It’s the dream. Early retirement. A stack of cash in the bank. An exciting and colourful bucket list of a million different treats to enjoy. But in reality, how much does early retirement cost? How much do you need to have saved? How long will your money last? And can you plan to retire at 55 with £400k in your pension pot?
Can I retire at 55 with £400k in the UK? You can retire at 55 with £400k in the UK, as this might reasonably give you £12-16K income a year sticking to the recommended 3-4% a year safe withdrawal rate. However that barely covers minimum income standards in the UK, much less provides for a comfortable retirement.
If you can live on between £12K-£16K per year. Great. But if your income needs are greater, you might struggle. For instance, if you plan to take 50K per year, your pension pot will be gone in around 8 years. So you need to do your homework before you make a decision.
Can you retire at 55 with £400k?
It depends. The short answer is, Yes. It is possible to retire at 55 with 400K in the UK. But will you want to? That’s a different matter.
Simon Garber, a Pensions and Retirement Specialist says,
‘It can be done. We have clients who do it [retire at 55 with 400K]. But they are not really living off just that. They have other assets. And moderate means.’
If you are considering retirement at 55 with 400K in your pension pot, there are 4 important questions worth asking yourself.
- How much money do you need each year?
- Do you have any other income?
- What are your retirement lifestyle goals?
- How long do you need 400K to last?
1. How much money do you need each year?
Have you sat down and calculated the cost of your retirement and the lifestyle you want to maintain? What are your financial commitments and outgoings? Now, and in the future?
You generally need more money when you retire younger and are more active (mortgages, dependent kids, hobbies and sports, etc.) Costs then reduce (mortgage free 60’s. Kids flown the nest). Then rise again later (due to costs such as increased insurance, medical and medical care costs). In short, your retirement outgoings aren’t static.
Which? estimates that a comfortable retirement for a single person costs around £20,000 per year. This includes such things as European travel/holidays, buying new clothes and recreation/leisure. But this is based on a lot of assumptions.
If you are not sure how much you need in retirement, we’ve created the world’s easiest retirement calculator to help you work out how much you’ll need.
2. Do you have any other income?
If a 400K pension pot is your sole source of retirement income, then how you plan to use it will be wildly different to someone who, for example, is simply using their £400K as a ‘top up’ to their Fun Fund.
£400K can work if you retire at 55. But it’s really important to look at all other possible assets and income you may have available. This could include money from downsizing, investments & savings, income from earnings, inheritance etc. This could also include any tax breaks that might be available to you that could save you thousands in the long term.
It’s important you do your homework. But, ideally, speak to a retirement specialist. It’s their job to make your assets work hard for you.
3. What are your retirement lifestyle goals?
Lifestyle is really important when considering your retirement and its cost. In fact, lifestyle should be your starting point.
Retirement planning is not as simple as picking an arbitrary figure out of thin air and thinking, ‘Yeah, I could live on that’. It should be about precise calculations and an in-depth look at the life you lead now, and the one you want to lead in the future.
The Two-thirds rule
The ⅔’s rule is a very crude measure for estimating the cost of your retirement that comes from Target Replacement Rate. But it states that you’ll need between half and two-thirds of your pre-retirement income to maintain a similar lifestyle standard in retirement.
But this is based on quite a few assumptions. Such as being mortgage and dependent free.
If you want help planning your ideal retirement and how much it will cost, you can read our retirement blog.
4. How long do you need 400K to last?
That is the golden question. Worthy of its own section (see below). Because no one knows how long they are going to live. And no one knows what life is going to throw at them. So it’s important you cover ALL your bases.
How long will £400k last in retirement?
It depends. YOU are the determining factor. 400K could last you 40 years. Or you could blow it all in the first decade. If you stick within a ‘safe withdrawal rate’/ sustainable income level, you should be able to keep your pension pot invested and grow your pension pot enough to sustain that income for life.
However, if you take too much from your pension, you risk depleting your pension pot before you die.
If you retire at 55, and the average life expectancy is around 87, then 400K will need to last you 30+ years.
If it’s your only source of retirement income, until the state pension kicks in at around 67/68, then you are going to have to budget hard to make it last.
Use our ONS life expectancy calculator to see what your life expectancy is.
The 4% Rule – safe levels of withdrawal
As a general rule of thumb, pension specialists advise that you – don’t take more than 4% of your pension pot each year. This is considered a sustainable amount or a safe level of withdrawal.
That’s because you need ‘wiggle room’ when investing. Markets go up and down. 4% gives you that wiggle room (as long as your pension has been invested properly – not too much risk, not too little).
You will still be drawing down from your pension each year (taking money out). But at a sustainable rate.
So if you take 4% per year from 400k you could still have money in your pension pot at the end of a 25-30 year retirement.
If you retire at 55, that takes you up to 85 years old (close to the current UK average life expectancy.)
Taking 4% per year keeps your pension pot at a level that shouldn’t run out. And if there is any remaining after you die, it can be left to your loved ones free of inheritance tax, ensuring your loved ones are taken care of.
Of course, a 4% withdrawal is just a guideline figure that might not account for prolonged periods of market fluctuations and stock market uncertainty, which may impact your pension pot, especially over a longer retirement.
That’s why our Retirement Specialist Simon Garber prefers to work with 3% for those considering early retirement.
“From experience retirement can be ‘suck it and see’ when it comes to planning how much income you need. You’re moving into a new stage of life, and often there are quite a few unknowns.
In addition, managing capital for income is a new step that should be eased into.
Remember, you don’t need to set the income bar high at the start, because drawdown is flexible. You can always adjust your income in the future. Plus, if you’ve underestimated how much you’ll need or need a cash injection to cover a holiday or Christmas etc, you take always take an ad hoc withdrawal.
Nothing is set in stone at retirement, but remember, it’s important to review regularly.”
Not sure how much you could safely draw down from your pension pot each year? Try our Pension Drawdown Calculator.
Retiring at 55 with 400K – using the 4% rule
If you retire at 55 with 400K and use the 3-4% rule (safe withdrawal rate) you would have around £12-16K per year to live on (assuming this was your only income). Let’s call it £14K, for argument’s sake.
Can you live on 14K per year?
Whilst £14K a year is above the £13,000 Which estimates a basic retirement will cost you, it’s well below the £16,996 the Joseph Rowntree Foundation say you need as a minimum income standard as a Pensioner – a 55-year-old is going to be far more active and will probably need more income.
When you’re reading these retirement estimates, please be aware that they only factor in the very basics – clothes on your back, a roof over your head, very few treats and lifestyle niceties allowed. And, also be aware that these estimates probably have very little relevance to your own lifestyle and living standards.
If you want to be able to enjoy a lifestyle that includes things like European travel/holidays, buying new clothes and recreation/leisure, you’ll need around to £20,000 per year. So, you might need to plan to subsidise you first few years of retirement until your State Pension drops in at 67 (assuming you’re entitled to the state pension).
Can you enjoy a luxury retirement at 55 with £400K?
Current estimates for a luxurious retirement for a single person are around £32,000 per year, which allows for eating out, leisure membership and long-haul travel.
If you retire at 55 and your £400K pension pot is your sole retirement income, you’d be looking at taking 8% of your pension every year for a £32,000 income, which is considered an unsustainable withdrawal amount for most investors, and would likely result in you running out of money in later retirement.
If you wait until your State Pension kicks in at 67, this could cover roughly £10,600 of your income requirements through your state pension, and if you push your pension pot withdrawals to 5% of your pension pot (£20,000), you would be closer to achieving a luxury retirement standard.
But even at 5% withdrawals, you run a higher risk of running out of money in retirement, and you would need to monitor your pension pot and adjust your withdrawals accordingly closely.
In reality, you can probably retire at 55 with a £400K pension pot and enjoy a fairly comfortable retirement income, but you will need to manage your withdrawals and you may need to adjust your lifestyle expectations.
*Please note – all of the above research has its own flaws, limitations, and are based on a variety of different ‘assumptions’. Which is why it’s imperative you look at your retirement as an individual and ideally seek professional advice.
Confused yet? Not sure how much you will need in retirement?
Planning your expenses in retirement can be a daunting task, especially if you’re planning years ahead, so we’ve created the world’s easiest retirement calculator to get your started.
We also cover 3 simple ways to work out how much you need in retirement in our cost of retirement blog.
The best way to ensure your retirement planning is in hand is to work with an expert. Arrange a free, no-obligation call with one of our retirement experts today and start your retirement journey on the right footing.