Monday, August 3, 2020

Can I retire at 55 with £300k?

The answer to that question isn’t straightforward. There are nuances to it and many things to consider before arriving at a conclusion. There is another important question that needs answering here. Will you want to retire at 55 with £300k? It might not be as great as you think. In case you have made up […]

Can I retire at 55 with £300k

The answer to that question isn’t straightforward. There are nuances to it and many things to consider before arriving at a conclusion. There is another important question that needs answering here. Will you want to retire at 55 with £300k? It might not be as great as you think. In case you have made up your mind about retiring at 55 with £300k, the things discussed in this post are what you need to seriously consider. Let’s get started:

Retiring at 55 with £300k: Things You Must Consider

1. How much money do you need each year?

Before you can consider retiring at 55, you need to figure out the kind of lifestyle you will have after retirement. You will need to calculate your financial commitments and outflow of cash. Not just now, but in the future as well. Will all your liabilities be settled by the time you reach the age of 55? When people retire at a relatively younger age, they usually need more money. That’s mainly because they still have liabilities such as mortgages, loans, dependent kids and are generally more active (spending more money on hobbies, sports, etc.). Retiring late definitely costs less. Most of your liabilities will be paid off and kids would’ve moved out. However, costs might rise again as well. The reason behind that could be more expensive insurance premiums and more money spent on medical care. What that means is that your expenses are not going to stay constant throughout retirement. So keep that in mind.

It’s widely estimated that one person needs to have at least £20,000 per year in order to live comfortably. This cost will also include things such as European holidays, new clothes and recreational leisure. However, this is based on some assumptions.

2. Do you have any other source of income?

If £300k is your only source of retirement income, then you will have to use it in a different manner than someone who has other sources of income and uses the £300k as a bonus or top up fund. £300k can definitely work out for you if you retire at 55 but you need to figure out your income from other assets as well. These assets could include things like money from downsizing, investments & savings, income from earnings, inheritance etc. Tax breaks available to you can also help you save lots of money in the long term. You can also speak to a retirement specialist to help make your assets work for you.

3. What retirement lifestyle do you envision?

Just like it was in your pre-retirement years, your lifestyle will have a major impact on calculating how much money will be enough for you to retire. As a matter of fact, you should start your retirement planning with lifestyle in your mind.

Don’t just select some arbitrary number and think that you can live on that. Make precise calculations and take an in-depth look at the life you lead now, and the one you want to lead in the future.

The Two-thirds rule

The two-thirds rule is a very crude measure for estimating the cost of your retirement. It comes from the Target Replacement Rate. As per the rule, you need to have something between half and two-thirds of your pre-retirement income to maintain your lifestyle in retirement as well. This rule assumes that you will be free of mortgages and dependents in retirement.

4. How long do you need 300K to last?

At the end of the day, it all boils down to this question. So we are going to take a more in-depth look at this.

How long will £300k last in retirement?

To keep it straight, it all depends on you. You can spend it all away in a few years or you can use it for 30-40 years.

The basics

Based on the UK’s average life expectancy of 81 years, if you retire at 55, you will need your £300k for more than 25 years. If it’s your only source of retirement income, until the state pension kicks in at around the age of 67/68, you will need to do some serious budgeting in order to make it last for that time.

The 4% Rule – safe levels of withdrawal

As a general rule of thumb, don’t take more than 4% of your pension pot each year. Anything above that won’t be considered a safe or sustainable amount for withdrawal.

The chief reason behind that is that you always need some ‘wiggle room’ when investing. Markets go up and down. 4% gives you that wiggle room. You will still be taking money out from your pension each year, but it’s sustainable at this rate. So if you take 4% per year from 300k you could still have money in your pension pot at the end of a 25-30 year retirement.

If you retire at 55, that takes you up to 85 years old (beyond the current UK average life expectancy that we discussed before).

Taking 4% per year keeps your money at a level where it won’t run out. And if there is any remaining after your demise, it can be left to your loved ones free of inheritance tax ensuring that they are taken care of.

Of course, the problem with retirement planning is that none of us know how long we’re going to live. But if we retire at 55, and only plan for a 15-20 year retirement, those last few decades could be pretty bleak living off state pension alone.

Retiring at 55 with £300k– using the 4% rule

If you retire at 55 with £300k and use the 3-4% rule you would have around 9-12K per year to live on (in case it’s the only source of income for you). To make it easier to discuss and calculate, let’s fixate on £10k. Now, the question arises, can you live on £10k per year? £10K a year is only just above the £9,397 the Joseph Rowntree Foundation says you need as a minimum income standard as a pensioner. Keep in mind, 55 year old retirees are likely to be far more active than pensioners.

If you read this research, or any similar research (with similar research findings of 10k per year), please be aware that they only factor in the very basics, clothes on your back, roof over your head, and that’s pretty much it.

With the state pension only available from the age of 67 (and rising) you could spend the first 12 years of your retirement living on just the bare minimum.

Now that we have established that, let’s work around a more comfortable number for retirement. How about £20k per year?  This includes such things as European travel/holidays, buying new clothes, and recreation/leisure. While that sounds amazing, if you only have a £300k pension pot as your source of income, you will fall £8-11K short of this retirement level each year. If you want a really luxurious retirement, with eating outside, global travel and leisure membership, you will need to spend at least £33k per year. So choose accordingly.

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