How much money do I need to retire early?

Feeling like you are behind schedule in planning retirement or don’t know where to begin? Don’t panic. Consider your options to help build up retirement income.

Common questions about how much to save for retirement 

How much money do I need to retire early?

Saving for your retirement is essential – but how much? To figure out how much you will need to answer two questions: 

1. How luxuriously do you want to live in retirement? One way to roughly determine how much you need to retire comfortably is to use the “70% rule”. This means you will need roughly 70% of your normal working income to maintain the lifestyle you want while in retirement. That means if you are used to living from £40,000 a year, you would need a retirement income of roughly £28,000.

At a minimum, you want your retirement income to cover basic living costs like food, shelter and public transport. The most basic cost of living is about £10,200 per year.

But you also want to add in little luxuries. For a high-end example, according to this retirement savings calculator if you want long annual holidays, regular shopping, to update your car every 5 years, a monthly dinner out and tickets to a show, and to stay on top of home improvement, then you can expect to happily get by with about £37,000 per person per year. 

2. When do you want to retire?  

The later you retire, generally the better your retirement income. This is because you give your money more time to grow. 

You can functionally retire anytime (stop working). If you have a pension, you can access it starting at age 55. That said, the average retirement age in the UK is 65. Knowing what age you want to retire at will help to determine how much pension you'll need.

When should I start a pension? 

The earlier you start saving, the better your retirement income, even if it’s just a small amount.

How much should I be contributing to my pension? 

If you already have a pension and make regular pension contributions, a simple pension calculator like this one can help you see any shortfall between the retirement income you want and what you can expect.  If you don’t have anything saved yet, this calculator can help you figure out how much you should be contributing each month.

Where does retirement income come from?

You don’t want to rely on cash savings to get you through retirement. You can draw a fairly reliable income year after year from all of or a combination of the following:

State pension: The UK state pension pays a maximum of around £8,767 per year. You will automatically receive the maximum state pension if you have paid 35 or more years worth of National Insurance contributions by your pension age. The current state pension age is 65, expected to rise to 68 by 2044. 

Workplace pension plan: If you are employed and over the age of 22 and make at least £10,000 per year in your job, you should have a workplace pension from your employer. A percentage of your salary is automatically put into this pension scheme from each paycheck (this is called automatic enrolment). Your employer also makes contributions to your workplace pension fund, thus increasing the total in your fund. 

Personal pension plan: A personal pension plan is one you personally set up and is not tied to your employer. You contribute your own money into this pot, and the pension provider invests it on your behalf (you have some control over which investments). The government gives you pension tax relief on your personal pension contributions. 

Passive income: Veering away from pensions, you may find it financially sensible to invest in something that pays you back a portion of your investment each year. This can be stocks that pay dividends, or even real estate that pays you rental income each month. You can read more about how passive income works and some ideas here.

What steps can I take to increase retirement income?

Tick tock. There are a couple of things you can do to improve your financial outlook or even retire early:

Increase your workplace and employer contributions 

Employers often match your contributions to workplace pensions. Auto enrolments can set your contributions levels low, so go in (log in to your pensions site) and crank it up. A little sacrifice to your income today can really pay off.

Increase your personal contributions. The government is generous with matching your personal pensions. It will add £25 for every £100 you put in (if you’re a basic rate taxpayer – more if you are a high rate taxpayer). So contribute what you can when you can. 

Open an additional private plan. If you don’t already have a private plan, consider opening one. There are a few types of personal (or private) pension plans, so review your options carefully. Starting a private pension is fairly quick and painless. Registering for one can usually be done online in a few minutes. 

Invest in alternative pension investments 

Passive income from investments made today can earn you money even after you retire.

Consider delaying your retirement or pension

You do not need to take retirement income the day you leave your 9-5. The longer you hold off taking an income from your pension, the more money you can earn when you do. 

Don’t be caught by surprise

Do yourself and future you a favour: understand where you are at currently with retirement savings. And understand what progress you need to make. 

It’s not unusual to have pension accounts with different financial institutions and other investments elsewhere. That makes it hard to keep track. Fortunately, with open banking you can collate and analyse your existing pensions using a service like PensionBee. And you can connect this to your wider finances using Money Dashboard, so you can see all your finances and track savings goals in one place. 

Disclaimer

All content is for informational purposes only and is the opinion of the author. Nothing on this website should be interpreted as "advice". Money Dashboard Ltd make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use.

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