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Fidelity personal finance specialist Marianna Hunt is back to help a reader who wants to know if they have enough in their portfolio to not only retire but to live the lifestyle they want.
Q. I’m 55 and have built up a portfolio worth around £500,000 – split across pensions and ISAs. I’ve also paid off my mortgage. Is that enough money to retire? If so, what kind of lifestyle would I be able to enjoy?
A. Reaching 55 with £500,000 and no mortgage puts you in a strong position, but whether it’s “enough” really depends on the lifestyle you’re aiming for, how long your money needs to last, and how you choose to take an income.
A good starting point is to think about your expected spending. Trade body Pensions UK suggest a “moderate” retirement lifestyle for a single person in the UK costs around £31,700 a year. This includes a fortnight 3* all-inclusive holiday in the Med each year, a long weekend off-peak break in the UK, and a small car replaced every seven years.
A “minimum” lifestyle, no car, fewer holidays, less spending on groceries and eating out, would cost more like £13,400 a year. At the other end of the scale, upgrading to a 4* holiday and spending more on food and home maintenance could push costs closer to £44,000.
Your own figure could be higher or lower depending on travel plans, hobbies, and whether you expect your spending to change over time.
The state pension consideration
The state pension will likely form an important foundation for your retirement income. Currently, the full new state pension is just over £12,500 a year, but you won’t typically receive this until your state pension age, likely around 67.
That means, if you retire at 55, your savings would need to bridge a gap of around ten to 12 years before this income kicks in.
There are broadly two main ways to turn your pension savings into an income: annuities and drawdown.
A lifetime annuity provides a guaranteed income for life. Based on current rates, a £500,000 pension pot might generate a monthly income of £1,653, or £19,841 per year (before tax). These are rates for a healthy 55-year-old, with no guarantee period or spousal benefits. They also assume you choose a policy where the amount increases by inflation (defined by the Retail Prices Index) each year.
Once you reach state pension age, your combined income would be more than £32,000 per year in today’s money. This should allow you to enjoy a “moderate” retirement, although your income before that point would be significantly lower.
If you wanted to take the full 25 per cent lump sum that you’re able to access tax-free from your pension, that would leave £375,000 to buy an annuity. In this case, that same person would be able to buy an annuity paying £1,236 a month, or £14,838 a year at current rates.
We’ve kept the same assumptions around no guarantee period, spousal benefits and an inflation-linked increase each year.
Not everyone will get these figures. Annuity rates depend on a range of factors such as your age, health, and whether you want features like inflation protection or a spouse’s pension.
The other option is drawdown. Here, you keep your money invested and take a flexible income as and when you want to.
It can be very difficult to work out how much you can safely withdraw from your pension each year without running out. This is where the ‘4% rule’ comes in. This is the theory that, in the first year of retirement, you should be able to withdraw 4% of your portfolio’s value. In all subsequent years you take the same cash amount but increase it by inflation. Looking at historic data, researchers have calculated that, if you do so, your money is likely to last for at least 30 years.
With £500,000 invested, this would mean annual income of £20,000 (4% of the total pot). This might sound low compared with the annuity, but the crucial difference is that, when you die, your annuity income will disappear with you unless you’ve selected to include death benefits or guarantees. Whereas any unspent money in drawdown can be passed on to your heirs when you die.
According to Fidelity’s own Pension Drawdown Calculator, withdrawing £20,000 per year from a £500,000 pension could eke out your pot for more than 40 years in average market conditions. But if market returns are poor, you could run out of money by age 82, assuming you started drawing on your pension at age 55.
Similarly to the annuity, a 4 per cent withdrawal rate would give you a combined income of more than £32,000 per year in today’s money – although only after your State Pension kicks in.
Many retirees plan to spend more in the early years of retirement when they are, hopefully, in better health to make the most of travel and activities. In that case, you may want to model the impact of spending more in your earlier retirement years and less once your state pension payments begin.
The 4% rule is not without its criticisms. It is based on US market data and US inflation rates so numbers in the UK may be different, and it doesn’t factor in tax. What’s more, at age 55, you are likely to want your money to last much longer than 30 years.
Overall, it’s better to see it as a general guide rather than a hard rule.
Making it last
The other crucial factor in making your money last during drawdown is having a well-diversified portfolio that’s invested with an appropriate level of risk for your circumstances.
Whether you opt for an annuity, drawdown or a combination of the two, remember to plan for the unexpected. Shocks like the death of a partner, a sudden deterioration in health, and care needs can derail the best laid plans: make sure to consider in advance how you would deal with them.
So, is it enough? In simple terms, £500,000 could support a modest to moderate lifestyle, particularly once the state pension starts. However, retiring at 55 adds extra pressure on your savings because they need to last longer and cover those early years without State Pension support.
Many people in this position consider a mix of approaches, for example, drawing down flexibly in the early years and then securing some guaranteed income later.
You might also consider whether retirement needs to be a hard stop. Instead, some people will cut down their hours, move to a lower-paid but more enjoyable or flexible job, or set up their own business. That way, they can keep earning an income but with more autonomy and fulfilment than before.
Ultimately, the key question isn’t “is it enough?” but “enough for what?”. Mapping out your desired lifestyle, estimating your spending, factoring in inflation and stress-testing your plan against different scenarios can help you reach a clearer answer.
If you’re unsure, speaking to a financial adviser can help you to explore your options and build a plan that fits your goals and risk tolerance.
