Retiring early: it’s the dream for many, leaving the weekly grind sooner than planned, and filling your days with what makes you happy – taking advantage of a few extras years of feeling active and energised, before older age brings new challenges. But how feasible is it really to retire when you’re 60, rather than 65 or even later? How much do you need to have in your pension pot to retire at 60, and make the dream a reality?
The answer to that is as individual as you are. It depends on a number of factors, each specific to you: what your retirement expenditure is going to be, what your other income will look like, and what savings and investments you have put by elsewhere too. Let’s look at each of these, and how you can assess them in the context of your own particular circumstances, to decide whether you could retire at 60 – and a few steps you can take to increase the chances as well.
Your Expenditure
Knowing what you expect your outgoings to be in your retirement is the place to start. If you’re not sure where to begin, start with what spend in a typical month at the moment. Take out the expenditure that will be coming to an end – the cost of commuting, work clothes or uniform costs, and even your daily takeaway coffee or lunch out. Then add in any increased expenditure, such as travel and holidays, or a new car.
Remember to factor in how many years you have left on your mortgage, if you have one, or rental payments, and any other costs and bills you’re likely to have from running a home. For a couple, £20k per year is a rough estimate to meet basic needs (council tax, utilities, general household expenditure). But if you add on lifestyle enhancements such as hobbies and holidays, the cost increases – so a more comfortable retirement could be around £45k per year.
Your Income
Once you’ve got your expenditure calculations, have a look at the income you’re likely to have that sits separately from the pension pot you’re paying into. You’ll probably receive the standard state pension each month, and you can find out how much and when you may be eligible to receive it, via this link: https://www.gov.uk/check-state-pension
Look into what other pension schemes you have, and whether you’ll be getting a final salary pension, or a lump sum payout on retirement. Don’t forget any income you have from rental properties or similar, regular interest from savings, and dividends.
Add these up for a typical year – then offset them against your predicted annual expenditure. If your average spend is likely to be £30k, and your annual income from sources like these is £10k, then the actual amount you’ll need to take from a pension is £20k per year.
Do bear in mind, though, that different incomes will start at different times. Your State Pension may not be paid until 66 or 67, and you may not be able to access any final salary pensions until 65. If you’re planning your retirement for 60, don’t forget to factor this into your income calculations for those early years.
Your Capital
This is the amount you’ve got saved up, and includes investments, savings and pensions. If your mortgage will be paid up and you’re planning to downsize, you can include any net gain from selling your home and buying one that costs you less.
You can draw on this capital to top up your retirement income, but do so wisely, to minimise the risk of it running out. Ideally, this is not a route you want to take, because overall it will reduce the number of years’ income you are assured of before your pension runs out altogether.
Do I have Enough?
If your calculations roughly follow the scenario above – ie for a retirement income of £30k per year, offset by £10k per year of other income – your pension pot will need to be at least £500k by the time you’re 60 years old for you to retire at that age, and for the income to remain the same for 25 years (£20,000 x 25).
If it’s not looking like that’s going to be the case for you at the moment, there are steps you can take to make it happen. Save as much as you can each year to increase your capital, and find ways to reduce the retirement expenditure you have planned. Another option is to compromise – stay in work for a couple more years, and retire when some of your larger expenditure commitments have finished – mortgage payments, for example.
Follow the steps above, and you’ll have a good idea of whether or not you’ll be in a position to retire at 60. Consulting a financial advisor will take that even further, as we’ll be able to forecast a number of different scenarios and include variables you may not have thought of – and we can advise you on the best ways to maximise your savings and investments, and safeguard the income you’ll have for as long as possible.
Give us a call today to arrange a review of your own situation and plans for the future, so you can get that retirement date in the calendar.