How much will I need to retire at 55? A guide to retiring early

How to retire at 55 versus any other retirement age? 

People’s expectations about their retirement age have changed considerably in recent years. Changes to the state pension age and the impact of an increasing life expectancy have had a big effect. 

In October 2020, the state pension age – the age at which you can start to receive the state pension – for men and women increased to 66. However, younger people will likely have to wait even longer as the state pension age is currently expected to increase up to 67 by 2028 and, with the state pension age constantly under review, it could increase further.  

Further to this, the number of years you have to make National Insurance contributions to qualify for a full state pension has increased from 30 to 35. 

So, if the state pension age is a decade later than 55 – why do many people think about, or aspire to, retiring at 55?  

The most likely answer is that 55 has traditionally been the age at which people have been able to access income from their personal pensions, and therefore became synonymous with retirement. In addition, the pension freedom reforms that came into effect in April 2015 gave people much greater flexibility about how they accessed their pensions once they reached 55 – reinforcing the idea of retiring at 55.  

Given today’s economic climate, retiring early may seem like an ever-dwindling possibility. However, many people fall short of retiring when they want to simply because they don’t start planning early enough. It’s so important to start early and to make the most of the tax allowances, pension plans and other saving and investment options available.

With sufficient planning and movements such as the FIRE movement (Financial Independence, Retire Early) we could see a growing number of people begin to actively map out their lifestyle choices for retirement much earlier on in life. 

How much do you need to save to retire at 55? 

The size of your retirement fund, and the precise amount you’ll need to save each month to retire at 55, depends entirely on the kind of lifestyle you plan on having in your retirement.   

According to research conducted by Which?, couples will need an annual income of about £25,000 to have a comfortable retirement. This covers all basic areas of expenditure and some luxuries such as European holidays, hobbies and eating out. 

Assuming you retire at 55 and bearing in mind the current life expectancy in the UK is around 81 years, your pension needs to provide income for at least 26 years. To provide this level of annual income, you’d need a pension savings pot of just over £460,000 that keeps up with inflation.  

A more luxurious retirement, including buying a new car every five years and taking long-haul holidays, would require an annual household income of £40,000, which means a pension pot of more than £730,000! 

The value of compound returns when building a pension pot

One of the keys to being able to retire at 55 is to give your pension pot as much time as possible to benefit from the powerful effect of compound returns. 

To put compounding into context: a 30-year-old who starts putting aside £500 a month into a pension pot with Nutmeg in our fully managed risk level 7, assuming 20% tax relief at source, could build a retirement pension pot of around £389,686 by the time they’re 55. If they’d started their pension pot five years earlier, they could have a pot in the region of £554,554 at 55 (in both cases, predicted returns net of fees, based on all-time performance of fully managed Nutmeg Portfolio 7. Calculation assumes returns are reinvested and don’t take inflation into account). All thanks to the benefits of compound returns.  

Our compound calculator can help you see the benefit of starting your investment journey earlier.  

Ways to boost your retirement fund 

Employer pension contributions can make workplace pensions an attractive option. The auto–enrolment rules mean all employers must now offer employees access to a pension. The employer pension contributions they make will, of course, enhance any contributions made by you (unless you opt-out, which is usually not a good idea). 

Workplace pensions also offer tax advantages. Provided you contribute to the pension via the payroll, your contributions will be taken from your pre-tax salary, which means you’ll save all the income tax you would have paid on that money. This is commonly referred to as salary sacrifice. 

You can also set up a personal pension alongside your workplace pension scheme. Benefits may include easier access to information about how your investments are performing, freedom to increase, decrease, or pause payments, and greater control in terms of how your money is invested. 

The pension provider will usually claim the basic rate of tax on your behalf and add it to your pension. So, if you contribute £100 to your pension, you will get £125 invested in your pot. If you’re a higher-rate taxpayer, you can claim back any tax paid at the higher rate via your annual personal tax return. 

As long as your money stays in your pension, there will be no tax on growth or income, but there can be tax to pay once you take your money out when you’re over 55. 

Further reading: Six simple tricks to turbocharge your retirement

Understanding the risks of investing

As with any investment, individuals investing into a pension scheme need to consider their attitude towards risk and the effect this will have on the performance of their overall investment pot. 

The more risk you’re exposed to, the greater the potential returns tend to be. You should be aware that a higher-risk approach to investing may also result in greater volatility, so the value of your investments could go up and down more sharply. 

This can be less of an issue when a longer-term view is being taken, as is often the case when you’re considering your pension options, as there’s more time for investments to recover from dips in value. 

As you get nearer to your retirement date, it’s a good idea to review your attitude to risk and make any adjustments to your portfolio. You’re getting closer to deciding how you take income from your pension, so your attitude to risk may start to change. 

Keeping track: the benefits of consolidating pension pots

Keeping a close eye on pension schemes that you are making contributions towards is essential, as is being aware of any pension pots that you may have stopped paying into, perhaps because you’ve changed job. It’s important to ensure you don’t have money sitting in a poor-performing pension or one that’s suffering from high annual charges, or else it could damage your returns and impact your target retirement age. 

Consolidating old pension pots into a current scheme, or with one provider, could prove beneficial. For one, it can help you keep track of your future finances more easily by having all your pension pots in one place – one beautifully organised retirement fund to keep an eye on. You could also save on fees, which will be key if your plans to retire at 55 are to become a reality. 

Before transferring pensions, beware of any exit penalties or transfer fees that might apply. It’s also worth remembering that some old pensions, especially final salary schemes, have valuable benefits that would be lost if transferred, so you may need to do some homework. 

New pension rules mean greater freedom if you do retire at 55 

Changes that came into force in April 2015 as part of the government’s sweeping pension freedoms reforms now give you much greater flexibility and control of your long-term financial planning. 

Instead of having to convert a retirement pension fund into an annuity that pays a guaranteed income, you can withdraw all the money in one go (25% of it as a tax-free lump sum, the rest taxed), or drawdown income as and when you require to minimise the amount of tax you pay. 

Remember, there’s also the State Pension to consider. Provided you have met the criteria, such as having 35 years of National Insurance contributions, the current state pension works out at £9,110.40 a year. So, once you reach the age at which you can start to receive it there will be some additional income to supplement your own pension pots.  

If it’s your goal to retire at 55, it’s not unachievable. The sooner you start putting money into a pension, the better position you’re likely to be in later in life – and the more chance you may have of enjoying that dream retirement lifestyle. 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Pension rules apply and tax rules may change in the future. If you need help with pensions, seek financial advice. Projections are never a perfect predictor of future performance and are intended as an aid to decision-making, not as a guarantee.