Introduction

‘I’m 55 with £400,000. Can I retire at 60?’. This is a common question that many retirees have. Retirement is a huge milestone. The five years leading up to your planned retirement and the five years following it are vital for ensuring you have a successful and worry free retirement. In this video we explore the retirement plan case study of Sue, a 55-year-old, who currently has £400,000 saved up in a pension, ISA and cash. Sue is asking herself ‘can I retire at 60?’. To summarise, we have added the main points of the video below.

Analysing Sue’s Financial Situation to Determine if She Can Retire at 60

Current Financial Position

Overall, Sue has £15,000 in cash savings, a workplace pension worth £250,000 that both Sue and her employer are contributing into, and a stocks and shares ISA valued at £150,000. Her home, worth £600,000, is mortgage-free. She earns a salary of £55,000 annually and for the purposes of the cash flow forecast we have assumed that this income will increase with inflation. With regards to future income, Sue has built up the full 35 years of NICs and therefore will be entitled to the full State Pension at the age of 67.

Essential and Lifestyle Spending

Sue’s current essential expenses are £1,400 per month, while her lifestyle expenditure amount to £1,000 per month. In retirement, her essentials costs are expected to decrease to £1,300 per month, but Sue intends to spend more time with family and traveling and this will result in an increase of her lifestyle expenditure to an estimated £1,300 per month.

Longevity and Inflation

The average life expectancy for a 55-year-old is 87 years, with a 1 in 4 chance of reaching 95. To take a cautious approach, we have assumed that Sue lives until 95. In the cash flow forecast, we have also assumed a 2.83% inflation rate.

Sue’s Retirement Score and Charts

Available Investments

Sue’s liquid wealth, including cash savings, pensions, and ISAs, will grow until she is 60. She has surplus income of around £11,000 per annum. For the initial cash flow base plan we have assumed that this £11,000 will be allocated to a savings account (a stategy will be applied later on to invest this amount). Based on the next five years, Sue accumulates approximately £524,000. Once she has retirement, her portfolio will fund her lifestyle, showing a gradual decline, with complete depletion projected by age 91.

Income Projection

As you can see in the Detailed Income Projection chart, Sue’s earned income stops at 60, and she is entirely reliant on withdrawals from her cash, pension and ISA until she starts receiving the state pension. The years between 60 and 67 are critical, requiring careful management to avoid depleting her funds prematurely.

Investment Returns and Market Volatility

We’ve assumed Sue’s portfolio will generate a 5.06% annual return, but market fluctuations can affect this. The Volatility Analysis (shown below) assesses how sensitive the plan may be to return rates varying over time. The plan is run through 1000 market simulations with return rates varied each year.

The top graph identifies the timing and frequency of challenges covering all goal expenses and therefore this illustrates that Sue may have to make some adjustments in retirement. These adjustments could be lowering expenditure or even going back to work.

Strategies to Enhance Sue’s Retirement

After analysing Sue’s current situation, we applied a number of financial planning strategies to her improve her retirement outlook.

1. Asset Allocation

The first strategy is that we adjusted Sue’s investment portfolio, increasing her equity allocation, which improved the expected annual return to 5.44% and raised her retirement outlook to 103%.

2. Increasing Pension Contributions

Sue’s employer matches up to 8% contributions. By investing an extra £800 net per month into her pension, enhanced by 20% tax relief, her retirement outlook improved to 108%.

3. Tax Efficiency

It’s important for all retirees to ensure they continue to maintain tax-efficiency through retirement. In particluar, creating a tax-efficient and sustainable income from Sue’s accounts helps minimise her tax liability and increases her retirement score to 109%.

4. Part-time Work

In addition to the above strategies, Sue wanted to understand the impact of her retirement plans if she decided to work part time at a school as a music teacher. The plan would be to earn £15,000 per year until 65. Based on the additional income in retirement, she relies less on her retirement portfolio to fund her lifestyle. This increases her retirement score to 124%.

Conclusion

So in summary, after implementing some of these changes and strategies, Sue can absolutely retire at the age of 60 and working part time during retirement will only make her retirement outlook better.

Any questions about your plans for retirement?

Risk Warnings

• The value of your pension may go down as well as up and you may get back less than you invest.
• Past performance is not a reliable indicator of future performance.
• The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
• A pension is a long-term investment, the value of your investment and the income from it may go down as well as up.
• Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.