It’s the dream. Early retirement. A stack of cash in the bank. An exciting and colourful bucket list of a million different treats to enjoy. But in reality, how much does early retirement cost? How much do you need to have saved? How long will your money last? And can you plan to retire at 55 with £300k in your pension pot?
Can I retire at 55 with £300k in the UK? If youretire at 55 with £300k in the UK, you could reasonably expect to draw £9-12K retirement income a year (sticking to the recommended 3-4% a year safe withdrawal rate).That’s well below the recommended £17K required for minimum income standards in the UK, much less providing for a comfortable retirement.
If you can live on £10K per year. Great. But if your income needs are greater, you might struggle. For instance, if you plan to take £50K annually, your pension pot will be gone in 5-6 years. So you need to do your homework before you make a decision.
Can you retire at 55 with £300k?
It depends. The short answer is,Yes.It ispossibleto retire at 55 with £300K in the UK. But will you want to? That’s a different matter.
Simon Garber, a Pensions and Retirement Specialist, says,
‘It can be done. We have clients who do it [retire at 55 with 300K]. But they are not really living off just that. They have other assets. And moderate means.’
If you are considering retirement at 55 with £300K in your pension pot there are 4 important questions worth asking yourself.
- How much money do you need each year?
- Do you have any other income?
- What are your retirement lifestyle goals?
- How long do you need 300K to last?
1. How much money do you need each year?
Have you sat down and calculated the cost of your retirement and the lifestyle you want to maintain? What are your financial commitments and outgoings? Now, and in the future?
You generally need more money when you retire younger and are more active (mortgages, dependent kids, hobbies and sports, etc.) Costs then reduce (mortgage free 60’s. Kids flown the nest). Then rise again later (due to costs such as increased insurance, medical and medical care costs). In short, your retirement outgoings aren’t static.
Which? estimates that a comfortable retirement for a single person costs around£20,000per year. This includes such things as European travel/holidays, buying new clothes and recreation/leisure. But this is based on a lot of assumptions.
If you are not sure how much you need in retirement, we’ve createdthe world’s easiest retirement calculatorto help you work out how much you’ll need.
2. Do you have any other income?
If a 300K pension pot is your sole source of retirement income, then how you plan to use it will be wildly different to someone who, for example, is simply using their £300K as a ‘top up’ to their Fun Fund.
£300K can work if you retire at 55. But it’s really important to look at all other possible assets and income you may have available. This could include money from downsizing, investments & savings, income from earnings, inheritance etc. This could also include any tax breaks that might be available to you that could save you thousands in the long term.
It’s important you do your homework. But, ideally, speak to a retirement specialist. It’s their job to make your assets work hard for you.
3. What are your retirement lifestyle goals?
Lifestyle isreallyimportant when considering your retirement and its cost. In fact, lifestyle should be your starting point.
Retirement planning is not as simple as picking an arbitrary figure out of thin air and thinking‘Yeah, I could live on that’.It should be about precise calculations and an in-depth look at the life you lead now, and the one you want to lead in the future.
The Two-thirds rule
The ⅔’s rule is a very crude measure for estimating the cost of your retirement that comes from Target Replacement Rate. But it states that you’ll need between half and two-thirds of your pre-retirement income to maintain a similar lifestyle standard in retirement.
But this is based on quite a few assumptions, such as being mortgage and dependent-free.
If you want help planning your ideal retirement and how much it will cost,you can read our retirement blog or book a free, no obligation chat to see how we can help.
4. How long do you need £300K to last?
That is the golden question. Worthy of its own section (see below). Because no one knows how long they are going to live. And no one knows what life is going to throw at them. So it’s important you cover ALL your bases.
How long will £300k last in retirement?
It depends. YOU are the determining factor. 300K could last you 40 years. Or you could blow it all in the first decade.
The basics
If you retire at 55, and the average life expectancy is around 87, then 300K will need to last you 30+ years.
If it’s your only source of retirement income, until the state pension kicks in at around 67/68, then you are going to have to budget hard to make it last.
Use ourONS life expectancy calculatorto see what your life expectancy is.
The 4% Rule – safe levels of withdrawal
As a general rule of thumb, pension specialists advise that you –don’t take more than 4% of your pension pot each year. This is considered a sustainable amount or asafe level of withdrawal.
That’s because you need ‘wiggle room’ when investing. Markets go up and down. 4% gives you that wiggle room (as long as your pension has been invested properly – not too much risk, not too little).
You will still bedrawing downfrom your pension each year (taking money out). But at a sustainable rate.
So if you take 4% per year from £300k, you could still have money in your pension pot at the end of a 25-30 year retirement.
If you retire at 55, that takes you up to 85 years old (close to thecurrent UK average life expectancy.)
Taking 4% per year keeps your money at a level where it shouldn’t run out. And if there is any remaining after you die it can be left to your loved onesfree of inheritance taxensuring your loved ones are taken care of.
Of course the problem with retirement planning is that none of us know how long we’re going to live. But if we retire at 55, and only plan for a 20 year retirement, those last few decades could be pretty bleak living off state pension alone!
That’s why our Retirement Specialist Simon Garber prefers to work with 3% for those considering early retirement.
“From experience retirement can be ‘suck it and see’ when it comes to planning how much income you need. You’re moving into a new stage of life, and often there are quite a few unknowns.
In addition, managing capital for income is a new step that should be eased into.
Remember, you don’t need to set the income bar high at the start, because drawdown is flexible. You can always adjust your income in the future. Plus, if you’ve underestimated how much you’ll need or need a cash injection to cover a holiday or Christmas etc, you take always take an ad hoc withdrawal.
Nothing is set in stone at retirement, but remember, it’s important to review regularly.”
Not sure how much you could safely draw down from your pension pot each year? Try ourPension Drawdown Calculator.
Retiring at 55 with 300K – using the 4% rule
If you retire at 55 with 300K and use the 3-4% rule (safe withdrawal rate) you would have around 9-12K per year to live on (assuming this was your only income). Let’s call it £10K for argument’s sake.
Can you live on £10K per year in Retirement?
It’s unlikely that you’ll be able to live comfortably on £10,000 a year retirement income; £10K a year is well below the £16,996 the Joseph Rowntree Foundation say you need as aminimum income standard as a pensioner.
Although similar research from Which, puts the cost of a basic retirement for a single person at £13,000 a year, please be aware that this estimate factors in only the very basics – clothes on your back, roof over your head, no treats allowed.
Whilst you might be able to top up your retirement income with your State Pension, you won’t be able to access that until you’re at least 67 years old. If you retire at 55, you could spend the first 13 years of your retirement living on next to nothing.
A more realistic retirement income figure to aim for would be around £20,000 for a single person or £28,000 for a couple, which according to Which? offers a more realistic estimate for a comfortable retirement. This figure includes such things as European travel/holidays, buying new clothes and recreation/leisure.
What if you want a luxury retirement?
A retirement pot of £300,000 won’t stretch to a luxury retirement budget if you plan to retire at 55.
Current estimates put the cost of a luxury retirement at between £32,000 and £44,000 depending on whether you are single or in a couple. This allows for eating out, leisure membership and long-haul travel.
If you assume an income of between £9-12K per year from your £300K pension pot, your 300K pension pot will leave you £23-32K short of this retirement level each year.Even if you add in the full state pension at 67, you’re still going to be well short of your luxury retirement target.
*Please note – all of the above research has its own flaws, limitations, and are based on a variety of different ‘assumptions’. Which is why it’s imperative you look at your retirement as an individual and ideally seek professional advice.
Confused yet? Not sure how much you will need in retirement?
Planning your expenses in retirement can be a daunting task, especially if you’re planning years ahead, so we’ve createdthe world’s easiest retirement calculatorto get your started.
We also cover 3 simple ways to work outhow much you need in retirement in our cost of retirement blog.
