How much does it cost to retire at 55?
Unfortunately, there’s no one right answer, it’s different for everyone. The minimum recommended income in retirement is £9,154 but expert estimates for a comfortable retirement income range from £15,000-£40,000. It depends on the standard of living you want.
It also depends on how you plan to fund your retirement. If you plan to fund your retirement from recurring income from property rental or passive income streams from investments or businesses then again, you may not need to build up such a large pension pot before you retire.
So how much do you need to retire at 55? And, if it’s different for everyone, how can you work it out? Let us help….
What is a good retirement income?
Estimates for what is a good retirement income vary wildly depending on whether you are a couple or single and how much you earnt before retirement. These ‘rules of thumb’ amounts are estimates based on averages and may not provide an accurate representative amount for you.
The minimum recommended income in retirement is £9,154 for a single person and £19,263 for a couple, According to research by the Joseph Rowntree Foundation, this amount, after tax and benefits adjustments, is enough to cover what the public think is needed for a minimum decent standard of living.
By contrast, research by consumer group Which, place the cost of a comfortable retirement for a couple at £26,000 per year and a luxury retirement with long haul holidays, gym membership and a new car every 5 years will set you back £39,000 a year.
Calculate your own retirement target by using our retirement cost calculators. Click here for singles and here for couples
— 2020 Financial (@simonpgarber) April 22, 2019
Once you have a retirement income target in mind you can start to put your retirement plan together.
Factors that can affect retirement cost
Remember there are many things that can affect your retirement income needs and you may need to adjust as you go.
As a rule of thumb, you’ll need a bigger pension pot if:
- You have a low rate of return on your investments or you want to minimise risk in your investments
- If you retire early and increase the length of your retirement
- Your retirement income is indexed to inflation
- You’re not entitled to the full state pension
- If you don’t own your own home or you haven’t cleared your mortgage
- You have planned capital spending i.e. to buy a motorhome, home renovations, gifting money to help a child or grandchild buy a home etc.
- You are the sole breadwinner and therefore need more of a contingency
How much need in retirement will be largely dependent on your basic income needs with one of the biggest factors being whether you own your own home? It is estimated by Royal London that a third of retirees will eventually be renting and will typically need to find an extra £6,554 a year in retirement to pay private landlords, equating to a pension pot of at least £445,000 and that’s based on retiring at State Pension age, if you opt to retire early at 55, you’ll need to find a way to plug the gap between when you retire and when you receive your State Pension.
However, you can get away with a smaller pension pot if:
- You retire later
- You earn a higher rate of return on your investments
- You lower your income expectations at retirement
- You have alternative income streams (i.e. part-time work, passive income or property rental)
- You are able to downsize and partially fund your retirement with the equity
- You have a partner with a large pension that can provide for you both
- You are in poor health with a reduced life expectancy
How much pension do I need to retire at 55?
How much you need in your pension pot is decided by:
How much you need in annual retirement income
The length of your retirement
Since we don’t have a crystal ball to know exactly how long you will live, we can work with some industry accepted assumptions to give us a strong foundation for a retirement plan. It can be helpful to use a life expectancy calculator, which works on averages based on gender and age.
We asked Simon Garber, our retirement planning specialist IFA – how much you’d need in your pension pot if you’re planning on investing your money and using pension drawdown to retire at 55, he said
“As a rule of thumb, for every £3-4K you plan to take in annual income, you’ll need about £100,000 in your pension pot. So if you opt to take £10K per year, you’ll want between £300-£400K in your pension pot.”
Using Safe Withdrawal Rate to estimate your Pension Pot Size
If you want to take an income through flexi-access drawdown from your pension or through income from an investment then you could use the 4% rule of retirement, also known as the 4% Safe Withdrawal Rate as a good rule of thumb. It loosely determines how much a retiree can safely withdraw from their pension pot each year without running out of money in retirement.
In theory, withdrawing 4% a year should provide you with a steady stream of income while also maintaining enough money invested in your pension pot to keep your income flowing through retirement.
Safe Withdrawal Rate theory is based on the results of the Trinity Study, published in 1998 by three professors of finance at Trinity University. The study looked at portfolio success rates over every 30-year period from 1926 to 1995 based on different withdrawal rates and portfolio allocations and concluded that 4% was a safe rate to withdraw
This approach is particularly helpful if you want to maintain the value of your pension to pass on to loved ones.
There are some flaws to relying entirely on Safe Withdrawal Rate as it assumes that your investment return is enough to cover inflationary increases and any investment fees and it doesn’t factor in any tax you may have to pay either, but it’s a useful starting point for individuals wanting to plan their retirement.
To work out how much you’ll need in your pension pot using a 4% safe withdrawal rate simply multiply your target annual income by 25
If we use the Which example for a comfortable retirement that states you’ll need £26,000 a year per couple, simply multiply that figure by 25 to see how big a pension pot you’re going to need
I.e. £26,000 x 25 = £650,000
Find your Safe Withdrawal Rate for Retirement
Using our UK Pension Drawdown Calculator you can see how likely it is that your Pension Pot will last you. It back tests against the last 100 years+ of UK financial market conditions including boom and bust years. It also allows you to select from a range of investment portfolios depending on your prefered level of risk.
If you plan to retire at 55 with a pension pot of £650,000 and we assume that you’ll live to an average age of 90. If your money is invested in a balanced fund and you opt to take a 4% annual income your pension pot would have been enough to last you in 68.1% of possible simulations. However, this does mean that in 31.9% of simulations your pension pot would have run out.
If you reduce your withdrawal rate to 3% a year however, your pension pot will still have a positive balance when you’re 90 in 97.5% of simulations run.
Don’t forget that if you are eligible for the full State Pension, that will provide a guaranteed income for life once you reach state pension age – which may reduce your income needs from your private pension pot. Use our State Pension Calculator to see how this could affect your retirement savings.
How much do I need to Save to Retire at 55?
So how much should you be saving every month to retire at 55? Again, it depends on 3 main factors,
- When you start saving
- What investment return you can expect
- How much you currently have in your pension pot
The earlier you start to save, the less you’ll need to save monthly and the more time you’ll have to benefit from compounding returns.
The higher investment returns you achieve, the quicker you can reach your retirement target, but you should be mindful that higher potential returns come hand in hand with increased risk. Investments can go down as well as up, so you need to be sure that your long-term investment strategy is one that you are comfortable with in terms of risk, and that it is designed to meet your goals – slow and steady wins the race!
Obviously, the more you have in your pension pot to start with, the less you’re going to need to save.
Example: Amount to save monthly to achieve a combined pension pot of £650,000 at 55. Assuming a 5% rate of return net of fees
|Savings amount per month to hit £650,000|
|Couple With Zero Savings||Couple With £100,000 savings|
This chart shows the amount a couple in their 20s, with no savings, would need to save per month to get a pension pot of £650,000 by the time they’re 55 using our example.
If you’re a couple in your 40s with £100,000 in your pension pot, you’ll still need to save £1,458.91 a month to hit your £650,000 retirement target by the time you’re 55.
As you can see, the earlier you start saving the better, it gets harder to make early retirement a possibility if you don’t start saving until your 50s, but it’s not impossible.
As a basic rate taxpayer, you’ll automatically get a top-up of 20% on your pension savings. If you’re a higher rate taxpayer you could get a 40% boost on any pension contributions by way of government tax relief equal to your highest rate of tax.
— 2020 Financial (@simonpgarber) May 1, 2019
Plus, if you’re employed and qualify for auto-enrolment your employer is legally required to contribute to your pension as well – it might not be as hard as you think to meet your pension pot target.
|Date||Employer minimum contribution||Staff Contribution||Total Contribution|
|New rate: 6 April 2019 onwards||3%||5%||8%|
|Previous rate: 6 April 2018 to 5 April 2019||2%||3%||5%|
Use our Pension Contribution Calculator to see how much you’ll need to save every month to hit your retirement target by your desired retirement age.
Choosing a Guaranteed Retirement Income
If you want a guaranteed pension income in the form of an annuity, the cost will depend on whether you want a single or joint policy, whether you are a smoker or have any health issues and whether you want your income to increase in line with inflation.
For example, £100,000 would buy a couple a joint annuity policy of around £3,830.40 a year. But in the event that one of you dies it would provide 50% dependent’s pension on death. This amount is not adjusted for inflation, so the real value of your income will fall over time.
Early Retirement and the State Pension
If you plan to retire at 55, it’s likely you won’t be able to claim the state pension for at least 10-13 years. You can’t claim it early.
The current State Pension age is 65 for men and is currently rising from 60-65 for women, if you plan to retire at 55, you’ll need to replace your entire pre-retirement income from the age of 55. If you’re born after 5th March 1961 – you won’t get your state pension until 67 and if you were born after 5th April 1968 you won’t get your State Pension until you’re 68.
Even when you receive your state pension, it’s unlikely to be enough to cover even basic living costs so you’ll still need enough money saved up to plug the gap between your state pension income and your cost of living.
How to Fund Your Retirement at 55
There are a number of ways to fund your retirement at 55:
- Access your private pension from 55 – use flexi-access drawdown or buy an annuity
- Tax-free cash from your pension
- Rental income
- Dividends from a business
- Money from the sale of a business
- Money from the sale of a property
- Savings and ISAs
- A redundancy package
- A maturing endowment policy
- An inheritance
- Opting for a flexible working retirement or
- Part-time work – read 7 jobs you can do in retirement
Using your Pension Tax-Free Lump Sum
You also have the option at 55 to access 25% of your pension pot as a tax-free lump sum
If you do opt to take your tax-free cash from your pension, there are a couple of things to consider.
1) you’ll have less money invested to potentially grow for the future.
2) Once you’ve taken your tax-free cash you’ll be liable for tax at your marginal rate on the remainder of your pension pot. Find out how much you could pay with a pension lump sum tax calculator.
If you don’t need the money straight away you could leave the money invested in your pot and take advantage of 25% of your withdrawals being tax-free.
Click here to find out more about taking tax-free cash from your pension.
Can I take my pension at 55 and still work?
If you haven’t built up a large enough pension pot to fully retire at 55, there may be another option. With the flexibility that the pension freedoms offer, there’s more than one type of retirement you can consider. Semi-retirement and/or phased retirement offer the freedom to take some of your pension early – whilst working part time, so you can enjoy some of the benefits of early retirement without running your pension pot down too early.
Read more: Can I take my pension at 55 and still work?
You should be aware that once you start to take an income from your defined contribution pension you will trigger the Money Purchase Annual Allowance, which limits the amount you can put into your pension and receive tax relief on.
It’s a complicated area, and one you should seek individual financial advice on if you’re thinking about working and taking your pension at the same time. It’s also worth speaking to an accountant to find out how much tax you could end up paying too.
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