£1.3m: the cost of a comfortable early retirement

With a possible return of the pension lifetime allowance (formerly £1,073,100) in the headlines ahead of the general election, new calculations from interactive investor reveal that investors now need a pension fund worth £1.3 million to fund a comfortable early retirement at 55 years old.

• The calculations show a 55-year-old now needs pension pot worth £1.3 million (with 2% inflation factored in) if they retire in 2024 and are aiming for a comfortable retirement, an extra £495,000 compared to if they retired at the state pension age of 67
• Meanwhile, a 60-year-old retiring in 2024 needs just under £1.1 million for a comfortable retirement, £315,000 more than if they retired at age 67
• For a moderate retirement, a 55-year-old needs a pension pot of £857,000, an extra £350,000 compared to retiring at age 67
• In contrast, a 55-year-old needs a pension pot of £230,000 to fund a minimum retirement, an additional £145,000 compared with retiring at the state pension age of 67.

Assumptions: pension needed at state pension age based on PLSA Retirement Living Standards, uprated by inflation of 2% pa. Pension needed to fund early retirement based on PLSA Retirement Living Standards total income needed, 5% investment growth net of fees and income withdrawn increasing at 2% pa.

Methodology of the calculations

We uprated the amounts needed at state pension age according to the PLSA Retirement Living Standards for a minimum, moderate and comfortable retirement, assuming 2% inflation, to work out how much each retiree would need when they reach state pension age.

Amounts needed before state pension age were calculated using the income needed from the PLSA living standards and assuming 5% investment growth net of fees and income withdrawn increasing at 2% pa to work out the size pension pot needed to generate income up to age 67.

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Alice Guy, Head of Pensions and Savings at interactive investor, says: “Many of us dream of early retirement but to get there in style you’ll need a seriously large pension pot. If you’re aiming to retire at 55-years-old with a comfortable standard of living in retirement, you’ll now need a pension pot worth an eye-stretching £1.3 million, based on the PLSA Retirement Living Standards. Even for a moderate retirement you’ll need around £850,000 to retire at 55 and £679,000 to retire at 60-years-old.

With Labour rumoured to be considering reintroducing the lifetime allowance, which was previously around £1.1 million, it’s thought-provoking that this previous level of allowance was arguably not enough for a comfortable retirement if you plan to retire early. This may seem like a high figure, but it factors in future inflation and needing to plug a long gap before the state pension kicks in.

“For a basic, no-frills standard of living in retirement, you now need a pension pot worth just over £200,000 to retire at 55-years-old. This would give you a modest income of around £15,000 each year, which is only really liveable if you have no housing costs.

“With many of us living for longer, retiring early could mean you need to fund over 30 years in retirement and inflation has a big impact on how much you need, £100,000 saved now will be worth a lot less in 15 years, meaning you may need more than you think to achieve a decent standard of living in retirement.

“Using a workplace pension or SIPP is one of the best methods to save for early retirement because your investment returns are sheltered from tax, and you’ll also get and additional tax boost and employer contributions when you pay into your pension. The magic of investment compounding means it’s often easier to get to your investment goals as your returns snowball over time. Starting early and keeping on plugging away with regular investing is one of the best ways to build long-term wealth.

“With the rising state pension age, it’s important to plan ahead and prioritise your future finances. For many of us, working into our late 60s simply isn’t appealing or even possible. In the future, we’ll be increasingly reliant on our own pension savings to fund retirement, especially if we’re aiming to retire early.

“If you’re not on track with your pension then it’s important to remember that how much you need is very individual. We all have different goals when it comes to retirement and how much you needs varies massively depending on your costs, lifestyle and how long you need your pension to last. If you can afford it, then consider increasing your pension contributions as small increases really mount up and can make a big difference when it comes to retirement.”