Originally published at: How you can retire at 55 – InvestEngine Insights
Early retirement is a common goal. For a lot of people, the dream of waving goodbye to work for good before the state pension age – currently 66 in the UK – is a priority in their long-term financial planning.
It can be difficult to know how to achieve retirement at 55. With careful planning, sound investing and disciplined saving, however, you too could clock off early. In this article, we’ll take a look at average pension pots, how much you’ll need to live your dream retirement and how you can reach that figure.
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What is the average pension pot in the UK?
The average pension pot in the UK differs a lot depending on your age (unsurprisingly). According to the ONS, these are the average figures across different age groups:
| Age group | Average |
| 16 – 24 | £2,700 |
| 25 – 34 | £9,300 |
| 35 – 44 | £30,000 |
| 45 – 54 | £75,500 |
| 55 – 64 | £107,300 |
Of course, retiring at 55 means having more years to budget for, so you’ll want to be well above these averages if this is your goal.
So, imagine you had £75,000 saved and wanted to spread that out over 25 years, you’d be drawing £3,000 a year. Add that to the new maximum state pension (from April) of £11,502 a year, you’d have an income of £14,502 a year.
Pensioners tend to need less money than working people – housing costs are usually lower, along with other expenses like commuting and childcare costs. As a rule of thumb, it’s generally accepted that you need between half and two-thirds of your annual salary to maintain your living standards in retirement.
How much do I need to retire at 55?
So, how much do you actually need to retire early? Let’s start by looking at the annual figures. The Pension and Lifetime Savings Association (PLSA) separates retirement standards into three tiers: minimum, moderate and comfortable.
- Minimum covers a person’s basic needs, with a little “left over for fun”.
- Moderate means more financial security and flexibility, with room to buy some luxuries.
- Comfortable means luxuries like yearly holidays and regular eating out, for example.
As you might expect, the amount you need differs greatly depending on your aspirations. It also differs based on whether or not you live in London. Below are the PLSA’s recommended amounts for both single people and couples.
Outside London
| Retirement tier | One person | Couple |
| Minimum | £12,800 | £19,900 |
| Moderate | £23,300 | £34,000 |
| Comfortable | £37,300 | £54,500 |
London
| Retirement tier | One person | Couple |
| Minimum | £14,300 | £22,400 |
| Moderate | £28,300 | £41,400 |
| Comfortable | £40,900 | £56,500 |
So, retirement isn’t cheap! Of course, for a lot of people, the state pension will supplement this yearly income, but aiming to retire early means having a sizeable pot to draw from over what (on average) will be around a 25 year retirement.
How big a pot should I have?
Unsurprisingly, retiring at 55 and living a good lifestyle in retirement means retiring with a lot of money. It’s important, however, to remember that your retirement pot can and should be making returns of its own over time.
If your retirement pot is invested in a diversified, well-balanced portfolio, it’s reasonable to expect a return of 4% or 5%. This means that you can take out 4% or 5% of your pension pot every year of retirement at a sustainable rate – in theory, you’ll primarily or entirely be using interest and dividends.
If you wanted an income of £25,000 a year over 30 years, you’d need a pot worth £750,000. For the same income over 20 years, you’d need £500,000. You can subtract the yearly state pension amount from your calculations, but ultimately you will need a large final pot to retire early.
Tips to help you retire at 55
Here are our top tips to help you build a pension pot large enough to retire at 55.
- Have a long-term plan. Without a breakdown of how much you want to save and over how long, you won’t know how much you need to be saving to reach your goals. From here, you can figure out how much to put away into a pension pot every month for the tax relief.
- Start investing early. Having a rainy day fund and being clear of any expensive debt should be your first priority but, once this is done, long-term investing can be a great way to hit your financial goals for retirement. Also, the sooner you get started, the better, as your investments have more time to grow and compound.
- Stick to the plan. Financial circumstances can change and unforeseen situations can arise, but it’s important where possible to be consistent with your retirement saving. As tempting as it can be to spend pension money on more immediate plans, it pays in the long run to keep it up.
- Don’t overpay on fees. Not every pension provider is equal – some charge a lot more than others. Over the long-term, the difference that high fees can make to the final balance of a pension is huge. So, look around for low fees and keep more of your money for yourself. Our SIPPs charge just 0.15% and are capped at £200 a year, for example.
- Consider semi-retirement. The dream of retiring early can be achieved in a number of ways and cutting down on how much you work could be a good stepping stone. You might want to reduce your hours or go freelance to keep your income ticking but also enjoy the free time you’ve worked so hard for – your pot will last longer as a result.
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This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
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