Do I have enough to retire at 60? | How much do you need?

Do I have enough to retire at 60?

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    If you are heading towards 60 and have had enough of work, the prospect of retirement may be very enticing. You may dream of travelling, spending more time on the golf course, or simply putting your feet up. But can you afford to retire at 60?

    The state pension age is 66*, so retiring at 60 requires a private retirement income. Your lifestyle expectations, pension savings and other income determine how much you need to save to sustain you through retirement.

    *67 by 6 March 2028

    That said, it’s by no means a simple calculation, as external market factors and changes to your circumstances can significantly impact your plan.

    If you’re wondering if your pension savings plan will allow you to live in the style you wish in the 6/7 years before your state pension kicks in – and beyond – read on for our professional advice.

    Heritage Financial Planning has helped hundreds of happy clients plan for the retirement of their dreams. Please get in touch for personalised advice and support to reach your retirement goals.

    How much pension income do I need to retire?

    Calculating how much income you need to retire is hardly an exact science. It depends on whether you have any other sources of retirement income (for example, rental income or a Defined Benefit/final salary pension) and if this is enough to sustain the retirement lifestyle you desire. Whether you are frugal by nature or want to live a more luxurious lifestyle naturally determines how much income you will need.

    It also depends on whether you wish to purchase an annuity or put your savings into a drawdown. An annuity offers a set income for life, whereas, in drawdown, you keep your pension pot invested and take whatever income you wish.

    The Retirement Living Standards survey sets out how much you would need for a minimum, moderate and comfortable retirement in the UK. I must stress that these figures are based on an average and are for guidance only.

    Retirement living standards survey

    To work out how much you need to retire at 60, it’s essential to complete an income and expenditure exercise for the present and your retirement years. You may have debts now, most likely an outstanding mortgage, that will be paid off by the time you are 60, so you should factor this in. Also, consider the increase in expenditure for things like holidays if this is a part of your retirement vision.

    How much money is enough to retire at 60?

    Once again, I stress that this is not a black-and-white solution. However, to give you an idea of how much you may need in your pension pot to retire at 60, let’s look at an example.

    We will use cashflow modelling software to factor in the below assumptions:

    • John and Karen retire early, aged 60.
    • Their pension pots are worth £300,000 and £100,000 respectively. 
    • Once they reach state pension age, John is entitled to the full state pension of £10,600 (in today’s money) as he has 35 qualifying years of National Insurance contributions. Karen took a break from employment for several years and is entitled to a reduced state pension of £7,000. 
    • Their retirement expenses are £34,000 per year, the amount needed for a couple looking to enjoy a ‘moderate’ retirement in the UK, according to the Retirement Living Standards survey.
    • We’ll assume their expenditure reduces by 20% when they reach age 75 as their lifestyle slows and their spending naturally decreases. We’ll increase the expenses by 3% per year to factor in inflation.
    • Their drawdown pensions grow by 4% annually, net of all fees, and they invest in a balanced portfolio.
    • Finally, we will set their life expectancy as 90, as they are both in good health. I’ve tried to be conservative with these figures and err on the side of caution, as according to the Office for National Statistics, the actual life expectancy for a 60-year-old man and woman is age 84 and 87, respectively. 
    Average life expectancy

    The results – their pension pot runs out at 77

    Running this through cashflow software shows that if Karen and John retire at 60, their retirement savings will run out at age 77, highlighted by the sinister red bar.

    cashflow software shows that if Karen and John retire at 60, their retirement savings will run out at age 77

    This is well before the assumed life expectancy of 90, meaning they face the unpleasant prospect of worrying about paying bills and keeping the lights on in their final years.

    Pension withdrawal rate is crucial

    Between their retirement at 60 and receipt of the state pension at 66, their only form of income is from their private pension pot of £400k. If they take £34k annually, the withdrawal rate is 8.50%.  

    This is significantly more than what is considered a ‘safe withdrawal rate’ of between 3% and 5%. Worryingly, a study by the FCA in 2021 shows that the average individual drew down 8% of their annual pension. 

    If this figure is accurate, excessive drawdown could be a ticking time bomb, with retirees blowing through their pensions very quickly. After the money is gone, they will find themselves relying solely on the state pension, which, depending on their lifestyle, might not cut it.    

    What steps can be taken to ensure you don’t run out of money in retirement?

    On that cheery note, we will now reverse-engineer Karen and John’s situation to see how they can sustain their pension pot to age 90.

    We will look at two scenarios:

    1. Delaying retirement.
    2. Downsizing to free up equity for their retirement.

    1 – Delaying retirement

    The benefits of this are twofold – their pension pot will naturally last longer, and potentially, their pension investments will have more time to grow. Although, this could be a double-edged sword if markets perform poorly on the eve of their retirement.

    retirement  savings when reitrement is delayed

    If they delay their retirement age by just three years and retire at 63, they won’t run out of money during their lifetime. As we can see, there are no distressing red bars as in our last example.

    By age 74, their combined pension pot will still be worth over £160,000, which their loved ones could potentially inherit tax-free if they passed away before 90.

    2 – Downsizing

    If John and Karen are determined to quit work and retire at 60, they can consider downsizing later in retirement.

    If we assume their home is valued at £450k, mortgage-free, and they downsize to a property worth £300k at age 70, this will free up £140,000 (minus an estimated £10k for costs and fees).

    retirement savings if couple downsizes

    In this scenario, even if they retire at 60, they would run out of money at age 89, but it’s certainly a much brighter prospect than in our first example.

    Risk of income drawdown – sequence of investment returns

    So far, in these examples, we have assumed the growth has been nice and linear each year at a steady 4%.

    The reality is that financial markets are a lot more volatile, as you can see from the table below that shows historic US stock market returns:

    Table Showing historic US stock market returns from 2000- 2022

    ‘Sequence of returns risk’ refers to the order and timing of investment returns and can significantly impact how long your retirement funds last.

    Let me give you a simple example to illustrate the point.

    Imagine you have just retired and have started taking a regular income from your pension fund. Suddenly, the stock market experienced a 30% crash. This situation poses an additional risk to your retirement income plan because you withdraw money from your pension pot at a lower fund value. This means you are effectively taking out more money relative to the new pot value, which could crystallise the previously unrealised losses. 

    Let’s put this into context and return to the example of John and Karen delaying their retirement by three years. We will use the real-life example of the stock market crash of 2008, in which the UK stock market lost over a third of its value before recovering by 2012.

    Graph showing how sequence of returns risk can affect delayed retirement

    While in the original scenario, John and Karen don’t run out of money during their lifetime, in this scenario, they will now run out of money at age 86.

    To learn more about investing the stock market, read our informative guide here.

    How to keep on track with retirement planning

    While a cash flow assessment is an essential component of planning for retirement, early or not, it is by no means a set-and-forget plan.

    It’s impossible to control variables such as investment growth, life expectancy and changes to your circumstances. Life is changeable, and your retirement plan will likely age almost immediately. So, staying agile and having regular reviews are crucial to keep your retirement plan on track.

    Is an annuity a good retirement option?

    If you are uncomfortable with investment risk and market volatility, a guaranteed income could be more appropriate. With an annuity, pension income is guaranteed, so there is no risk of the money running out as with a drawdown.

    However, unlike an income drawdown, changing the agreed income amount is usually impossible once the annuity is purchased. This can be a problem if you wish to retire at 60 and take an income from your private pension, as you cannot reduce it once your state pension or final salary pensions kick in.

    Talk to Heritage Financial Planning and start planning for early retirement today

    As the examples in this article show, there are a lot of variables when it comes to retirement planning, and it is not an exact science. To make the right choices for your circumstances and goals, seeking professional financial advice is essential.

    The financial advisers at Heritage Financial Planning can give you independent advice on pensions based on factors such as your lifestyle, savings, health and appetite for risk. Call us today to arrange a consultation and take control of your retirement planning.

    The value of investments and any income from them can fall as well as rise, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance and should not be relied upon. Annuity rates may change in the future, which could reduce the potential income.

    The figures in this article are based on various assumptions, which are impossible to control, such as life expectancy, growth rates and inflation. If the figures are much worse, this can affect the sustainability of your pension fund.

    Picture of Alex Norman-Jones​

    Alex Norman-Jones​

    I am one of the founders of Heritage and I am highly motivated to deliver bespoke financial planning solutions to my clients.

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