Are you approaching that milestone age of 55 and starting to think about early retirement?
At this age it’s common to start panicking about what is a good pension pot at 55 and what might happen after you leave the routine security of full-time work. Especially if you haven’t given much thought to it previously. Indeed, since the recent introduction of pension freedoms, you are now able to access your pension savings from the age of 55, whether you are still working or not.
It’s around this age that the thoughts and images of what your retirement lifestyle could look like, starts to transform into a real retirement plan and people often ask ‘how much pension do I need to be able to retire at 55’ and still live comfortably?
Reviewing the state of your finances and figuring out a plan for early retirement can be a daunting thought, but it is a hugely important task that should ideally be done as early in adult life as possible. It is easy for us to say “I’ll do it next week/month/year” when it comes to seriously thinking about pensions, but there are plenty of reasons you should start retirement planning earlier rather than later.
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If you are in your 50s and still unsure how to plan for retirement then you are not alone! There are plenty of people in the same position. Though it is something that you should start to change as soon as you feasibly can.
A comfortable retirement income is one that allows you to maintain your standard of living after you stop working. This includes being able to pay for essential living costs such as housing, food and healthcare, as well as having enough money left over for leisure activities and unexpected expenses. The amount of income needed to achieve this will vary from person to person, depending on their individual circumstances.
It’s also worth noting that the average life expectancy is always increasing. We are now expected to live to the age of 81 whereas in 1990 life expectancy was 75 and the longer you live, the further your pension pot has to stretch!
Planning For Retirement In Your 50s
Most people in their 50s will have more disposable income than ever in their life as a result of adult children who are now financially independent, a smaller mortgage with lower bills if you’ve downsized, and the highest potential for earning from your career. Of course, these situations may not apply to everybody, but it is a general assumption.
It is strongly suggested that you pay off any short-term and usually expensive debt (such as credit cards and overdrafts) before you retire if possible, as taking your debts into retirement with you is a guaranteed way to cause unneeded stress. Long-term debts such as a mortgage are easier to manage, although you would hopefully be well on the way to becoming mortgage-free once you’ve retired.
Reconsidering any investment strategies you already have in place is an intelligent move to make at this point in your life.
You might want to contemplate moving any current investments into lower risk assets such as cash – although it should be noted that lower risk assets offer a lower return for understandable reasons. The other risk with low risk assets – such as a low-interest savings account – is that because of the low interest rates of such assets, they may not keep up with rising inflation rates, which would mean that the value of your money would decline – i.e. it would have lower buying power.
Making decisions about investments is something that an Independent Financial Adviser can help with. When it comes to investing your money, especially when you are nearing the age of retirement, you should always seek professional advice otherwise you risk the cost of losing capital. This could potentially have a devastating effect on the state of your finances at any point in your life, but more-so when you are of retirement age with a lack of regular income other than your pension.
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Consider Consolidating Pension Pots
If you are an employee, your employer is legally bound to put you into a pension scheme, and, where appropriate, make contributions. This is referred to as ‘automatic enrolment’. Any employee is permitted to ‘opt out’ of the workplace pension scheme, although you should only consider this in extreme circumstances.
For the self-employed or run your own business, then pensions are a little more complicated as there are more options available and avenues to go down, and this is where an IFA can be invaluable.
No matter what route you’ve taken in terms of contributing to your pension, by the time you reach your 50s, you will have most likely have multiple pension pots.
It is usually advisable to consolidate pensions where possible, as not only will it probably be easier to manage, but you will likely benefit from lower fees as well.
So, What Is A Good Pension Pot At 55?
How much pension do I need to retire at 55 is a difficult question to answer.
It depends on how you are going to spend that money and how long it needs to last you.
How much income you’ll need to live comfortably will depend on your expectations and unique personal circumstances. How much you’re willing to compromise, if needed? It’s estimated that you’ll need around 65-70% of your final salary to maintain your lifestyle once you retire.
According to consumer group Which? a couple needs a joint household income of just £26,000 per annum to cover living expenses and up to £39,000 if you include luxuries like exotic holidays and a new car every five years.
Other calculations suggest that for an individual to retire at 55 and receive a £20,000 per annum pension income for life, they’d need a £700,000 pension pot, plus a full state pension.
This is a long way, away from the average UK pension pot of £71,342, held by most people aged 45-54.
It is also crucial to recognise the significant impact of inflation on retirement income. Over time, the cost of living tends to rise, eroding the purchasing power of your money. To ensure you can maintain your desired retirement lifestyle, it’s essential to plan for these rising expenses.
Adjusting your pension pots to keep pace with inflation ensures that the income you’ve set aside will retain its value and cover your future needs effectively. Ignoring inflation can lead to a gradual reduction in your spending power, making it a critical factor to consider in your retirement planning.
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State Pension Entitlement?
The full amount of new State Pension is currently £203.85 a week – that’s £10,600 a year. So, relying on state pensions as a sole source of retirement income is simply not practical anymore, especially if you want to retire early and before your normal state pension age, which is currently 67 for the majority of the people in their 50s and only set to increase in the coming years.
It just isn’t enough for comfortable day-to-day living. It most likely wouldn’t pay for added luxuries like holidays and leisure activities, which you would hope you could take advantage of after a lifetime of hard work.
An IFA can assess your current situation with regards to your pension, and help you make informed decisions about what next steps to take.
Whether you are just looking at consolidating pensions into one for ease of access, or you’re a complete newcomer to detailed pension planning and need tailored advice, it’s never too soon (though it can sometimes be too late) to start thinking about putting some solid retirement plans into place.
On Wednesday 22nd November, Jeremy Hunt, Chancellor of the Exchequer, delivered The Autumn Statement. Here is a quick summary, focussing mainly on the changes made to pensions, National Insurance contributions and ISAs. [...]