When can I retire?

1. The desire to retire

When someone tells us they want to retire (at any age), our first question is always: why? The ‘why’ is always the starting point for lifetime financial planning, and as you can imagine the answer is different for everyone. The reasons we hear often include:

• “I have worked for many years and have done my time”
• “Running a business is stressful and I want to sell it”
• “I want to explore the world”
• “Spending more time with friends and family is really important to me”
• “My parents died young and I want to enjoy life whilst I still have time”

Having established this, our next step would be to explore in great detail exactly what you will do in all the free time you will suddenly have.

The reason for going into so much detail – before we even think about the numbers – is because retirement at any age (like life in general) is all about getting the right balance.

For example: people that are really fed up with work might go from a five-day working week to zero work overnight – and immediately discover that it comes as a big shock to the system. But those that have a financial planner working by their side are, more often than not, armed with the knowledge that they could completely stop working if they really wanted to.

With the financial aspect to retiring removed from the equation, they will suddenly find the weight has been lifted off their shoulders, and they are now working on their own terms. This is incredibly empowering, and we often see clients decide to transition into retirement over several years (even if they can afford to retire outright), and gradually transition towards retirement.

This is just one example: you will have your own reasons for wanting to retire. But once that ‘why’ is broken down in detail, you’ll be able to put a plan in place that realises your goals. And if you’re working with a financial planner, you’ll almost certainly be surprised at what’s possible.

2. The means to retire

In other words: can you afford to retire? Again, ‘balance’ is the key.

The average life expectancy for a 55-year-old living in the UK is 84 for a man and 87 for a woman, according to the Office for National Statistics (ONS). Great – so if you stop working at age 55, you need enough money to last you roughly 30 years, right?

Not exactly.

These figures don’t take into account differences in region, socio-economic standing, personal health and so on. Plus, an average life expectancy is exactly that: an average. Millions of people will die earlier and millions will die later; the average of all these is the number that sits in the middle. This might sound like morbid thinking, but it’s really the opposite: we must think positively when planning for retirement! If your plans assume you live to 85, but you actually live until age 100, you may have no money for the last 15 years of your life.

We call this the ‘flaw of averages’. It is one of the biggest risks when it comes to retirement planning, and it’s the biggest reason that there’s no one-size-fits-all approach to the topic. You will probably have seen articles online – often in a ‘listicle’-type format – that offer simple rules about when to retire. Because of the ‘flaw of averages’, these articles are completely and utterly useless.

ONS predictive statistics for a woman currently aged 55

If you can see past the rather gloomy nature of the exercise, we encourage you to look at the ONS life expectancy calculator for yourself. It will also show you the chances of living to the State Pension Age, and of living to 100 years old.

In the example shown on this page (for a woman currently aged 55), there may only be a 1 in 10 chance of living until age 99. But it is a good idea to plan for living at least that long, just in case. Some people are convinced that because their parents died young, they too will die young. Sure enough, 20 years after their self-predicted death, they are still going strong – but having spent a large proportion of their retirement funds. For couples, there is 25% chance that you’ll both live to 95 and a 50% chance that at least one of you will live to 95: put that way, you can really see how you need to plan ahead for a long life.

Don’t forget the ‘doubling’ effect

Remember that for every extra year you work, you could have two years’ less to fund in retirement. That’s because in addition to your retirement period being one year shorter, you’ll have earned an extra years’ worth of savings, pension contributions, and investment growth, which will in itself fund one year of your retirement.

Other things to factor in when considering your ‘means’

There are a number of other things to consider, and all of them revolve around finding that all-important ‘balance’. These could include:

• Matters of inheritance: You don’t want to retire too late, with too much money that you will never spend or that you pass on to children when they are already older and don’t really need it. As one of our clients bluntly put it – “you don’t want to be the richest stiff in the graveyard”! But at the same time, you need to make sure you have enough to see out your days in comfort
• You’ll need to balance up whether you want to spend more to enjoy life now whilst you are still working, or to be more deliberate with your current spending to ensure your future financial security
• You might want to weigh up spending more in your earlier years of retirement (e.g. going on that round-the-world trip whilst you are still young, fit and healthy, or one-off big purchases like motorhomes and cars), against having a nest egg for later life to get the level of long-term care you may need

3. How much do I need for a good retirement?

How long is a piece of string?

This really depends on what is classed as a ‘good’ lifestyle for you. It usually follows that this is linked to the kind of lifestyle you have become accustomed to in the lead-up to retirement. It sounds like an obvious statement but the amount we ‘need’ in retirement can vary wildly from person to person.

Whatever that amount is for you, it’s important to remember that you must end up with this amount after paying any tax – which can have a big impact on which pots we need to take money from, and in what order.

As a starting point, Which? Regularly surveys its retired members to find out how much they need in retirement for different lifestyle types.

Image: ‘Which’ Magazine

‘Essential’ spending covers everything needed just to get by (such as food, transport, utility bills, clothes, etc). The ‘Comfortable’ income target includes leisure activities, short haul holidays and gifts. The ‘Luxury’ target also includes home improvements, health club memberships, long haul holidays and a new car every five years.

Retirement Living Standards research carried out by the Pensions and Lifetime Savings Association gives a broadly similar picture, albeit with slightly higher amounts than the Which? Research. (Please do note that the figures given in both of these examples will have increased significantly over the last couple of years due to inflation.)

Image: Pensions and Lifetime Savings Association

Typically, our own clients have household retirement target incomes of £75,000+ per year and often have the ability to take income far above their targets. But ultimately, your ‘Number’ will depend on what you want to do in retirement and the type of lifestyle you wish to have.

How do I calculate my ‘Number’?

When working out what this is, you need to be very diligent in calculating not only your essential spend, but what you will actually want to spend on the ‘nice-to-haves’: the fun things in life, like going out, entertainment and holidays. Our experience tells us that around 90% of people underestimate this, so be careful – it can lead to you not enjoying the retirement you had hoped for.

We always tell our clients to dream big – you only get to enjoy one retirement! The key is to be honest with yourself (and us!) so we can properly plan for the amount you’ll need.

You will also need to think how your spending will change once you stop work. You will not have commuting costs to contend with, but you may travel more to see friends and family. You will have likely paid off your mortgage by the time you stop work, but are you spending more on activities and entertainment because you have more free time?

It’s highly likely the kids will have flown the nest by that point too – however, you may be spending money on helping them out (with house deposits, perhaps, or school fees for the grandchildren). You will probably be paying less tax than when you were working too: at the very least, you will not pay national insurance unless you continue earning money through work.

A useful rule of thumb is to assume you will need two thirds of your gross salary to maintain a similar level of lifestyle in retirement. Of course, rules of thumb should only be seen as a starting point to determine the right level of retirement spending for you personally. There is no substitute for detailed financial planning.

The Retirement Spending Smile

The Retirement Spending Smile principle says that people typically spend more in their early years of financial independence, because they are young and active and want to travel. Spending then typically tails off when they reach their late 70s/early 80s as they take less holidays, stay closer to home and are generally less active.

Spending may then increase again in their later years if they have to pay for care, which can last a few years.

If there are big one-off spending plans in the first few years of retirement (a new car, a motorhome, a cruise to Antarctica…) we would also take these into account when creating a client’s financial plan.

Inflation-proof planning

The amount we need in retirement will also go up with inflation. An estimation of £50,000 per year for retirement in in today’s money might, in 20 years’ time, actually translate into £100,000 per year. This is why we always need to inflation-proof our income and pots of money as much as possible. You can find out more about how this can be managed in the ‘retirement income’ section below.

I know how much I need – what’s next?

Once you know how much money you think you will need per year, the next steps are to understand how you will meet your needs.

4. What guaranteed retirement income can I get?

You should aim to get at least the State Pension, but other forms of guaranteed income are also available.

The State Pension

The State Pension is currently paid out to people who reach age 66 and have built up enough qualifying years. As previously mentioned, this age is increasing to 67 and then eventually to 68. Independent researchers have suggested this needs to increase to 71 in order for the State Pension to remain affordable for the government. Because of this uncertainty, it is vital that you also make the most of private pension arrangements (see section 5, below) to help mitigate any gaps you may face.

Once you reach State Pension Age, you can choose to delay taking your pension (which will result in a slight annual increase). However, the lost income whilst you are not receiving it can mean this is not a good idea.

You will need at least 10 qualifying years to get any State Pension and typically 35 years to get the full State Pension (broadly speaking, you are accruing ‘qualifying years’ if you are employed or self-employed, but do check the government’s own guidance for an extensive definition). Some people need more than 35 years (for example if you have been a member of a public sector pension scheme such, as the NHS pension).

The full State Pension will pay £11,501 per year from April 2024, meaning a couple could receive £23,002 per year. The State Pension does not transfer to a spouse on death.

This income is really the bedrock of your retirement planning. It is guaranteed to be paid out for the rest of your life and will increase in line with inflation (currently measured by the triple lock). This is why it is vital to ensure you will be entitled to the full State Pension before you reach State Pension Age.

You can check your State Pension forecast and contribution record via the Government Gateway. It is important to focus on the text under the forecast number in the big box. This will tell you how many more years you will need to contribute to get the full amount. If you have gaps in your record, there is a limited window to make good any shortfall and you should seek advice as soon as possible. If you do have to make up any shortfall, the State Pension is an extremely good value investment to make in your future financial security!

Other guaranteed pension income (final salary pensions)

If you have been a member of a defined benefit pension scheme (also known as final salary or CARE schemes) – for example because you work in the public sector, or have an old private sector pension, then this will provide you with an income for life. This pension income will come in on top of your State Pension and form part of that bedrock of your retirement planning. It may well get you most – if not all the way – to your income target.

There are many different schemes out there, but they all have features in common and some may provide extra benefits as well. A defined benefit pension:

• Will provide you a guaranteed pension income for life
• From a specified age (usually between 60 and State Pension Age)
• There is usually some inflation-linking as well
• If you die, your spouse or partner is usually entitled to a percentage of your pension for the rest of their life (typically between 33%-50%)
• You may be entitled to an automatic tax-free lump sum when you take your pension, or have the option to give up some of your annual income in exchange for a tax-free lump sum (known as commutation)
• You can usually take your pension before the specified age (although you can’t be younger than 55 when you do this) – however, you will likely have to give up some of your annual income to do so (usually 4% for every year early you take it)

You may also be entitled to an annuity, which again is usually an income for life and will have some or all of the features listed above.

This pension income is very valuable – because of the guarantee for life, it will not dry up as you get older. However defined benefit schemes are very complicated and it can be a minefield when negotiating all the options available to you. You only have one chance to take the right option for you, and so you should seek advice to ensure you fully understand all of the consequences. This gives you the best chance of ensuring your future financial security.

Other Income

You will need to consider any other sources of income you might have in retirement. These could include:

• Consultancy work, where people transition into retirement and can often earn very good money due to their experience, for a relatively small time commitment
• Rental income (this is becoming less favourable due to the high interest rates, tax regime and illiquid nature of property)
• Dividends from shares (for example: if you set up a business during your career, then you might retain shares in retirement)
• Deferred consideration from a business sale (where someone receives the proceeds over a number of years)

Any extra income you expect to receive will again go some way to meeting your retirement income targets. The real question you have to ask yourself here is: how long will this other income last?

And how long do you want it to last? For example: do you really want to be running a rental property portfolio rather than enjoying retirement? Or would you rather have access to the capital from the properties now?

And if your various incomes lead to a surplus? Well you can either spend it, or save it for future years when you may need it.

5. Growing your income even further: using investments to achieve the retirement you want

Financial planning: could it extend your life expectancy?

Be warned that working with Montgomery Charles is likely to make you live longer! A recent study has found a correlation between good financial planning and increased life expectancy. Okay, this correlation hasn’t been proven (yet!) – but it’s not hard to imagine how this could be true.

• The stresses and strains of managing your own finances and planning for the future should not be underestimated. The reassurance of having an expert by your side, doing this for you, can relieve this burden
• Those who work with a financial adviser a number of years before they want to retire, rather than at the point of retirement, will likely be in a much better financial position due to taxes saved, investment growth and other factors. This means that our clients often retire several years before they originally planned to when they first started working with us – an obvious reduction in stress at a key stage in their lives
• More time spent doing the things we want to do (both pre and post-retirement), is likely going to mean we are happier, healthier and live longer
• Our clients have more money in retirement and so are able to live the lifestyle they want to live. Because we always encourage our clients to ‘get more life out of life’ (our motto), we are helping them ensure their money is always working in the best way for them

This is why we always plan for a client to live to at least 100 and sometimes beyond!

Your next steps: is going alone the right option for you?