Despite the stark figures, it is possible to retire in your 50s, but you must plan, save regularly and start as early as possible. The first step, says Jeremy Willsher, senior consultant at Sedgwick Independent Financial Consultants, is to calculate the level of income you require in retirement and from which date. “You need to take account of current expenditure and make allowance for inflation. The most difficult part is estimating likely costs and expenditure in retirement.”
It is also important to check that your pension scheme will pay you an income if you retire early. “I had a client in a pension scheme where the standard retirement age was 65 and there was no early retirement factor,” adds Willsher.
Given the fact that the level of income you will receive will decline by between 6 and 8 per cent for every year you retire early, Willsher suggests that one option is not to draw on your pension until you are 65, so you do not lose any benefits or have to take a lower income in retirement.
Will your ship come in?
The next stage is to estimate how much income your current investments and pension plans will provide if you retire early. Pension calculators can help. There's one right here on MSN Money. The calculator enables you to choose your target pension a year and, based on your current salary and age, will calculate how much you need to consider contributing to be able to achieve your desired income.
It can also allow you to select an amount of your salary you would like to contribute into a pension and, based on that figure, will calculate your projected pension fund size and potential income at retirement.
Estimating your retirement income will be helped by the introduction of the statutory money purchase illustrations that will provide an annual guide to how much income individuals should expect in retirement from their existing pension schemes.
For non-pension investments, Adrian Shandley, director of Premier Wealth Management, suggests you assume an annual growth rate of between 3 and 5 per cent. He says the good news is that people forget that take-home pay rises after they retire, resulting from not paying National Insurance or paying into a pension scheme. “Some costs come down as well because you do not have to spend money on clothes for work or travelling to work, for example,” he adds.
Got a shortfall?
If your investments and pensions are going to fall short of the income you will require, you basically have two choices: put back your planned retirement age or save more money. Switching your savings to higher-risk investments to try to make up the shortfall is a dangerous game.
Tony Clemence, an independent financial adviser at the Millfield Partnership, recommends that people phase in their retirement rather than stop work altogether at 50 or 55. “You could move from working five days a week to three with your current employer or take on part-time employment when you retire. This takes the pressure off your savings and pensions.” Clemence stresses that you must also look at the asset allocation rules of your pension schemes: “As you approach retirement, pension funds move money out of equities into fixed-interest investments. But this is designed for those people retiring at 60 or 65. It is important to check that if you retire at 50 or 55 the asset allocation will allow a move into gilts and fixed-interest earlier than the pension fund is programmed for.”
In trying to ensure they have an adequate income to retire early, Tom McPhail, pensions research manager at Hargreaves Lansdown, says the core of your planning should be a pension because it is the most tax-efficient way to save. But he adds there is no single solution for how you save for an early retirement: “You cannot expect to retire early by putting £50 a month into a pension. You should use all your tax-efficient saving vehicles such as ISAs, which also provide greater investment flexibility.”
Ways to top up your pot
If you wish to retire early, it is unlikely that a single corporate or personal pension will be sufficient. McPhail recommends the use of additional voluntary contributions (AVCs) and stakeholder pensions. “You can ask your employer whether you could buy top-up years for your corporate pension as well, which might involve contributions of £100 a month.
“I am a big fan of people using stakeholder pensions, which are cheap and transparent. They are open to anyone who earns less than £30,000 and is not in a corporate scheme. A man or woman could take out a stakeholder in their spouse’s name if they are not working. This also allows spouses to use their tax-free income of £4,500 a year in retirement.”
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