When would you ideally like to retire? When you’re 68, 70, 75 or are you thinking about clocking out of work for the last time earlier than that? Let’s be honest, most of us aren’t planning on working into our 70s. So, if you get the opportunity to retire before your 60s, you’ll take it! But realistically and financially, how much do you really need to make this happen?
Let’s take a look at the finances
Before we go any further, we’re going to make a few assumptions to create our pension calculations. The biggest one is that you have no mortgage or debts to pay off. The second assumption is that we’re planning on retiring at 55 and living until we’re 90. Which may be nearly 10 years longer than the UK’s average life expectancy and it puts us in the 99th percentile of the UK population1, but why not dream?
But why does this all matter? For three reasons:
- Debt can really eat into your monthly outgoings, and if you want to retire early then debt and mortgage payments can make this difficult and sometimes even prohibitive
- At 55 you can start drawing money from personal pensions – with 25% of your total pot tax-free. Retiring any earlier than this would mean you’d likely be eating into your other savings.
- The longer you live for, the more money you need. It’s simple math, but something that has a significant impact on how long you can live off a certain amount.
We deliberately haven’t included the state pension for a few reasons. First of all, you won’t be entitled to it for some years if you retire at 55. But there’s a lot of uncertainty around the future of the state pension, and that means predicting how much it might be is very tricky and would be a lot of guesswork.
Realistically, how much do you need to retire?
Having said that about the state pension, it does provide a relatively accurate baseline to work from. And with the current state pension, you could retire on £185.15 a week – or about £9,627.80 a year. If you wanted to use this as a guide, you’d need £336,973 in your pension, which could be achieved by investing £517 each month into a Wealthify Pension (with an Original theme and Confident investment style) from 25 years old until early retirement at 55.2 One thing to keep in mind though is that this is only a forecast and not a reliable indicator of future performance, meaning there’s a risk you could potentially end up with less.
However, a study done by the Pensions and Lifetime Savings Association (PLSA) found that to achieve a minimum living standard, you’d actually need £10,200 a year. And for a more comfortable retirement, you should try to amass enough for £20,200 a year. But if you really wanted a retirement without many limitations, then the study suggests aiming for £33,000 a year.
So, how much money do you need to save up for early retirement? We’ve worked that out for you, using the amounts put forward by PLSA and based on your pension needing to last from 55 to 90. If you’re looking to get out of work and live the quiet life, then you could retire at 55 with £357,000 in your pensions or savings. You’d need nearly double that to retire with a comfortable lifestyle (£700,000) and a whopping £1,155,000 to retire in luxury at 55.
How achievable is that?
Honestly, how ready you are for early retirement depends on your personal circumstances. How old you are, how much is in your pension pot now, and how much you can put aside each month. For argument’s sake, we’ll say you’re 35 and have managed to tuck away £30,000 in your pension. If your personal pension was under Wealthify’s Confident Plan, then you would need to pay around £653 into your pension each month3 to be able to achieve the minimum target pot. Around £1,450 a month for a comfortable retirement4. And as much as £2,500 to achieve a luxurious early retirement.5
If you’re older then you’d probably need to put in more, and if you’re younger you might be able to get away with putting in less. The same is true if your current pension is smaller or larger than the £30,000 we based the above scenario on. It’s also worth noting that the contributions required for a comfortable retirement at 65 or 68 would be less. That’s because you would have 10 or 12 years more of regular monthly investments, your pension pot doesn’t need to last as long, and you’ll experience the ‘mathmagic’ power of compounding – which is when the dividends and profits of your investments that have been reinvested start generating their own gains.
Can you retire early without a pension or savings?
Theoretically, yes, depending on how little you can realistically live on or even what you consider retirement to be. If you have a regular second income that provides for your needs – for example, rental property – then you may be able to retire early without the need for a large pension. However, it may be a good idea to keep back some savings just in case you need to carry out repairs or your property is vacant for an extended period.
Interestingly, the number of retirees continuing to work has more than doubled with nearly 1 in 12 over 70s staying employed.6 While many of these are staying in their career, lots look to take up relatively stress-free part-time jobs to keep them both entertained and regularly earning through retirement. If you haven’t got any significant plans for early retirement other than to clock out of your job, then this could be an option if you haven’t got a big pension to rely on.
Give your pensions more potential
Something that could have a big impact on being able to retire early is to understand what your pensions are doing, what you’re paying in fees, and how they are being invested. If you’ve got several pensions with different providers, it can be tricky to get the full picture on your retirement pot. You may also be paying over the odds on fees, and some of their investments may simply not be performing as well as you want.
One thing you could do is consolidate all or some of your pensions in one place, that way it can be easier to manage and fees could end up being lower – however, remember, performance isn’t guaranteed and there’s always a risk you could end up with less than you initially put in or transferred in. With a Wealthify Pension, you can choose an investment style that suits your needs – with the option of ethical investments that aim to grow your money while delivering a positive impact on society and the planet.
As you can access a personal pension from 55, this is a great way to ensure that you have money available if you choose to retire early. Plus, with a personal pension, you will receive a 25% top up as a result of tax relief on each contribution you make. And although you can put as much as you want in your personal pension, the amount you get tax relief on is limited to £40,000 a year (or 100% of your earnings if they’re lower– this is your pension annual allowance and it includes contributions made by both you and the government. So, effectively, to build up a £100,000 pension pot, you’ll only need to add £80,000 yourself. And, if you’re a higher or additional rate taxpayer, you may be entitled to an additional 20% or 25% tax relief through your self-assessment tax return. That makes it a little bit easier to achieve those target pension pots, but don’t forget that tax treatment depends on your personal circumstances and financial situation and may change in the future.
We’ve made it easy for you to open a Wealthify Pension. Choose to start a new pension – or transfer an old one in – decide how much you want to contribute (you can use our forecasting tool to get an idea of what your pot could be worth) and select the investment style that’s right for you. Our investment team will do the rest, building out your portfolio and managing your investments to keep them on-track for your retirement.
Do you know how much you’ll need in your pension pot for your dream retirement? Our new pension calculator can help give you a good idea of what you might need to save.
2: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform as expected, your return could be £337,118. If markets perform, worse, your return could be £237,244. If markets perform better, your return could be £515,118. Values correct as of 28/06/2022
3: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £262,190. If markets perform as expected, your return could be £357,159. If markets perform better, your return could be £491,551. Values correct as of 28/06/22
4: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £526,432. If markets perform as expected, your return could be £701,562. If markets perform better, your return could be £944,207. Values correct as of 28/06/22
5: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £874,556. If markets perform as expected, your return could be £1,155,294. If markets perform better, your return could be £1,540,554. Values correct as of 28/06/22
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.