How to retire at 55

For many savers, retiring at 55 feels like an achievable compromise between stopping work early and having enough time to build substantial retirement savings.

While it still means leaving work more than a decade before most people will reach State Pension age, the challenge is much less daunting than retiring at 45 or 50. With enough planning, it may be within reach for those who start saving early and invest consistently.

In this article, we look at how much you might need to save to retire at 55, based on your current age.

This is the third instalment in our four-part series on retiring early. The other articles in the series are:

• How to retire at 45
• How to retire at 50
• How to retire at 60

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How much income will you need in retirement?

One of the first questions to answer when planning for retirement is how much you expect to spend.

Predicting spending decades in advance is difficult. Your expenses are likely to change over time and there may be unexpected costs, such as care fees later in life.

To keep things simple, we have used the Retirement Living Standards produced by Pensions UK. These estimate the cost of different lifestyles in retirement.

A “moderate” lifestyle once you stop working is estimated to cost £32,700 a year in today’s money. This is for a single person and includes:

• a three-year-old small car (replaced every seven years)
• a fortnight-long, three-star, all-inclusive holiday in the Mediterranean and an off-peak long weekend break in the UK each year
• around £59 a week on groceries
• £110 a month to take others out for a monthly meal

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Starting age 21

The earlier you begin saving, the easier it becomes to build a retirement fund large enough to support you for the rest of your life.

We looked at someone aged 21 earning £50,000 on average throughout their career.

This is a relatively high salary for a 21-year-old. However, many people will earn more later in their careers, so we have smoothed earnings across their working life for simplicity.

We estimate they would need to contribute £250 a month into a stocks and shares ISA and 18% of their salary into their pension, including employer contributions, to retire at 55 and enjoy a moderate lifestyle.

Under our assumptions, this could allow them to build up an investment portfolio worth around £2m by age 55.

Our modelling suggests this should be sufficient to provide a moderate retirement income without running out of money before age 100. They may still have around £800,000 remaining at that age.

This sounds like a large buffer but even small changes to their contributions could mean they fall short. Our model suggests that saving 17% of their salary into their pension rather than 18% could make the difference between running out of money at age 98 and having around £800,000 left at 100. 

This highlights how sensitive long-term projections can be to investment growth assumptions and contribution levels over many decades.

While pension contributions benefit from the uplift of tax relief, ISA savings remain important. Under current rules, most people cannot access their pension until at least age 55, rising to 57 from 2028. This means ISA savings will likely be needed to bridge the gap between retirement and pension access.

• Explore our award-winning Stocks and Shares ISA and Self-Invested Personal Pension

Assumptions

The figures above are based on the following assumptions:

• Inflation averages 2.5% a year.
• Investments are held in a high-growth portfolio returning 6.61% a year until retirement. After this point, assets move into a moderate-growth portfolio returning 6.45% a year.
• Annual fees of 0.41%.
• The individual receives the full State Pension, which increases with inflation.

These assumptions remain the same throughout the following scenarios.

Remember that these are illustrations rather than guarantees. Investment returns, inflation and future spending needs may differ significantly from those assumed here.

Starting age 30

Starting later means having less time for investment growth to do the heavy lifting. In this scenario, we looked at a 30-year-old earning £50,000 a year who already has £40,000 in a stocks and shares ISA and £50,000 in workplace pensions.

We estimate they would need to contribute £250 a month into their ISA and 19% of their salary into their pension, including employer contributions.

Under our assumptions, this could allow them to retire at 55 with an investment portfolio worth around £1.4m. 

Our modelling suggests this should be sufficient to support a moderate retirement lifestyle until age 100, with around £200,000 potentially remaining.

While these contribution levels are still demanding, retiring at 55 is considerably more achievable than stopping work at 45 or 50 because there are more years available for investment growth and fewer years of retirement to fund.

Starting age 40

Someone starting at age 40 has much less time to prepare, meaning they are likely to need substantial existing savings. For this example, we assumed a salary of £50,000 and existing savings of £100,000 in an ISA and £105,000 in workplace pensions.

To retire at 55, we estimate they would need to contribute 33% of their salary into their pension, including employer contributions. This could allow them to build an investment portfolio worth just over £1m by age 55.

Our modelling suggests this should provide sufficient income for a moderate retirement and potentially leave around £134,000 by age 100. 

The key challenge for people starting at 40 isn’t just the monthly contributions but having already built a sizeable savings base.

Starting age 50

Retiring at 55 may still be possible if you only begin actively planning at age 50, but the challenge becomes much greater.

With just five years until retirement, there is limited time for investments to grow. This means you need to have already saved a large proportion of your required retirement fund.

In this example, we assumed a 50-year-old earning £50,000 who already has £250,000 in ISA savings and a further £250,000 in workplace pensions.

To retire at 55, they would need to contribute 21% of their salary into their pension, including employer contributions. Under our assumptions, this could allow them to retire with a portfolio worth around £734,000.

Our modelling suggests this would be enough to support a moderate retirement income through to age 100, with around £35,000 potentially left over.

This scenario highlights the importance of building retirement savings throughout your working life. Those who start planning later generally need either very high contribution rates or substantial existing wealth to meet their goals.

The bottom line

Retiring at 55 is still an ambitious goal, but it is considerably more achievable than retiring at 45 or 50.

Our modelling suggests that people who start saving early and consistently may be able to build enough wealth to stop working a decade or more before State Pension age.

However, those who begin later are likely to need much larger existing savings pots and higher contribution rates.

The biggest lesson is that time is one of the most valuable assets in retirement planning. The earlier you start investing, the more opportunity your money has to grow.

You can see for yourself the impact even small increases to pension contributions can make over time using Fidelity's Power of Small Amounts calculator. This tool allows you to see how much adding an extra 1%, 2% or more to your pension contributions today could boost your retirement savings by age 68.

These examples are illustrative only and based on a specific set of assumptions. Your own retirement plans will depend on your income, spending goals, investment returns and personal circumstances.

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question. 

• Read: How to retire at 45
• Read: How to retire at 50
• Read: How to retire at 60

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.