How Much Do I Need to Retire at 55?
Updated: May 18, 2022
Retiring at 55 can seem like the height of luxury if you’re still slogging away at work, but your golden years are going to be more enjoyable if you have enough money to support yourself and your lifestyle. So how much do you need?
A general rule of thumb is that you should have 10 times your annual income saved up, but this depends on many different factors, including your monthly expenses and whether or not you have family members who could offer financial support in the event of an emergency or a long-term illness or disability.
In short, if you want to retire at 55 you need a pension fund or pot of circa £750,000 for a £30,000 per year income, or nearer £1,000,000 for a £40,000 income. This is the natural yield available for those sums.
Determine your monthly expenses
How much do you spend on a monthly basis for food, entertainment, clothing, etc.? How much can you reasonably reduce your expenses and how quickly can you find ways to cut them?
What are some easy things that can be cut immediately if need be and what are some other areas where cuts will be harder (such as housing or transportation)?
It's helpful if you break it down into smaller chunks too. For example, while figuring out how much money you'll need each month in retirement, breaking it down by month gives you a better picture of whether there are any big expenditures coming up (like mortgage payments or child-related costs) and allows for more flexibility in figuring out ways to get around those large monthly bills.
Lets assume for illustration purposes, that your total monthly expenses including everything was £2,500 per month.
Calculate your current income
The first step to knowing how much you need for retirement is figuring out your current income. If you're not sure how much money you make, get familiar with your payslip or P60, which will give you a good idea of your gross salary.
From there, determine what percentage of that money is going into retirement and emergency savings (you want those numbers in your head).
Then figure out where you stand on health insurance and other benefits that you will have to pay yourself if your employer is currently paying for them. How much do those cost monthly?
And lastly, how does your current income look versus your current expenses including all items like groceries and entertainment etc.
Once all that's figured out, add it all up and start dreaming about a life without work!
For illustration purposes we shall assume that your current income level is £3,000 per month after tax.
Invest in long-term growth investments
Earning money from savings is simple in concept, but unfortunately, it's not so easy in practice. Compounding interest on a nest egg sounds great in theory. But, for most people, it's easier said than done.
To grow a nest egg by even just 3 percent per year requires putting away 20 percent of your gross income each year. And that can be tough when you're barely covering all your living expenses after taxes and retirement plan contributions are taken out of your paycheck each month.
The best solution is a balanced investment portfolio that includes growth investments like stocks and real estate as well as stable investments like bonds and cash equivalents—all tailored to meet your particular financial goals (and taking into account your risk tolerance).
Use a retirement calculator
There are a bunch of tools out there for estimating how much you’ll need to retire. One calculator we like is Bankrate’s retirement planner, which estimates how much you’ll need, based on factors such as whether you have a pension, if your partner works and how many years until retirement.
Account for taxes
The most basic rule of thumb for retirement is that you’ll need 70% of your income during your working years in order to maintain your standard of living when you’re no longer employed.
That means, if you make £50,000 a year right now, you should plan on needing £35,000 a year once retired.
However, before you decide what percentage of your current income is enough to survive on in retirement, it’s important to take taxes into account.
Most people pay a lower rate of tax during retirement than they did in their working lives, so UK pensioners are likely to pay the basic rate of 20% taxation.
Choose the right investment strategy for you
It’s crucial that you pick a retirement strategy and investment mix that fits your personality, risk tolerance, and specific needs.
If you have time on your side and are patient by nature, you may want to consider a more conservative approach.
(That’s not necessarily a bad thing. Saving for retirement is all about long-term thinking.) If you don’t want to run out of money in retirement—and are willing to accept potentially bigger but hopefully fewer returns—you could try taking on a little more risk. Investing with index funds and ETFs can be a great way to do that.
Consider different scenarios
Early retirement depends on a number of factors. If you have a DB pension with your employer, estimate how much that would be worth at retirement.
If you have other assets such as stocks or bonds, find out what they're worth and plug those figures into any retirement calculator you can find.
You might need about 70% of your pre-retirement income in today's money to maintain your current lifestyle in retirement. That amount increases if you want an extravagant lifestyle (yachts and private jets don't come cheap) or decreases if you're planning on skimping it out (Aldi living).
Another thing to consider is how much money will be coming from the State Pension when you retire.
How Much Do I Need to Retire at 55 - The Bottom Line
While early retirement isn’t for everyone, you should have a plan and a number in mind. Start by finding out how much money you'll need to retire comfortably—then work toward achieving that goal.
Using our very basic illustrations above, if you had £2,500 of monthly expenses on average that needed to be replicated, you would need a defined contribution pension fund of circa £750,000. This would generate £30,000 per year at 4% return.
You could of course mix it up by taking the 25% tax free cash, and a lower monthly income, whilst also thinking about any other income streams you may have.