The seemingly simple question of ‘how much do I need to retire at 55’ is actually far from simple to answer definitively. All the articles I read online about it fell very short of providing a comprehensive enough answer to be useful. So I thought I’d write up my thoughts on the matter based on my own personal circumstances.
Single readers please note. I am writing this based on my own circumstances i.e. as a couple, you’ll need to make some adjustments to what follows.
TLDR – What’s my Number?
I’d urge you to read the rest of the article rather than focus on how much I personally think I need to retire at 55, as I’ll go on to explain why my number will not be the same as yours and yours won’t be the same as the next person’s. But for the impatient ones, here’s what I have arrived at:
- I am aiming for a post-tax income of £50k p/a for a couple
- I am using a 3.5% safe withdrawal rate
- Therefore I need approximately £800k to achieve this (which is £28k per year gross @ a 3.5% SWR) with the remaining balance from my DB pension taking me to my target £50k net per year
- If I didn’t have the DB pensions, I would need between £1.5-£1.7m (depending on income tax liability) to generate this income
- My figures ignore the state pension (as I don’t trust we’ll get it)
Why is it so difficult to give a simple answer
Most of the articles I came across said something simple like you need 20 or 25 times your desired income. Basically, they are using 5% or 4% as a Safe Withdrawal Rate, which we FIRE types know all about (if you don’t then read this). But even if you are happy to use 4% (I can’t imagine anyone sane using 5% at age 55) as your ‘Safe Withdrawal Rate’ then there is a lot more to think about than just that.
How much income do you need in retirement?
The articles I’ve read refer to the Retirement Living Standards Study, which I’ve discussed before. This says that for a ‘Comfortable’ retirement you need £37,300 p/a if you’re single and £54,500 if you are a couple outside of London (these numbers are after tax and assume you have paid off your mortgage).
Obviously, everybody will have different circumstances and expectations, so these numbers may be well over or well under what you want (only you can work that out). For me, they are about right and my target after-tax income is £50k for a couple and I think we can have a nice and comfortable retirement on that.
The impact of Tax – the first complication
OK, so let’s go with £50k per annum net as our target income in retirement as a couple. That’s simple right, just using the 4% rule we need the not-insignificant sum £1.25m to generate that income (£50k x25).
Hmm, but how are those assets held and which of you holds them? This is where you really need to think about the impact of tax, mainly income tax.
In the worst-case scenario, all your assets are in a pension (or other taxable vehicle) in one person’s name. If that’s the case (and assuming these numbers are after you’ve taken the 25% tax-free pension lump sum) you need a gross income of around £65k to get to a £50k net income. To generate that £65k you need closer to £1.6m (using the 4% rule).
In the best-case scenario, all your assets are in ISAs, which are totally tax-free. That makes a difference in the capital required between the two scenarios of £350k!
In my case, there is a skew in our assets towards me but it’s manageable in a tax-efficient way with a bit of thought about the order in which we decumulate our assets in the earlier years of retirement.
Some good news (almost) – State Pension
Now for a little bit of good news. If you are entitled to the State Pension (in my case both MAFF & I are eligible for a full state pension) then you can factor this into your numbers, bringing the total assets you require down. The full state pension is currently £10,600 from age 67. So that’s £21,200 of our income covered.
The bad news is that I am rather pessimistic about governments and the state of the UK finances. Basically, I don’t have much faith that in 17 years time when I am due to start receiving it, I’ll actually get it. If I were the government I would means-test the state pension.
I’ll leave you to make your own decisions about that one, but for me, I exclude it from my calculations. If we do end up getting it then I’ll look at it as a very pleasant surprise bonus.
Some more good news – Defined Benefit Pensions
This one won’t apply to most people reading this (sorry) but MAFF & I both have defined benefit pensions (aka final salary) that kick in when we are 60. These pay us a guaranteed income each year which rises with inflation, capped at 5% (who’d have thought that would be a problem!! …inflation is at 8.7% as I write this).
If you are one of the lucky few and have a DB pension then that’s great, especially if it is due to pay you a significant % of the income you need. It removes a lot of the worries about long down periods in the market etc.
The only real conundrum a defined benefit pension gives you is whether to take the 25% tax-free lump sum and whether to take it early (we could take ours at age 55 if we wanted). But that’s a topic I’ll cover in another article.
The 4% Safe Withdrawal Rate – Is it ‘Safe’
OK, back to the bad news. In simple terms, the widely used 4% SWR rule says that if you withdraw 4% or less of your capital each year (adjusted for inflation), assuming it is invested in a broad low-cost index tracker fund, then chances are (based on historical stock market returns), it will last you at least 30 years.
The actual detail behind the 4% rule is a bit more complicated than this and worth reading about to fully understand. But the short answer, in my case, is that I have decided for my own calculations to use 3.5% as a more conservative number for my forecasts (particularly as MAFF is female & will only be 50 when we are due to FIRE, so the money may well need to last more than 30 years).
I’ll also point out that I specifically say I use 3.5% for my calculations. When it comes to actually drawing the money down I’m planning on using a more dynamic drawdown strategy based on where the stock market is at. I think a dynamic approach for actual drawdown makes far more logical sense.
Sequence of Returns Risk
Related to the Safe Withdrawal Rate concept is the Sequence of Returns Risk. In short, this is saying that when you finally pull the plug and retire the market may have a long period of underperformance ahead of it (unfortunately you won’t know that until it is too late).
Let’s say the market is bad for 10 years (which can and does happen) then those investments that you rely on for your income are going to take a battering.
There is nothing you can do about this other than reduce your expenditure/withdrawal rate (hence the ‘dynamic withdrawal rate’) and hold faith that the markets will eventually return to normal.
The main reason for mentioning the sequence of return risk is that if your numbers are really tight it’s a risk you need to think about it.
MAFF & I have already reached Financial Independence (i.e. we have hit our target FIRE number) but we want to wait until I’m closer to 55 to fully retire. I can access the money tied up in my SIPP at that point which means I don’t need to drain our ISAs (which is what we’d need to do to RE now).
This part of the plan is currently a work in progress. MAFF has made the transition to a part-time job in the charity sector which she enjoys and almost covers all our living expenses, but I haven’t quite worked out what I’m going to do yet.
Summary – How Much Do I Need To Retire At 55
I think most of what is written online about how much do I need to retire at 55, or at any age, grossly oversimplifies the answer by using a simple 20 or 25x your desired income to arrive at a figure.
Even ignoring the optimistic assumptions with those numbers, there are many other factors specific to how your finances are structured, your attitude to risk, your trust in the long-term existence of the state pension etc. etc.