Anybody who wants to stop working before today’s state pension age of 66 and live their final years in comfort will have to save hard and long.
Without bags of cash, they may be in for a huge shock as this woman was after kidding herself she could retire at 40.
Too many Brits have kidded themselves that a nice early retirement is an achievable goal.
Since the pandemic, an estimated 600,000 workers in the 50s have quit their jobs and put their feet up.
Now they’re on their way back in what has been dubbed “The Great Unretirement”. A good number of them are bored, lonely and miss having a reason to get up in the morning.
Most of them have no choice, though. They just don’t have enough money, and the cost-of-living crisis has made this patently obvious.
Retirement is incredibly expensive. If you quit work at 55, there’s a fair chance you will have to fund yourself for another three decades.
And for the first dozen years or so, you will get no state pension. It’s a huge gap to plug.
A single person needs an annual income of around £20,800 to live a moderate retirement and £33,600 for a comfortable one, according to the Pensions and Lifetime Savings Association.
That’s enough to give them financial security and flexibility, one foreign holiday a year, and the odd meal out.
It assumes they have paid off the mortgage and are not renting.
Currently, a 65-year-old with £100,000 worth of pension can get a single life annuity paying a level income of £6,870 a year, according to Hargreaves Lansdown. That’s a fraction of what is required.
If they qualified for the full new state pension, which is worth £10,600 a year from April, they would need another £148,471 in personal retirement savings to generate that “moderate” £20,800 income.
If they wanted a comfortable retirement income of £33,600, they would need £334,789 of retirement savings on top of their state entitlement.
That’s a tall order, and it gets even taller if you want to retire early.
The average 55-year-old would get just £5,742 a year income from an annuity. To generate £20,800 a year, they would need £362,243 in pension.
For a comfortable retirement, they would need a whopping £585,162. Who of us has that kind of money at age 55?
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Even if we do have a big enough pot, retiring early is fraught with pitfalls. First, we have to clear all of our debts, otherwise they will only spiral.
Then we must hope no big expenses eat into what is a fixed income.
Also, the figures I have produced here are for level annuities that will not rise in line with inflation.
A 55-year-old who wants to generate £33,600 a year income that rises in line with RPI would need pension savings of a staggering £1,095,890.
That’s right, more than £1million.
If they had a partner and wanted a joint life annuity, they’d need even more.
Many of those who took early retirement after the pandemic are discovering these uncomfortable facts for themselves, and returning to work.
The truth is that nearly all of us will have to work on and on. If we’re lucky, we can retire at 66, 67 or 68, depending on state pension age at the time.
Personally, I expect to work to at least 70, if I’m healthy enough to do so. Those who do more physical jobs won’t be able to do that.
The only reason most people should consider early retirement is if they are too ill to work (as a growing number are, which is a different story altogether). Otherwise we’ll all have to go on and on.
I’m sorry to be the bearer of bad news. That’s just how it is and people need to know before even more of us make a costly mistake and retire before we can really afford to do so.
The other alternative is to save, save, save into a pension, but who can afford that as living costs soar?
