Retiring early is a distant dream for many, with the figure of a million pounds often mooted as being a number that will provide for a comfortable retirement. But just how true is this nowadays, and can you retire early with a million pounds or will this only offer a decent income when retiring at the standard age?
In this short guide, we decided to crunch the numbers to see how far a million pounds can go in retirement, what income it could generate, and whether you retire early between the ages of 45 and 60 with this amount in your pension pot… here’s the short answer first:
Can I retire with a million pounds? Yes, you can retire with 1 million pounds in the UK, as it could reasonably give you an annual income of £30,000 to £40,000 providing you stick to the recommended safe withdrawal rate of 3 to 4%. However, whether you want to retire on a million pounds will depend on your retirement aspirations.
The above statement is a blanket statement that doesn’t take into account your age at retirement. For example, if you retire earlier, you will have to take out lower annual amounts if you want the income to last the same amount of time.
How far a million pounds goes in retirement has many factors
The question then asked will be whether you can afford to live on a reduced income.
For example, for a comfortable lifestyle that lets you take a couple of holidays a year, a single person with their mortgage paid might need to have an annual pension income of £43,000 according to Which.
To achieve this kind of income from a million-pound pot, you’ll need to take a little more than the 3-4% recommended as a safe withdrawal amount, it might just be doable if your investments go the right way. But there’s a chance, even with a million-pound pot, that it might not be enough to last a 25-30 year retirement at that rate of withdrawal.
The bottom line is; you can retire with 1 million pounds, but whether it’s enough for you to retire on will depend on how long you intend to retire for, and what annual income you want to withdraw.
To help you understand this better, we’ve used our pension drawdown calculator to run a number of different scenarios based on historical pension and market data.
Before we get into the details though, it’s important to understand that it’s currently not permitted for people to access their pensions before the age of 55 (with the exception of a lucky few with a protected early retirement age). That means if you plan to retire before you’re 55 with a million pounds, your investments will need to be placed elsewhere, or you will need an income plan.
Can you retire at 40 with 1 million pounds?
Retiring at 40 is something that many will aspire to, and you would think that a million pounds could offer security in retirement. However, if we look at the numbers it can make for sobering reading.
For example, if you retire at 40, and estimate you will be retired for 40 years, then you will need to have a pension that you can access at 55, and prior to that have built up your wealth elsewhere.
For example, ISAs are a tax efficient way of doing so, with couples currently being able to invest £40,000 a year into them tax free.
That doesn’t you should not be paying into a pension if you plan on retiring early with a million pounds. There are many tax efficiencies to be had with pensions, not to mention employer contributions if you’re employed, so you should work with a financial advisor to plan best on how to split your million pound retirement investment.
Then, once you are 55, the pension can also start paying out. A little further down we explain what this could mean for you based on historical market data.
Can you retire at 45 with 1 million pounds?
Similarly, retiring at 45 with 1 million pounds might sound fantastic, but when you actually consider how long that money needs to last, it might not be enough for you to live as one would expect at this age.
Realistically, your million pounds might need to last for 35 to 45 years or maybe even longer. This means you might aim for an annual retirement income of £43,000 funded possibly with ISAs before you hit the age of 55 and can draw on the pension.
Whilst £43,000 a year isn’t to be sniffed at, if you’re used to living on more, it might not provide you with the idyllic early retirement you’d dreamed of.
Can you retire at 50 with 1 million pounds?
Retiring at 50 leaves you with the realistic possibility of at least a 30-year retirement. You still can’t access your pension for another 5 years, so you’ll need to plan on how your early retirement will be funded with your million pounds.
You could consider a combination of ISAs, rental properties, and other investments, but importantly not having the whole million pounds invested in just one area.
Can you retire at 55 with 1 million pounds?
The good news is that now you are 55 you can access your pension which could be where the bulk of your million pounds has been invested.
It will be possible to access 25% of the pension fund now as a tax-free lump sum. However, if you do decide to do this it will impact how long the rest of your million-pound pension investment will last.
If instead, you decide to withdraw a regular amount from your pension each year and wish your pension fund to last 25 years at £43,000 annually, it could be at risk of lasting the course.
According to simulations run against historical market data, a million-pound pension has a 17.5% chance of running out of money early.
Can you retire at 60 with 1 million pounds?
It is entirely possible to retire at 60 with 1 million pounds, and there’s no reason why it cannot offer a single person a good retirement of £43,000 a year.
Based on our calculator, retiring at 60 for 20 years with 1 million in your pension pot, only has a 6.7% chance of running out of money according to historical data simulations.
How to plan better for retirement
In all of the retirement examples above, there are risks that your money could run out, even if you do have one million pounds to retire with.
This risk can be mitigated with the support of a specialist pensions advisor who can build in contingency planning and provide investment advice.
By using a financial advisor, they can continually run investment simulations for you, and be able to adjust and correct your annual retirement income and investment strategies. By doing so, you can be more diligent with your money, and make the million-pound retirement fund work better for you.
What are your retirement aspirations?
However, whether you want to retire at this age with 1 million pounds is another question and will depend on how you want your retirement to be.
Simon Garber, a Pensions and Retirement Specialist says;
“Retirement planning is incredibly personal, there really is no one-size fits all approach. You have to work out what amount feels right to you, in terms of how much you can afford to save, how much you want to live on and when you plan to retire – it all has to line up. The other thing to consider, is that, for most people at some point, we move beyond retirement planning into legacy planning and that has to be factored in too. It definitely helps to talk to an expert who can not only help with the complex sums but who can also help you look at some of the more emotional subjects with objectivity.”
Considerations to take when retiring with 1 million pounds
If you are planning on retiring with a million pounds 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 1 million pounds to last?
1. How much money do you need each year?
Have you sat down and worked out 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. and if you’re used to a much higher income, £20,000 isn’t going to feel all that comfortable.
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 million pounds 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 million as a ‘top up’ to their Fun Fund.
For example, a million pounds could work if you retire early at 50. 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 two-thirds 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.
4. How long do you need the million pounds 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 far does £1 million go in retirement
It depends. YOU are the determining factor. A million pounds could last you 40 years. Or you could blow it all in the first decade.
If you retire at 66, and the average life expectancy is around 87, then a million pounds will need to last you 20+ 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 plan properly to make it work for your retirement goals.
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 1 million pounds you could still have money in your pension pot at the end of a 25-30 year retirement.
Of course, the problem with retirement planning is that none of us know how long we’re going to live. 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.