The financial planning journal

£250,000 in your pension? How to retire early…

15 June 2021

In your mid-40s, with £250,000 in your pension pot? Wondering if you really have to wait until 67 to retire?..

Well, perhaps not – with a little bit of planning and investing you could retire early.

How much will I spend in retirement?

The Pension and Lifetime Savings Association and the University of Loughborough have researched the amount required per annum to provide a ‘comfortable retirement.’ They concluded that, for an individual, it was around £33,000 a year. This sum certainly isn’t a lavish figure: it’s enough to provide £56 a week on food, enjoy a nice holiday in Europe and spend £1,000 a year on clothes, shoes and other gifts. So, perhaps ‘mildly comfortable’ might be a more accurate description.

How you can easily save for a more comfortable, early retirement?

To achieve this, all I’m going to ask you to do is save and invest £1,000 a month. If you are earning £80,000, that’s 15% of your annual salary. Of course, the majority of that could be made up by employer pension contributions, meaning it may not entirely have to come out of your pocket.

If you’re 45 today and your savings are invested well, making a conservative 4% a year, by the time you arrive at your 60th birthday, you’ll have just under £700,000.

William Bengen is an economist famous for creating the 4% rule after analysing 50 years of historical returns across every asset class. He determined that in all circumstances, regardless of when someone retired over the 50 years, they could take annual withdrawals of 4%, and the pot would always last 30-years. By applying this rule, you could take £28,000 a year from your £700,000 retirement pot. Not quite a comfortable retirement but almost.

However, you’ve probably done some quick sums – if it did run out in 30 years and you retired on your 60th birthday, your 90th birthday could be a pretty miserable one…

National insurance contributions

Fortunately, if you’ve made 35 years of national insurance contributions, you’ll be eligible for a full state pension of just under £9,340. For the first seven years of retirement, you’ll have to draw entirely from your own assets but your state pension should be a real game-changer. Due to the additional £9,340 of income (increasing with inflation), your pot should now last well into your late 90s and you can close in on that comfortable retirement figure of £33,000 per annum.

Investing your money across different tax wrappers, to reduce the tax you’ll pay in retirement is paramount as the £33,000 is very much a net figure. The investment strategy you employ will also be of equal importance to ensure your pot is growing at a sufficient rate to reach your early retirement objective.

So, if you’re in your 40s and have £250,000 in your pension pot and want to retire early, get planning, get investing and maybe take some advice!

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