How much do I need to retire at 55?

Source: Expenditure comes from PLSA, November 2024. Pension pot estimates are from Nutmeg, created using a model that makes several other assumptions set for the purposes of comparison, but in reality may change and go down as well as up. Assumptions as follows: 1) Inflation increases outgoings by a steady 2% per year, every year. 2) Net growth rate in the pension portfolio remains steady at 3% per year, every year after charges and inflation. 3) Any tax free lump sum has already been taken. 4) Tax is paid on income drawn from the pension at 20% 5) The unlikely scenario that the personal allowance - on which income tax is not charged - remains steady through the 25 year period at £12,570. We have assumed state pension deferral. 

Any mathematicians out there will have noticed that all of the above total pension estimates are pretty close to 25 times the annual expenditure estimates. So a rule of thumb could be to put aside 25 times what you expect to spend. 

Why then go to the trouble of building a model and explaining the assumptions that went into it? It's important to understand the assumptions, as if these change, the amount in your pot will change, and you can't therefore regard these figures as set in stone.

How much would you need to save, from today, to retire at 55?

This is a complicated question to answer for a number of reasons.

Let's say you started contributing seriously to a personal pension today at the age of 20.

To save the £1,100,000 figure suggested above for a "comfortable" retirement by age 55, a 20 year old today would need to save around £1,500 per month. That's assuming the savings pot is growing at the conservative net growth rate of around 3% used above, at the same time as growing through your contributions.

The problem is, there are a lot of variables that might change all of the above. £43,100 in 35 years is not going to be worth the same in real terms as it is today. Factor in inflation and, over the course of 35 years, you might need to have built up a considerably larger pension than the one that should sustain a retiree today.

There are other unknowns. For 20 year olds today, the minimum age of retirement will likely be higher by the time they reach 55. 

Additionally, with very few exceptions, earnings rarely peak in our 20s. For the majority of people, our earning power is highest in our mid-to-late 40s. When you're earning more, you should be able to put more into your pension than you can when you've just begun your career.

What if you started planning for retirement at age 30? Or 40? A 30 year old has less time to save, so where a 20 year old in the example above would have to put away £1,500 per month, the figure for a 30 year old would rise to about £2,500 per month. For a 40 year old, it might be as much as £5,000 per month. But it is also much less likely that a 30 or 40 year old is starting entirely from scratch. Most people this age are likely to have contributions of some sort made by an employer into a workplace pension pension, and may have even added to these contributions themselves.  

Any scenario one might consider will share one thing: the earlier you start thinking about your pension, the more likely you are to achieve the outcomes you want. 

While it is never too late to make a plan, a long-term commitment of regular contributions may give you the best chance of building a sizeable pension pot. 

You can get an idea of how much you would need to save regularly from various ages, by using the Nutmeg pension calculator.

The calculator makes a number of assumptions, so the results should only be used as a guide (it also assumes living in retirement for 20 years rather than our more optimistic 25).

Is a £500k pension pot enough to retire at 55? 

For many people £500,000 has become a ballpark figure to aim for, and it is within reach for many more people than the kind of sums our number crunching produced above. In many cases, the answer is yes, £500,000 would be enough.

The research we've presented here focuses on personal pensions, and so doesn't take into account any State Pension entitlements. While you'll have access to workplace and private pensions at 55, you won't be able to receive State Pension until you reach a certain age and this has to be factored in.

The state pension age is set to rise from 66 to 67 by end 2028, but this is reviewed regularly. You can find out your state pension age on the UK Government website. Meanwhile, the government also forecasts how much you might get from the State Pension, which also depends on your date of birth.

If you’re a man born on or after 6 April 1951 or a woman born on or after 6 April 1953, you’ll get the new State Pension. The full rate of new State Pension is £221.20 per week for the 2024/25 tax year, though this is dependent upon your National Insurance record. The new State Pension was introduced on 6 April 2016. Everyone eligible for the previous basic State Pension has now reached State Pension age. The full basic State Pension is currently £169.50 per week.

The Government is legally required to increase the basic and new State Pension each year at least in line with average earnings. Under its ‘triple lock’ commitment, the Government will increase State Pensions by whichever is highest of average earnings growth, consumer prices index (CPI) inflation, or 2.5%. 

The triple lock has been in play for more than a decade, except for a temporary suspension in 2022/23. However, there is no guarantee that this will continue indefinitely.

Why should I invest in a personal pension?

A personal pension can be a prudent and tax efficient way of investing for your post-work life. You can open a personal pension and contribute yourself. You could also transfer existing personal pensions, and/or workplace pensions you no longer contribute to, if it is appropriate (note that not all workplace pensions should be transferred as it could result in you losing valuable benefits). You can choose how a pension is invested and what level of risk you’d like it to be set at. You can have a personal pension – containing these consolidated pensions – alongside a workplace pension to which you and potentially your employer contribute.

Tips to help you achieve your goal of retiring at 55

We asked Claire Exley, Head of Advice and Guidance at Nutmeg, for her four step guide on how to to achieve your goal of early retirement: 

1. "Know what you have and make a plan. This sounds simple but lots of people don’t understand their existing pensions, where they're invested, what the charges are, and how much they will need for a comfortable retirement. Getting advice or guidance can make a real difference here.
2. "Consider consolidating your pensions. If you have your pensions in one place it can make it easier to manage and potentially reduce fees (providing you don’t lose any valuable benefits – see point 1, know what you have!)
3. "Make the most of any employer contributions from workplace pensions. Often your employer will match your contributions so if you’re not making the most of this you could be missing out on free money.
4. "Take the right level of risk for your time horizon. If retiring is a long way away you may be able to take more risk as you have time to ride out the ups and downs of the market – the default option for your pension might not be right for you (point 1 again!)"

Need further financial guidance? We're here to help

We appreciate that planning for retirement can be a complex undertaking, regardless of your age or when you plan to retire. This article may act as a rough guide to get you started, but all individuals have different financial circumstances.

You may wish to speak with a professional to tailor a plan specific to your retirement goals. 

Nutmeg has a team of qualified financial planners on hand who offer restricted financial advice. You can expect a fully personalised recommendation on your finances, just remember that as this is restricted, we can only advise on Nutmeg products and services.

You can book a free consultation with a member of the team; they will get to know a bit about you and your circumstances, and then recommend whether or not advice could be right for you. If you choose to go ahead, we'll build your financial plan and help you implement it for a one-off fee. 

If alternatively you'd just like some guidance, you can book a call with an expert, free of charge. Financial guidance means we can provide you with useful factual information on what each investment product does, to help enable you to make your own decisions.

If you're unsure which service is best for you, feel free to give us a call. Our team are on hand to help you make the decisions that are right for you, your circumstances, and your money.