This is exactly how much you need to have in the bank at every age to NEVER work again. And it's surprisingly easy to achieve
The idea of quitting work for good is the ultimate dream for many people. But swapping the daily grind for a life of leisure requires careful planning – and a sizeable savings pot.
A survey of 6,000 people by insurer Standard Life found that those aged 18 to 28 hope to retire by age 60 on average and those aged 29 to 44 by age 61. Yet most people admit they probably won’t be in a position to stop working until they’re 67.
So exactly how much would you need to swap your office desk chair for a deckchair? We’ve crunched the numbers to find out.
It’s never too early to start planning ahead
The starting point for retirement planning is deciding the income you will need to fund the lifestyle you want. Consider what you want retirement to look like, from holidays and socialising to where you’ll do the food shop.
Pensions UK, an industry body, compiles Retirement Living Standards, a set of figures that offer a guideline as to how much different levels of lifestyle could cost.
A minimum lifestyle, for example, includes enough for a £55 weekly food shop and one takeaway a month, an annual half-board holiday and £450 a year to spend on clothes. A single person would need an annual income of £13,700 to provide for this.
Achieving the dream retirementis achievable if you plan wisely
A moderate lifestyle includes £56 for the food shop plus a weekly takeaway, a two-week all-inclusive holiday and £1,550 a year to spend on clothes, plus extra for hair and beauty. A single person would need £31,700 a year for this.
Crucially, these figures assume no housing costs, so if you have rent or a mortgage to pay, you’ll need to factor this on top.
Early retirees have something else to bear in mind too. Typically, you can factor the state pension into these numbers, meaning your personal savings have less heavy lifting to do.
With the new full state pension at £12,547 a year, an individual would need to generate £1,200 for a minimum lifestyle or £19,200 a year for a moderate one.
But early retirees must do more. While pension savings are the cornerstone of any retirement plan, you cannot access this money until later in life – typically the age of 55 (57 from 2028) for private savings and 67 for the state pension.
That means someone retiring at 50 has a gap of at least five years to bridge, and someone who stops work at 40 has at least 15 years before they can access their retirement savings.
Be sure to factor this into your plan. Those hoping to retire early will need to make use of other savings vehicles, such as tax-free Isas, and even consider other potential sources of income, such as a buy-to-let property.
But first, before we get started...
To work out exactly how much money is required to make the dream a reality, we need to make a few assumptions.
Firstly, we assume that someone is aiming for a moderate lifestyle, requiring an annual income of £31,700.
More difficult, but crucial to determine how long your pot needs to last, is life expectancy. Here we assume the money needs to last until the age of 86, which is a typical life expectancy.
However, many live beyond this, so you may want to factor in for longer. One option is to assume you will access the value of your home through equity release in your later years – remember you always have your state pension.
Next, we consider how the saver will access their money. For this, we assume they do not withdraw 25 per cent of their pot as a tax-free lump sum but put it all into drawdown. This is a flexible way to manage retirement savings, where the money is left invested and you can withdraw from the pot as you need it.
Our sums assume that the money invested continues to grow at 4 per cent above inflation, so if inflation averaged 2 per cent, the returns would be 6 per cent a year.
Finally, these numbers are based on an individual. However, in reality many people will be saving and planning as part of a couple. This is often easier as you can share fixed costs, such as bills. Pensions UK says a couple seeking a moderate lifestyle would need an income of £43,900 between them – equivalent to £21,950 each, far less than someone going it alone.
Tips on how you can retire at age 60
Retiring at 60 is an achievable ambition for many. Those who start saving into a pension early in their working life have had decades for their money to grow.
Working on the previously mentioned assumptions, this person would need savings totalling about £510,000, according to the wealth manager Quilter Cheviot. This would provide an income of £31,700.
For anyone planning to retire after age 57, pensions are the priority. You can currently access your pension from age 55, but this is rising to 57 from 2028.
Not only are they incredibly tax-efficient because you get tax relief on your contributions, you also get employer contributions, which means you have to save less of your own money to reach your goal.
Someone who starts work aged 21 on a salary of £35,000, which rises with inflation until they are 60, could build a pension pot worth £266,000.
Pension planning is key to a financially healthy retirement
This assumes minimum pension contributions under auto- enrolment, which is 8 per cent of earnings – 5 per cent from the employee and 3 per cent from their employer.
To build the remainder, the saver should make use of their annual Isa limit. Adults can put £20,000 a year into these accounts and all gains are tax-free. If they contributed £135 a month to their Isa from age 21 to 60, it could grow to £251,000.
The two pots combined should provide enough to live on for life. Ian Cook, chartered financial planner at Quilter Cheviot, says: ‘This is a sweet spot for retirement planning. For most people, aiming for retirement around 60 with focused, consistent saving is a very realistic and sustainable goal, particularly when combined with the full state pension from age 68.’
What you need to do to retire at 50
Retiring younger means you need to make more use of savings outside of a pension to bridge the gap until you can access your retirement savings. Quilter Cheviot estimates that someone hoping to retire at 50 would need total savings of about £600,000.
Saving into a pension from age 21 to 50 could build a pot worth £157,000. Saving an extra £400 a month into an Isa could generate a pot of £373,815 to cover the rest, says Quilter.
Take steps to boost your pension pot if possible. Increase contributions after a pay rise and consider funnelling workplace bonuses straight into the pot.
Many employers will contribute more if you do the same, so find out what is available – this is essentially free money. If both the saver and employer in this example increased their contribution by 1 percentage point, the pot could be worth £195,000 – an extra £38,000.
With less time to build a pot, savers might consider other sources of income. A buy-to-let property can be one way to generate a passive income. The average rent in England is now £1,424 a month. But there is more to consider. Alex Race, chartered financial adviser at Rathbones, says: ‘Void periods, maintenance, tax, higher mortgage rates and admin costs can all eat into returns, and landlords must factor in the hassle of ongoing tax reporting.’
One alternative is to let a room in your own home. Under the Rent a Room scheme, households can rent a fully furnished room in their main residence and earn £7,500 a year from this tax-free.
I’d like to retire at 40. can that be done?
Retiring at 40 is not impossible, but the money needs to last for a very long time. Quilter estimates that someone planning to retire at this age would need around £760,000 to generate an inflation-linked income of £31,700 a year until the age of 86.
The financial independence, retire early (FIRE) movement is all about saving hard while you are young in order to retire as soon as possible. To achieve this, these savers typically aim to put aside as much as 70 per cent of their earnings.
Freelance work can provide useful income if you choose to 'retire' young
Quilter estimates someone working from age 21 to 40 could build a pension pot worth £103,000, meaning they would need another £565,000 to fund their living costs until they can access this money. This would require investing about £1,250 a month into an Isa for that period.
Rather than give up work entirely, some savers could consider going part-time or freelance. Alternatively, generate income from a hobby, such as crafting, tutoring or dog-walking. Research by the savings app Spring found this can typically generate almost £1,000 a year.
Cutting costs is one obvious way to reduce the amount you need to save, says Race: ‘The lower your spending, the less income you need to retire.
‘For couples who can live on around £25,000 a year, their future state pension could cover most of it, meaning they only need to save enough to bridge the gap until then.’
But even then, earlier retirement brings other planning headaches, which can make it difficult to work out what your needs might be. Race cautions: ‘The earlier you retire, the longer your money must withstand inflation, market shocks and potential policy changes.’
Is it possible to retire even younger?
For those hoping to retire in their 30s, the sums become quite colossal. However, anyone lucky enough to have had parents saving for them from a young age could still find it achievable.
Parents can put up to £9,000 a year into a Junior Isa for their children and, just like an adult account, all the gains are tax-free.
Investing the full amount each year from birth could build a pot worth £309,000 by the time their child turns 18, assuming annual returns of 6 per cent. At this age, the young person is able to access their money – but those who do not will reap the rewards.
Putting cash in a junior ISA can give children a very strong financial headstart
If the pot is left to grow, it could be worth £633,000 by the time they are 30, assuming they make no further contributions.
Those who keep adding to the pot can boost it further. Contributing £250 a month from ages 18 to 30 could see it reach £686,000 by the age of 30.
A junior self-invested personal pension (Sipp) can lay the foundation for a luxurious retirement. Parents can save £2,880 a year into a pension for under 18s, which is topped up to £3,600 with tax relief.
Investing the full allowance every year until age 18 could build a pot worth £123,600. But crucially, this money cannot be touched until at least age 57.
If it continued growing at the same rate, it could be worth an incredible £1.35million by that age, even if they never contribute another penny.
Cook says: ‘Not every family can afford to save at this level, but even smaller sums invested early can have a meaningful impact decades later. The key lesson is that time in the market matters far more than trying to save large amounts later in life.’
Do you plan to or have you retired early? Let us know your tips: money@mailonsunday.co.uk
