Many people look forward to the day when they finish work for good and have more time to spend on their passions. It’s no surprise, then, that one of the most common questions people ask is, ‘Can I afford to retire early?’
Retiring at age 55 might seem like the dream, but if you don’t have enough money to pay for the things you enjoy or you run out of money too soon, then it might not be the wisest decision. Read on to find out why retiring at 55 could prove financially challenging, and the impact of working just a few years longer.
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Is retiring at 55 feasible?
If you have a defined contribution pension, you can start withdrawing money from it at age 55 (or age 57 from April 2028). But just because you can withdraw pension money at this age, it doesn’t necessarily mean you should. Our research reveals you would need to have built up substantial savings to be able to retire at 55 without depleting your pension pot too quickly.
The Pensions and Lifetime Savings Association has calculated that you would need retirement income of £20,800 a year to fund a ‘moderate retirement’, or £33,600 a year to fund a ‘comfortable’ retirement1. However, our analysis shows that a 40-year-old who earns £60,000 a year, has a £75,000 pension and £10,000 in ISA savings would run out of money at age 68 on retirement income of £20,800 a year, or age 62 on retirement income of £33,600 a year. This assumes they pay £3,000 a year into ISAs until age 55, that their pension contributions remain at 8% of salary, and their investments grow at 4% per annum after fees and inflation2. Despite these diligent savings habits, retiring at age 55 is unlikely to be affordable for this individual.
Now let’s imagine a 50-year-old who earns £75,000 a year and has more substantial pension and ISA savings of £250,000 and £100,000, respectively. They could take annual retirement income of £20,800 from age 55 without running out of money, or £33,600 a year until age 71. This is based on the same investment growth and pension contribution assumptions as above and a higher £9,000 annual ISA investment.
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What difference could delaying make?
For most people, retiring at age 55 may simply be a pipe dream. However, working just five years longer could make a huge difference to your projected retirement income and how long your pension money lasts.
Our calculations show that if our 40-year-old retired at age 60, they could withdraw income of £20,800 a year until age 86. In other words, delaying retirement by five years could see their money last for an additional 18 years, thanks to extra pension contributions and compounded investment growth. If they wanted retirement income of £33,600 a year, however, their money would run out at age 70.
For our 50-year-old, retiring at age 60 would enable them to withdraw retirement income of £33,600 a year until age 86 – that’s an extra 15 years.
What other options are there?
If you have your heart set on an early retirement but don’t think it’s affordable, one option is to try to increase your pension contributions from now until finishing work. If the 40-year-old above made pension contributions of 12% of salary until age 55 and then started withdrawing £20,800 a year, their pension pot could last until age 76. That’s eight years longer than if they maintained contributions at 8% of salary.
You could also think about paying any bonuses or inheritances into your pension, and making sure your contributions increase in line with any pay rises you receive. Over time, these steps could make a big difference to your projected pension pot at retirement. If you’re able to contribute large amounts into a pension, then be mindful of the pensions annual allowance. This limits the amount you can save into your pensions each tax year while still benefitting from tax relief. It is currently £40,000, but this might be tapered if your ‘adjusted income’ exceeds £240,000.
Another option is to consider taking a ‘phased’ approach to retirement. This could involve working on a part-time basis or as a consultant. This is becoming a more common option as people live longer and more active lives. Working past the traditional retirement age could reduce some of the pressure on your pension savings, which may only be needed to top up a lower income level, rather than immediately replace earnings.
We all have dreams for the future; the difficult part is developing a plan to make those dreams become reality. And that’s where financial advice comes in. An adviser can give you a clear picture of your financial situation, set practical goals to work towards, and help you maintain prudent savings habits. For smart advice that’s tailored to your individual circumstances, why not speak to one of our financial advisers today?
2 Assumes inflation of 2% per year
The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
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