When can I afford to retire?
Retirement is no longer the cliff-edge it once was. In the past people tended to work until a retirement age set by their employer or the State. But you can now usually work for as long as you want and you don’t have to retire all in one go. If you are considering taking your pension early you should understand how doing so will reduce your retirement income and make sure you have what you need for the whole of your retirement.
- How long will my retirement be?
- How much income will I need?
- Draw up a retirement budget
- What income will I have?
- The State Pension
- Salary-related pension from your employer
- Workplace or personal pension where you build up your own pension pot
- Other income
You may choose to retire gradually or to carry on working for longer perhaps moving to part-time work before you stop completely.
When you give up work you’re likely to lose your main source of income. So you need to make sure you’ll have enough income from other sources before you retire.
It’s hard to know off the top of your head much income you’ll need. But there are several things you can do and think about which can help you decide when you can afford to retire.
How long will my retirement be?
Retirement can last for 30 years or more depending on when you retire and how long you live.
Most people underestimate how long they’re likely to live. A 65 year old man now has a 50% chance of living to 87 and a 65 year old woman a 50% chance of living to 90 (Source: ONS data, 2014).
The longer your retirement, the longer your retirement income needs to last. If you have a secure income for the whole of your retirement this is not a problem. If you don’t, then you need to make sure your money doesn’t run out before you do.
How much income will I need?
Your spending and the amount of income you need will change when you retire. You won’t have any work expenses but you may spend more time on hobbies or at home which could mean your household bills increase.
Cashing in your pension to clear debts, buy a holiday, or indulge in a big-ticket item will reduce the money you will have to live on in retirement, and you could end up with a large tax bill. If you need to clear debts get specialist help – see Where to get free debt advice.
Draw up a retirement budget
Make a list of all the essentials you’ll need to pay for in retirement such as accommodation, food and bills. You need to make sure you’ll have enough secure income (that’s income you can rely on) throughout your retirement to at least cover these costs.
Bear in mind that your spending habits are likely to change during your retirement. As you get older you may spend less on going out and more time at home and on healthcare. Later in retirement you may need extra help around your home or to pay for care fees.
Inflation is also likely to affect how much money you need. Prices tend to rise over time which means your income also needs to increase if you are to maintain your standard of living.
What income will I have?
Most people have more than one source of income in retirement. Your main income is likely to come from your State Pension and any other pensions you’ve paid into. You may also have other sources of income such as from savings or property.
You need to make sure you have enough secure income before you fully give up work otherwise you risk running out of money before you die. Secure income includes your State Pension, a promised income from a past employer’s pension scheme and any other income you are guaranteed to receive for the rest of your life.
It’s worth remembering that most of your retirement income (including your State Pension) is taxable so this will affect how much money you actually receive.
The State Pension
You can take your State Pension once you reach your State Pension age. If you defer taking your State Pension you’ll receive a higher pension later on or a lump sum if you reach State Pension age before 6 April 2016 and have deferred your pension for at least 12 months. The lump-sum is not available to people who reach State Pension age on or after 6 April 2016 who defer taking their new State Pension.
Currently, you get an extra 10.4% of State Pension for every full year you defer. For people who reach State Pension age on or after 6 April 2016 it will be just under 5.8%.
Your State Pension usually increases by at least the rate of inflation each year.
Salary-related pension from your employer
You may be entitled to a pension from a past employer’s defined benefit pension scheme (also known as a final salary or career average scheme). The normal retirement age for these is typically 65 but you may be able to take your retirement income earlier or defer it until later. If you take your retirement income early you’re likely to get a significantly reduced amount. If you defer you’re likely to get more. Ask your pension scheme provider for more details.
Workplace or personal pension where you build up your own pension pot
You can start taking cash from your pot from age 55 but most people won’t until later on when they need the money. If you take money out of your pot before you retire, you’ll have less available to provide yourself with an income in retirement.
If you want to provide yourself with a secure income in retirement you can use some or all of your pot to buy an annuity (a type of insurance policy) which pays you a level or increasing income for life.
You may have other sources of income in retirement. This income is likely to vary over time and may not be guaranteed for life.
This income could come from:
- A pension pot you have invested and can draw a flexible income or lump sums from (the value of your pot is likely to go up and down and this could affect the amount of income you receive and how long your pot lasts).
- Part-time work.
- Savings and investments (the amount of interest or income you earn is likely to vary depending on interest rates and the performance of your investments).
- Property. This could be rental income from any property you own (this income is not guaranteed as you may have periods when you are not able to rent out the property). Or you may plan to sell the property and raise money to supplement your income.
- Your home. You may rent out a room to a lodger, plan to downsize and use any money raised to supplement your income, or sell some of the equity in your home in return for a lump sum or income.
Once you’ve worked out how much money you’ll need and the sources of income you’ll have in retirement, you will have a clearer idea of when you can afford to retire.