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How you can retire at 55

As you stand stuck on a crowded commute, your dreams may wander to an early retirement. The prospect of being able to retire early is what keeps many going through the daily grind, and it doesn’t need to be a luxury kept for a fortunate few.

Whether you dream of an around-the-world cruise, writing a best-selling novel or starting a new hobby, careful financial planning will take you closer to making your dreams a reality.

By prioritising your earnings, savings and investments, you too can retire early – although it will take some sacrifice along the way.

How much will you need in retirement?

The good news is that most people overestimate how much they’ll need in retirement. To maintain your chosen lifestyle, you’ll need between half and two-thirds of your annual salary when you hang up your work boots.

After all, you’ll probably have paid off the mortgage, won’t have to fork out for your commute and the kids will – hopefully – be independent.

For a comfortable retirement, you’ll need around £26,000 a year – that’s around £2,200 a month, according to Which?. With that you’ll be able to pay for the essentials, as well as a few luxuries – a couple of European getaways a year and eating out, for example.

If you want to swap your city breaks with long-haul flights and get a new car every five years, you’ll need £39,000. As you get older, your priorities will probably change and your regular holidays might be replaced with high insurance bills.

State pension

You’ll get a helping hand from the government in the form of the state pension – as long as you’ve contributed to national insurance for between 10-35 years. You’ll get around £8,500 a year from the government, unless you reached the pension age before 6 April 2016, which means you’ll get the old state pension of around £6,500.

If you’re not sure how many qualifying years you have built up, you can find out through the Department for Work and Pensions.  

Whilst you can normally access a workplace or personal pension at the age of 55, you won’t be able to get your state pension until pension age – which the government wants to rise to 68.

Unfortunately, you won’t be able to rely on the state pension to retire early or achieve a comfortable retirement. Instead look to supplement your income with a personal pension.

If you want to have an income of £25,000 a year gross, and assuming you will have no state pension income, you’re going to need a pension pot worth a minimum of £500,000.  

The logic behind this is that from a balanced and diversified portfolio, it’s reasonable to expect an average annualised return of around 5% over the long term.  Assuming this is your return, if you withdraw up to the same 5% each year, you’ll never deplete the nominal value of your pension over time.

If you want an income of £39,000 a year, you’ll need at least £780,000 when you retire if you want to withdraw 5%. If you’re a bit more conservative over your expected returns and want to withdraw 4% a year, you’ll need a pension pot worth at least £973,500.

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By making an investment, your capital is at risk.

Whilst you might aim to retire early, you might need to work longer or slowly reduce your working hours to easy yourself into retirement whilst sustaining an income.

Tax incentives

There are generous tax incentives available to savers to encourage them to save more for retirement. You’re able to claim tax relief relative to how much tax you pay.

If you want to contribute £10,000 to your pension, everyone needs to pay in £8,000. You’ll receive basic rate tax relief at source of £2,000, taking your total contribution to £10,000.

If you’re a higher or additional rate taxpayer, you can claim further tax relief from HMRC via your tax return.

You can also take 25% of your pension pot tax-free once you hit 55. After that you’ll need to pay income tax on your pension income, but as you’re likely to be earning less in retirement, you might pay less tax. If you received 40% tax relief on your contributions, you may only pay 20% tax on your withdrawals.

You can use Moneyfarm’s Pension Calculator to help you work out how much you need to be saving a month to get the income you want in retirement, or start one of Moneyfarm’s regular investment plans.

Five tips to retire early

  1. Start early

Once you’ve paid off expensive debt and saved up three months of your outgoing in a rainy-day cash fund, it’s time to make your money work harder for you. The earlier you start the better, not only do you put more money aside, but you also benefit from compound interest – one of the most powerful forces of investing.

  1. Set a target and invest as much as possible

Take the time to set a budget, taking into account when you want to retire and how much you’re going to need. Then it’s time to put as much as you can aside each month into your pension. You won’t be able to get this money back in an emergency, so make sure you can afford it.

  1. Keep more of your money

Don’t let expensive management fees eat into your retirement savings. There are low-cost opportunities for investors wanting to protect their money and grow it for their future.

  1. Don’t sacrifice your pension savings

As you go through life you’re going to come up against competing priorities, whether it’s getting on the housing ladder, spending on your children, or house renovations. Try not to sacrifice the amount you put into your pension – it may be tough at times but it will be worth it in the long run.

  1. Ease yourself into retirement

You might want to slowly reduce your working hours before giving up work for good. That way you can enjoy some more free time, but still benefit from regular income. You won’t be using your pension pot as quickly as if you gave up work straight away.

  1. Decide what to do with your pension pot carefully

What you decide to do with your pension savings can make the difference to your financial security in retirement. If you want regular income you can swap your savings for an annuity, although the annuity rates are often low. If you want more flexibility in retirement, you can keep your money invested in the market and withdraw as you like. Be careful though, once your savings are gone, they’re gone.

Making sure you plan for retirement in the best way for you and your family can be difficult. If you need any help, talk to an independent financial adviser.

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