“Can I afford to retire at 55?”
This short blog will help you to understand:
“Can I retire early?”
“Can I retire at 55 or 60?”
“How long will retirement last?”
“What do I need to do to retire early?”
If you’re sick of the daily nine-to-five grind, you might be thinking about retiring early.
Unlike your parents’ generation, when employers tended to set a default retirement age of 65, you can usually start withdrawing money from a private pension any time after age 55. The government has indicated that this will be increased to age 57 from April 2028.
Whether it’s feasible for you to quit work at 55 depends on several factors, including how much money you’ve saved for retirement, what you want to do in retirement, and your projected life expectancy.
Without careful financial planning, there’s a risk that you’ll run out of money and your dreams of a comfortable retirement will be shattered.
To help you decide whether retiring early is viable, I’ve highlighted below the important things you need to think about. In the meantime, if you’re looking for retirement advice near Bath, please don’t hesitate to contact me.
Your retirement could last 40 years
Life expectancy has risen significantly over the past few decades. Figures from the Office for National Statistics show that in 1980, a male aged 55 could expect to live an additional 20 years, while a female could expect to live an extra 25 years.
In 2019, these figures increased to 27 years and 30 years, respectively, meaning the average 55-year-old should be prepared to spend three decades in retirement.
Remember, these are average figures. A 55-year-old man has a one in 10 chance of living to 97 and a 55-year-old woman has a one in 10 chance of living to 98. Your pension money might need to last 40 years, which is no small feat.
If, sadly, your health means you can’t look forward to a long life, then retiring early could enable you to make the most of the precious years you have left.
What you do in retirement will impact when you can finish work
No two retirees are the same. Your retirement plans could be very different from your neighbour’s and cost significantly more or less. For example, if you intend to spend your time hiking and gardening, this is likely to be cheaper than travelling to far-flung places around the world.
Having a rough idea of what you want to do in retirement is important because it will have a bearing on how much money you need and, therefore, when you can afford to finish work.
It’s worth thinking about what your expenses are likely to be on a monthly or yearly basis, so that you have a concrete figure to work towards.
I use cashflow modelling tools to help you work out your projected retirement income and demonstrate whether you’re on track to meet your goals.
The healthier your finances, the higher your chances of retiring early
Whether or not you can retire early will largely depend on the current state of your financial affairs. In general, the healthier your finances are, the higher your chances are of being able to retire early.
Some of the questions to ask yourself include:
Is my mortgage paid off?
Have I paid off my other debts?
Have I saved up enough money to cover emergencies?
Will my pensions and investments generate enough income in retirement?
If you’ve answered ‘yes’ to all of these questions, then retiring early could be feasible. If not, it might be wise to push your retirement back a few years until you’re on more solid financial footing.
Retirement savings can come from many sources
The next step in deciding whether you can retire early is to work out how much money you’re likely to have at retirement.
This might sound easy, however, lots of my clients don’t realise that retirement savings aren’t just your pension. Your overall pot of money can come from a range of sources, including:
The State Pension
Personal and workplace pensions
Savings accounts
ISAs
Other investments.
To get a true picture of your retirement wealth, you’ll need to add up all the money in your various savings and investment accounts. This might involve digging out paperwork from accounts you set up decades ago.
If you’ve moved jobs throughout your career, you may have forgotten about some of your workplace pensions. If so, you can use the government’s Pension Tracing Service to track them down. You can find out how much State Pension you could get, and when you can get it, via the government’s State Pension forecast tool.
I can help you calculate your projected retirement wealth and show how much income it is likely to generate.
Retiring early puts more strain on your finances
The sooner you stop working, the greater the strain on your finances. Your money will have to last longer and you’ll have had less time to build up savings.
Research by Brewin Dolphin shows if someone with a £400,000 pension retires at 55 on a retirement income of £25,000 a year, they could risk running out of money at age 78. However, if they worked until age 60, reinvested growth within their pension, and added a £10,000 lump sum from excess income, they could still have more than £74,000 left by age 100. These figures assume annual growth of 4% and inflation of 2%.
It’s also worth bearing in mind that you won’t immediately qualify for the State Pension if you retire early. A 55-year-old retiring in 2020 will have to wait until age 67 to draw their State Pension, meaning they’ll have more than a decade in retirement without this extra source of income.
I can show you what impact each year of early retirement will have on your finances, and help you decide whether you can really afford it.
Get in touch
If you’d like to find out whether an early retirement is possible or are looking for pension advice near Bath, please get in touch. Email daniel@wiltshirewealth.com or call 01225 699790.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
