund is sufficient or if you need to set a more ambitious retirement savings goal. Our article 'How much do I need in my pension to retire' provides comprehensive guidance on this crucial aspect of retirement planning.
Remember that you may need to rely on a higher level of income from your investments until you become eligible for the State Pension. At this point, you may receive a significant boost to your income, particularly if you are married and both of you are eligible.
How can I increase my income in retirement if I retire at 60?
Should you discover that your retirement income requirements are higher than anticipated, it's crucial to explore additional avenues to bolster your financial standing during this phase of life.
Firstly, 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.).
Part-time paid work, consultancy or non-executive positions using your industry expertise.
Income from a business.
Income from rental properties.
Generating income from your home via letting rooms, B&B, land, etc.
Clearly, the more income you are able to generate and the lower your cost of living, the more comfortable your retirement will be and the better your chance of retiring at 60. Speaking to our clients, it's very rare for anyone to say they have too much income in retirement, but we often hear that there isn't enough…
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. One of our financial advisers would be very happy to hear from you, and we offer a free initial consultation.
How your capital needs may change if you retire at 60
Income is, of course, only part of the picture. 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 60?
Your one-off capital costs in retirement could include:
Repairs and maintenance of your home.
Adapting your house for greater accessibility.
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.
If your budget only covers the cost of your living expenses but doesn’t allow for saving excess income or dipping into your capital, is retirement at 60 a sensible option?
How much do I need in my pension pots to retire at 60?
The first thing to consider if you want to retire at 60 is how much income you will need each year. As discussed in our previous article, ‘How much do I need in my pension pots to retire?’, there is a general rule of thumb called the ‘25x Rule’.
By multiplying your desired gross annual retirement income by 25, you can set a target for your retirement fund. This fund, if managed properly, could sustain a 4% annual withdrawal without significantly reducing the capital.
You can use our quick Pension Pot & Retirement Fund Calculator below to do the 25x Rule calculations for you and get a rough estimate of the size of pension pot and retirement funds you will need. Remember, this is just a guide, but it will help shape your financial expectations.
Pension Pot & Retirement Fund Calculator
For example, if you need a retirement income of £20,000 each year, a retirement fund of around £500,000 could provide this (£20,000 x 25 or £500,000 x 4%).
Alternatively, for those who want to draw a gross income of £40,000 each year, a retirement fund around the £1,000,000 mark may be a more suitable target (£40,000 x 25 or £1,000,000 x 4%). This income level will provide a higher standard of living in retirement and may provide greater capital longevity, particularly if you retire at 60.
Ultimately, the decision on how much income you will need in retirement rests with you. It's likely to be similar to your pre-retirement income, depending on factors such as mortgage or rent payments. Our article 'How much do I need in my pension to retire' offers comprehensive guidance on this crucial decision-making process.
Once you have an income figure in mind, the next thing to consider is that you must be able to meet all of your annual income needs solely from your private investments and/or the pension benefits from your pension pot because you won't be entitled to your state pension top-up until you reach 'normal retirement age' (typically your late 60s - this age changes and it depends on when you were born).
Questions to ask yourself if you want to retire at 60.
Do you know how much income you need in retirement?
Do you have sufficient private investments and pension savings to meet your income needs when you are 60?
When will you be eligible to receive the State Pension?
Have you accrued sufficient National Insurance credit years to qualify for the full state pension?
Our highly experienced financial advisers are ready to help you make sense of your retirement plans. We even offer a free initial consultation to help get things started.
What is the cost of early retirement at 60?
To retire successfully at 60, rather than in your late 60s (when the state pension kicks in), several financial factors will affect the overall balance of your retirement fund. You will need to overcome a combination of:
The opportunity cost of at least seven (or eight) years when you won’t be making contributions into a pension. This means no employee contributions from your salary, free employer contributions, or pension tax relief.
At least seven years of reduced compound interest can make a significant difference. While 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 more significant financial impact—money makes money, and every year counts once you have amassed a considerable amount of pension savings.
Drawing down on your investments at least seven years earlier may affect how long your funds will last.
Putting the cost of early retirement at 60 into context.
Note: To keep things simple, we are going to use many assumptions from here and ignore inflation. This is purely an illustrative example to give readers some insight into just how significant the impact of early retirement is.
Let’s use the example of:
A 41-year-old.
Earning £40,000 a year.
With a current total pension pot of £115,000.
Their state pension age is 68, which means there is a maximum of 27 years left to build a retirement fund.
Retiring at 60 gives them a maximum of 19 years left to build a retirement fund.
£40,000 a year equates to a gross (pre-tax) income of approximately £3,333 each month. If this person aimed to contribute 15% of their gross income into their retirement fund, their total monthly contributions would be £500 each month. They could achieve the £500 savings target each month via a combination of employee pension contributions, employer pension contributions, SIPP contributions, and any tax relief they are entitled to claim, alongside extra ISA contributions or similar from their net pay.
By plugging these figures into a compound interest calculator assuming 8% annual investment growth and £500 of contributions each month, the £115,000 is forecast to become approximately:
£307,000 by the time they are 50 (9 years).
£488,000 by the time they are 55 (14 years).
£754,000 When they are 60 (19 years).
£1,144,000 When they are 65 (24 years).
£1,461,000 When they are 68 (27 years).
How your pension pot could grow substantially by delaying retirement for a few years.
As you can see from the data, delaying retirement from 60 (19 years) to 68 (27 years) and continuing to make the £500 contribution each month could have a remarkable impact on the balance, doubling it from £754,000 at 60 to £1.46m at 68.
Conversely, we can see the effect of retiring at 60 with a pension pot of £754,000 and withdrawing £3,000 each month as an income below.
The impact on a pension of retiring at 60 and drawing an income.
In this case, a monthly income of £3,000 has been chosen as it is similar to their current gross monthly pay and approximately 4.75% of the retirement fund capital value. This is a little higher than the 4% typically recommended to balance the preservation of capital with income; however, this can be reduced if necessary once income is boosted by the state pension at 68.
Remember, even though an income is being drawn from the pension, the overall capital sum remains invested and continues to achieve 8% annual growth.
In this example, after eight years and £288,000 of withdrawals (£36,000 each year x 8 years), the capital sum continues to grow and is still nearly £1m at age 68 when the State Pension payments begin.
Accordingly, the theoretical cost of retiring early in this case is:
Retirement fund balance at 68 if taking £3k PCM at 60: £998,642
Plus income taken for eight years: £288,000
TOTAL VALUE: £1,286,642
Retirement fund balance at 68 if no income taken and £500 PCM contribution: £1,461,000
TOTAL COST OF RETIRING AT 60 RATHER THAN 68: £174,358.
Applying the 4% annual withdrawal rate that balances preservation of capital with income (although not guaranteed) - that £174,358 of missed opportunity is worth about £6,974 in gross annual retirement income each year. These figures clearly illustrate the financial cost of taking early retirement at 60 rather than 68.
However, given the sums involved, this individual may decide that retiring eight years early at 60 but forfeiting nearly £7,000 of additional annual income if they continued working is a compromise work making. As always, it’s down to every individual to decide the right balance.
Everyone’s situation is different though. If you are already in your late 50s, your options of increasing your retirement fund substantially before you are 60 are going to be slightly more limited than someone in their 40s. Understanding these unique circumstances is crucial in making informed retirement decisions.
Consider taking a phased approach to retirement at 60
If you think your retirement fund may not quite meet your income needs in retirement, consider a phased approach, which could give you a better balance in your life.
We’ve had the privilege of working with many clients who, in their 60s, decided to take a more relaxed approach to work, reducing their hours to 3 days a week. This not only provides them with a long weekend for travel but also allows them to continue earning, contributing to their pension, and enjoying the benefits of sick pay, paid leave, and private healthcare, providing a sense of security in their retirement.
Even if you decide to change jobs and start working in a completely different field, you may find learning new skills or an easier pace of life enjoyable. This has the added bonus of giving you a reason to get up in the morning alongside social contact, as retirement can be isolating.
How to retire at 60 - 8 steps to early retirement
If you are still keen to retire early at 60 and are comfortable with the income you need and the expenses you will face, work through our checklist to get yourself in the best possible financial position.
Make regular pension contributions as early as you can - every year counts when it comes to compound interest.
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 claim the tax relief automatically or via your tax return (if a higher earner). 15% of your gross salary is a good target to aim for.
Select jobs where your employer contributes generously to your pension (this is free money, after all).
Work with a financial adviser to ensure that your pension is invested according to your growth requirements and risk tolerance.
Find the details of any private pensions (also known as defined contribution pensions) you may have from previous employers and consider transferring them into a single pension as this will be easier to manage, track and control (although be careful to check you won't lose any valuable benefits by doing this - the best thing to do is speak to 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 60.
Finally, remember money isn’t everything
From a purely financial perspective, unless you have amassed a significant retirement fund by age 60, taking early retirement will cause you to have a lower level of income when compared to working/saving for another few years, particularly as you won’t be eligible for the state pension until your late 60s.
However, money isn’t everything, and the extra 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 your chance of making the figures work for you.
What's next?
To make the most out of planning for early retirement at 60, here are a few steps you can take to help you plan and decide if it is right for you or not:
Read our complete guide to pensions for links to in-depth articles to bring yourself up to speed.
Use the tool on Gov.uk to see exactly when you will be eligible for the State Pension.
Read the article ‘How much do I need in my pension pots to retire’ to get a better idea of your income needs in retirement.
Use our Pension Pot Calculator to model your own retirement plan.
Speak to an expert, independent financial adviser about retirement planning. Part of our advice includes 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 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 the value of investments and pensions, and the income from them, may fall or rise and you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.