If you’re thinking about cashing in on your pension, we’ll help you figure out if you can afford to retire at 55. If you’re a little way off, we’ll help you understand how to help your pension grow.
Bear in mind that retiring as early as 55 is an ambitious strategy that can become very expensive if you start saving later in life.
How much money do you need to retire at 55?
The amount you need to retire early will depend on:
How much you intend to spend in retirement
How long you expect to live for
Whether you’ve paid off your mortgage and other debts
Whether you retire single or can partly rely on a partner’s income
Calculating how much retirement income you’ll need
There are a few quick ways to get a rough idea of how much you might need, but none are 100% accurate.
1. Multiply your expected annual outgoings by the number of years you hope to be retired
If you expect to spend £25,000 per year and live until 85, you might need a pension of around £490,000 to support you through those 30 years of retirement.
2. Multiply your final salary by 70%
So if you retired on £40,000 per year, you’d need around £28,000 per year to live on in retirement (around £550,000 if you live until 85).
The idea behind this is that you’re likely to have paid off your mortgage and other expenses, so your outgoings will be lower.
3. Consider what others are spending
According to consumer group Which? a couple needs a joint household income of £26,000 a year (a £260,000 pension pot each) to cover living expenses. This rises to £41,000 (a £410,000 pension pot each) if you include luxuries like exotic holidays and a new car every five years.
*Pension pot sizes were estimated using this calculator, assuming funds were drawn down over 30 years from the age of 55 and the pension continued to grow 3% annually. We’re not including the State Pension which you’ll receive in your late 60s.
How your mortgage and other debts affects your pension
You don’t need to have paid off your debts before claiming your pension. But you may find that a significant portion of your monthly pension income could be eaten up paying off any outstanding debts, leaving a smaller amount to cover your remaining expenses.
Mortgages are the biggest loan most people take out, averaging £230,800 in December 2019 according to UK Finance. Fortunately, many lenders have extended their remortgage products to people up to 80. So it may be possible to remortgage to a more competitive deal with lower monthly payments, relieving the burden on your pension.
If you have other debts, such as credit cards or car finance, you may want to consider consolidating them into a single repayment plan to lower your monthly outgoings.
How your marital status affects your pension
Your pension isn’t affected by whether you have a partner or not. However, your household income and outgoings can be drastically impacted.
If you have a partner who’s also retired, their pension income will boost the total household income you both have at your disposal. This can be particularly helpful if you still have outstanding debts like a mortgage to pay.
In addition, living costs tend to be more affordable per person when shared. For example, the cost of heating your home probably won’t be too different whether you’re living alone or with a partner. So sharing that cost with a partner cuts your personal outgoings in half. The same applies to council tax, utilities, and grocery bills.
How your life expectancy affects your pension
If you take money from your workplace pension pot on a regular basis, you’ll be able to do so for as long as there’s money in your pot. For example, if you take £10,000 a year from a £100,000 pension pot, the pot will last ten years.
If you use your pension pot to buy an annuity when you retire, the annuity will guarantee an annual income for the rest of your life.
None of us know how long we’ll live for, which is why it’s important to start saving as early as possible so as to retire with a healthy pension pot.
Will my retirement income needs change over time?
Your lifestyle at 55 is going to be quite different to when you’re 85, which will impact your income needs.
For example, you’ll probably want to spend more money on leisure activities like holidays and dining out when you’re newly retired. But when you’re older, you might want to allocate more of your pension income to healthcare and supporting your family.
How will inflation affect my pension?
Inflation is the rate that the cost of goods and services increase over time. It affects everything from the cost of your weekly food shop to the price of property.
Inflation in the UK averaged 2.8% between 2000 and 2019, meaning that goods costing £10 in 2000 cost on average almost £17 in 2019. It’s almost inevitable that your costs will be higher by the time you retire, and even higher in your later retirement.
Pensions do tend to grow over the long-term (the government state pension is linked to keep up with inflation too, under the triple lock). But you’ll need to make sure you don’t take out more than your pension grows each year to avoid reducing the number of years it will support you.
When do I need to start saving to retire at 55?
Generally speaking, the earlier you can start saving the better. This is due to what’s known as compound interest.
Compound interestis the amount of interest you receive on your initial investment, and the amount of interest that grows on that, year on year.
For example, let’s imagine you have £100,000 in your pension:
It grows by 4% over the next year to £104,000 (a £4,000 increase)
It grows by 4% again over the next year to £108,160 (a £4,160 increase)
It grows by 4% again over the next year to £112,486 (a £4,326 increase)
See how you earn a little more each year, even though it grew by the same percentage? And that’s before we’ve even added further payments into your pension! That’s compound interest at work.
In the real world, the percentage of interest would change every year and it could even see negative growth. But it’s not unreasonable to think it might grow by 4% on average.
Calculating when to start saving
We’ve used our pension calculator to find out how much you’d need to save by the time you’re 55 to earn £20,000 a year in retirement.
We’ve assumed your employer will contribute £100 per month and that you’ll retire at 55. We haven’t included the State Pension, which you might be eligible to claim when you reach State Pension age.
|Your starting age||Your monthly contribution|
As you can see, not only is retiring at 55 ambitious from any age, but it becomes very expensive the later you leave it.
Can I afford to retire at 55?
If you really want to retire at 55, you’ll need to start planning long before you decide to dip into your pension fund.
You’ll want to think about:
What your fixed costs are likely to be (eg. council tax and utilities)
If you’ll have any remaining debts to pay off (eg. mortgage)
How much you’d like to spend on other living expenses (eg. groceries and clothing)
How much you’d like to spend on luxuries (eg. holidays)
If you’ll receive income from other sources (eg. savings or property)
Our online pension calculator will help you figure things out and can estimate how much you’ll need to save between now and age 55 to ensure you don’t run out of money.
If you’re unsure how much money you have in old workplace pensions, and can’t remember the details, the government’s Pension Tracing Service is a free database you can check. Alternatively PensionBee can help you locate old pensions and consolidate them into one simple plan.
What is a good pension pot?
While the jury’s out on exactly how much you’ll need, a good pension pot is a retirement fund that enables you to live comfortably when you stop working. And even though there’s no one-size-fits-all approach to pension saving, a general rule of thumb is the more you can save now, the better off you’ll be later.
Each year you can save up to 100% of your earnings into your pension or a £40,000 allowance, depending on which is higher. This amount includes your pension contributions, those made by your employer and any tax relief you get from the government.
Can inheritance be used to top up my pension?
Any windfall you receive can be put towards your pension, including inheritance money. You can choose to top up your pension with regular payments or an additional lump sum.
The usual rules apply for most people:
You can put in up to £40,000 per year or 100% of your income, whichever comes first
The government will boost your contribution by 25% or more
Your employer will still pay in at least 3% of your salary each year
Depending on your circumstances - such as being self-employed or a high earner - these rules might be slightly different for you.
Could you take a step closer to early retirement?
Hopefully this article has helped you understand what it takes to plan for an early retirement.
Now estimate how much you’ll need to save to reach your goals using our easy-to-use pension calculator.
If you’d like to take the next step on your journey towards retiring at 55, PensionBee can help you:
Track down and combine all your old pensions into one
Pick a plan from a range of established partners, including State Street Global Advisors, BlackRock, HSBC, and Legal & General
Benefit from one simple annual fee
Manage your pension performance and make contributions in one place with our simple but powerful app
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.