£400,000 in a pension pot sounds like a lot of money, but is it enough to provide a comfortable lifestyle over 40 years of retirement – or more?
After all, if you are looking at retiring at 55, this is likely how long your fund will need to last, especially given today’s higher average lifespans. In this article, our financial planning team offers some practical insights on how you can look at retiring at 55 while avoiding the risk of running out of money.
Is it realistic to retire at 55?
It is possible to retire at 55, but figuring out how realistic it is to retire with £400,000 is difficult. You need to consider many factors, which we discuss below.
First of all, there is the impact of inflation. Inflation is where the “purchasing power” of each pound in your pension decreases over time. For example, £400,000 in 2023 will not be worth £400,000 in 2050. Nobody can predict inflation over four decades, although the Bank of England’s (BoE’s) target rate of 2% per year is a good starting point. Assuming that average UK inflation reflects this over the next 40+ years, your pension pot must grow by at least 2% per year to retain its value.
Taxes, fees, and other costs come into play, of course – which can also erode the purchasing power of your pension). In 2021-22, fortunately, generous UK pension rules means your pension contributions receive tax relief as you build up your pot (equivalent to your income tax bracket). Moreover, your savings are not subject to dividend tax or capital gains tax. Once you start taking an income from your pension, it is subject to income tax. Tax systems could change under new governments – although this appears unlikely to happen any time soon.
Finally, the funds and platforms where your pension savings are invested charge investors so these can be run profitably. Here, you have more control as an investor. A wide range of funds are available on the pension market in 2023, with many decreasing their prices over recent years due to more competition. A financial planner can help you identify a good range of options suitable to your investment goals and risk appetite.
Can you retire at 55 with £400,000?
With all of this now stated, let’s imagine a scenario to see how far £400,000 could stretch in retirement after working for more than 30 years.
Suppose you saved £400,000 by age 55 and are looking to retire soon. If you are comfortable taking on higher investment risk, you can invest most of your pension in equity markets over the coming years. These markets are likely to fluctuate in value as stock markets rise and fall, for this example, let’s assume that you get an overall annual return of 8%.
Remeber, you need to take inflation and investment costs into account. Subtract 2% from this 8% figure in line with BoE’s inflation target, leaving you with a target of 6% average “real return” target each year. Adding up all of your investment costs (e.g. fees, trading & advice), let’s also assume these fees will average around 1.5% a year – leaving a 4.5% real return. We then apply this to your £400,000 pension pot, this means you can withdraw £18,000 annually without eroding too much of your pension pot value in the years ahead.
Removing pre-retirement costs
£18,000 per year might not sound like a lot. However, on average, the annual spending of most people drops considerably in retirement. After all, your mortgage is likely to be fully repaid, commuting costs are no longer needed and your children (possibly!) have left home. You may need much more to sustain a comfortable retirement lifestyle. If so, there are other options you can consider, which include:
- Delaying early retirement and working longer, to build up a larger nest egg which could help you meet your retirement goals.
- Scale back on your desired lifestyle and retire earlier with the funds you have saved.
- Retire abroad to a country with a lower cost of living.
- Downsize and invest the property sale proceeds into your pension and/or an investment account (e.g. a Stocks & Shares ISA), which could help boost your income.
- Take a lower income earlier in retirement until you can access your State Pension from your state pension age, taking pressure off your own pension savings. Bear in mind that, if you retire at 55, then you could be waiting until age 68 (or later) to access this money.
There are other options, too. The key point is to plan carefully with an experienced, qualified professional. It is easy to make costly irreversible decisions on your own, which you may regret later. A financial planner can help you make sense of the complex pension rules and investment dynamics, giving you more peace of mind in the decades.
Are you interested in discussing your pension and investment planning needs with a financial adviser? We’d love to assist you here at Hanson Financial Services. Discover how you can ensure guaranteed income for life post-retirement.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
This content is for information and educational purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated financial advice regarding your affairs please consult us here at Hanson Financial Services (financial advice in Liverpool).