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Retire at 55. How much capital do I need?

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What is a good monthly income if I retire at 55?

Are you looking to retire at 55? When determining how much you may spend in retirement, the research into ‘Retirement Living Standards‘ can provide a helpful guideline. The extensive research shows that for a couple to have a comfortable lifestyle in 2021, they would spend just under £50,000 per year. This drops down to £30,600 for moderate lifestyles. Actual values in areas such as London will be higher than this. On the other side of the spectrum, the research suggests that an individual needs a minimum of £10,900 per year in retirement for a basic lifestyle.

The effect of inflation

The current cost of living crisis is a worry for the majority of people. The Bank of England anticipates inflation to be 13.3% by the end of 2022.

We have not seen inflation at this level since the 1970s, and the impact could be devastating for retirees.

We have estimated the increases for 2022 on top of the retirement living standards figures. A couple looking for a comfortable retirement could face a £6400 increase in the cost of living for 2022, an extra £538 per month. The table below shows the estimates for 2022.

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How much capital do I need to retire at 55?

20X your annual expenditure is wrong.

Whilst some advisors give a simple multiple of your annual expenditure as the amount you would need in capital, we believe this is flawed and highly inaccurate.

Firstly it all depends on the age you retire. For example, a couple of the same age retiring at 55 would have a 70% chance of one of them still being alive at age 85. So using a simple 20X annual expenditure would not be sufficient.

Estimated life expectancy for a couple that retire at 55

Survival probability

“So if your annual expenditure is £30,000, then £600,000 would not be enough.”

As well as life expectancy, you also need to consider inflation. The idea of living off the same level of income each year is not realistic. In retirement, retirees need to consider the cost of living, especially through periods of high inflation.

Ultimately the amount of capital you need to retire on will vary from person to person. We take into account

  • Current and future income
  • Expenditure and inflation
  • The investment returns you require
  • Your anticipated life expectancy
  • Your current and future tax position.

How do we calculate how much you need

Initially, we look at the current income and expenditure. We then factor in known changes such as a reduction in income(for example, if you want to retire at 55).

Expenditure is also reviewed, and any changes will be factored in. We also consider any one-off expenses you might have in the future, such as changing your car or gifts to children.

We can then calculate the difference between your retirement income and your expenses. Once we know if there is a shortfall, our software can calculate where to take your income from.

The software we use is called cash flow software. However, our software is different as it is based on historical returns and inflation. This gives us a better outcome and a more accurate picture of your retirement.

We will consider any pensions, investments property and any other asset that might generate an income for you. Your assets , excluding your main residence can be split to generally three types.

Capital Growth Assets

Any Savings, Investments, Cash or property (Excluding your main residence or second home) can usually be classed as capital or an asset. These assets are often used to generate an income that can be used for retirement.

Although there is a school of thought that you can withdraw 4% of your capital each year without losing money, the reality is that the calculations are much more complex.

A recent report (November 2021) by MorningStar called “The state of retirement Income” updated the 4% rule.

“Investors and Retirees should in the future withdraw only 3.3% of their capital each year to ensure they do not run out of money.”

If you plan to retire at 55, these assets’ value is vitally important. Most Retirees do not want to run out of money so getting the level of income you need to be accurate. However, for most people, it is essential to maintain your standard of living in retirement.

Income Producing Assets

Any asset that specifically generates an income for you. This might include Savings accounts, rental property, income producing investments. We would also consider pensions to be income producing, especially in retirement. Again the 3.3% withdrawal rule should apply. However with pensions you could possibly take a higher level if you accept that the value of you pension assets might reduce.

With your pensions it will depend on the type of pension you might have. This could be final salary, private pensions or an employer based pension scheme.  The pension options available to you could include flexi access drawdown, ufpls or a pension annuity.

Your investments can be reviewed to generate an income for you.

Any income that is generated should be as tax efficient as possible to make sure you pay as little tax as possible.

Income and Growth Assets

Any assets where the aim is to produce an income as well as the possibility of capital growth.

How much capital does the average person retire with at 55?

Many factors are involved with knowing how much capital is needed to retire at 55. An average figure would not do the question justice because it depends on the individual’s specific scenario. In straightforward terms, the amount of capital needed to retire at 55 would be their yearly expenditure multiplied by the years they have left to live. But even beyond this, there are inflation, interest rates, investment returns, inheritance and other sources of income to consider. No two situations will be the same.

The ultimate aim for retirees will be to maintain their current lifestyle in retirement whilst possibly ticking some items off their bucket list. To answer the original question, we will use the value of £30,600 per year for a couple living moderately and assume they live to age 90. This is 35 years, so it would total £1,071,000. Of course, this is shared between two people, but it shows how much is needed to sustain a reasonable lifestyle during a very long retirement.

How do I ensure I don’t run out of money when I retire at 55?

This is a complicated one. It isn’t easy to work out unless you have the best software. Our retirement planning software measures how successful your retirement planning will be. It gives us a success score out of 100. The higher the number, the more likely your plan is to succeed.

Retirement Planning with a difference

However, our software tracks daily the value of your pensions and investments. Your success score is constantly updated, and if we notice a significant drop in your success score, we will notify you for a review of your pensions and investments. This way, you can be assured your plan is on track, and you should not run out of money.

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Reviewing your plan after your retirement

We believe the only way to do this is to use an advisory firm committed to using the latest technology.

Retirement Planning Review

Our retirement planning review service is the first step to helping you into retirement. If you want to retire at 55, we recommend our review service. At the initial meeting, we will gather information from you to input into our cash flow planning software. This will then give us an idea if retirement at 55 is possible. If not, we can consider alternative assumptions to help you with your retirement plan.

Still want to retire at 55? We can help you

If you want to find out if you can retire at 55, please get in touch with us. Retirement Planning is a complicated subject, and we recommend speaking to an appropriately qualified Retirement Advisor.

How to book your free review

To book your free retirement planning review with us, you only need to click the button below or click here. There is no cost for the initial meeting. However, our service is designed for clients with at least £250,000 of pensions and savings.

Click here to book your review

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