This article will show you how much you need to retire at 55. It covers:
1. Do you want to retire at 55?
If there’s one question that comes up time and time again, it’s how much do I need to retire at 55? This is closely followed by “can I retire at 55?”.
To retire at 55 is a goal that many share. You still have your health, fitness and enthusiasm for life. Retiring at 55 allows you to do the things you always wanted to do, but not got round to.
But do you know how much you need to retire at 55? What is a good pension pot at 55, and will it give you the retirement you want?
Early retirement isn’t for everybody, but anybody can do it. The earlier you start saving and investing, the earlier you’ll be able to retire.
2. What is a good pension pot at 55?
A lot of people ask me what is a good pension pot at 55?
The average UK pension pot at 55 is around £80,000. But knowing that in itself is meaningless.
The answer is that there’s no such thing as a good pension pot at 55. What somebody else has in their pension has no relevance to your retirement.
Your benchmark for retirement isn’t how much somebody else has in their pension. It’s whether you have enough money to do the things you want.
To understand how to retire at 55, you first need to understand how much income you’ll need in retirement. This will determine how much money you need to retire.
3. How much income do you need in retirement?
If you’re thinking about retiring at 55, the question you need to ask is “how much will I spend in retirement?”
This is the starting place for any retirement planning. This will determine how much you need in your pensions and other savings to retire at 55.
If your answer is “I haven’t got a bloody idea”, then start from where you are. What do you currently spend each month? How is this likely to change once you retire? Will you be spending more on travel, but less on commuting?
If you can bear to do so, I suggest writing down what you need and what you want in retirement. We call these ‘basic expenses’ and ‘leisure expenses. To help you get started, download our free one-page retirement expenses sheet.
If you’re still struggling, then go with the ‘70% rule’. This states that the average retiree requires 70% of their normal working income. So, if you currently earn £60,000 per year, you’re looking at a retirement income of £42,000 per year.
4. Where will your retirement income come from?
Once you know what you want to spend, the next question is how much income will you receive in retirement?
Broadly speaking, your retirement income will be made up of two parts, income and capital:
Working out how much you will receive from the ‘income’ section is fairly easy.
…..– If you have a buy to let property, you will already know how much income it provides.
…..– If you have a final salary pension, you will receive a statement each year.
…..– You can get an estimate of your State Pension online.
Of course, you need to recognise that different incomes will come in at different times. Your final salary pension may not be paid until 60 (or 65), whereas your State Pension may not be paid until 67.
Working out how much capital you can withdraw each year isn’t so easy. Withdraw too much and you risk running out of money. Withdraw too little and you’ll get to the end without living the life you wanted.
Broadly speaking, you can withdraw around 4% of your capital each year without running out of money.
Income & Capital
Although income and capital come in different forms, they serve the same purpose, to provide you with an income in retirement. For the time being, simply get a list of all of your different ‘pots’, as shown below.
5. How to create a retirement income plan?
Once you know your income and capital, the next step is to combine them together to create a retirement income plan. A retirement income plan is simply your income + capital combined to fund your retirement expenses.
This is where cash flow modelling comes in, creating a forecast of your finances. It starts by working out how much you spend each year. It then overlays this with the income you will receive.
Once your income and expenses have been built in, the final step is to add your capital. Your cash flow report will show you one of two outcomes, either you have enough money to retire at 55, or you don’t.
If you have enough
What are you waiting for?
I recently met with a client who thought he needed to work for another 10 years. By completing a cash flow report, we showed that he can afford to retire at 55, without fear of running out of money.
If you don’t have enough
Don’t worry – you have options available. You could, for example:
…..1. Save more each year
…..3. Spend a little less in retirement
* By taking more investment risk. There is no guarantee that taking more risk will deliver a higher investment return.
6. How to retire at 55 without running out of money
The only way to retire at 55 and guarantee that you won’t run out of money is to purchase a pension annuity. That way, you’re certain that the income will never stop.
However, pension annuities provide a pitiful income, and you will need a very large pension pot to do this.
The alternative is to use a drawdown pension. Whilst this comes with the risk of running out of money, regular reviews of your pension can help to eliminate this risk.
By working with an independent financial adviser, you can benefit from regular reviews of your retirement plan, helping you stay on track.
7. What else do you need to think about?
Pensions and inflation: how much will prices rise?
We have long been in a world of low-interest rates and low inflation. But this is not going to last forever. One of the biggest risks to your retirement income is that it does not rise in line with inflation (the cost of living).
Over a couple of years, inflation is difficult to see. But over a 30+ year retirement, a 2.5% pa inflation rate has a huge impact if your income is not increasing in line with it.
For example, £5,000 of income in 1995 will need to have grown to around £10,000 in 2020 in order to keep pace with inflation.
So if your income’s don’t increase with inflation, it could mean a much lower level of lifestyle in the future.
Some investments, such as inflation-linked bonds, are specifically designed to protect against inflation, but consider consulting with a financial adviser before exploring any of these.
Annuity vs Drawdown?
An annuity is a guaranteed income for life. The amount is usually fixed, though you can purchase one that rises with inflation.
The main advantage of using your pension to purchase an annuity is that you will never run out of money, no matter how long you live.
The main disadvantage of using your pension to purchase an annuity is the low level of income you receive. For example, if you use your £100,000 pension to purchase an annuity at 55, you will receive just £1,722 per year.
A drawdown pension is very different. Your pension pot remains invested, and you draw on it as needed.
The main advantage of a drawdown pension is that you have complete flexibility over how much you withdraw. You can withdraw as little or as much as you like when you like.
The main disadvantage of a drawdown pension is that you can run out of money if you withdraw too much. Think of a drawdown pension like a bank account, if you withdraw too much, your balance will eventually hit £0.
8. How can we help you retire at 55?
We are independent financial advisers and experts in retirement planning. We have helped dozens of clients retire early and enjoy life whilst they’re still young, fit and healthy.
By working together, we can show you whether you are on track to retire at 55 or whatever age you decide. If you’re not, we can advise you on the best options available to achieve your retirement goals.
9. Free Retirement Review
To get started, we offer a free retirement planning review. This looks at where you are today, where you want to be and then creates a retirement plan.
It provides you with a high-level retirement summary, looking at:
✓ Retirement Savings – how much you need to save for retirement
✓ Retirement Date – when you can afford to stop working
✓ Retirement Income – how much you can spend in retirement
As ever, if you want a helping hand, feel free to drop me a line.
All the best,
James Mackay, Independent Financial Adviser in Bristol
Financial Advisor Bristol and Pension Advisor Clifton
About us: Frazer James Financial Advisers is a financial advisor, based in Clifton, Bristol. As an independent financial adviser, we’re able to provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice.
Frazer James Financial Advisers is located at Square Works, 17 – 18 Berkeley Square, Bristol, BS8 1HB.
This article provides information about investing, but not personal advice. If you’re not sure which investments are right for you, please request advice.
Remember that investments can go up and down in value, you may get back less than you put in.