Is it possible to retire with £100,000?
Perhaps you have started saving for retirement later in life and have not been able to build as big a pension pot as you would have liked.
Does this mean you are destined to be working well into later life?
Or perhaps your younger and you are trying to plan how much you need to save for a decent retirement whilst at the same time balancing having a good life now. Well let’s explore some potential scenarios to see if it is in fact possible to retire with £100,000.
What a ‘minimum’ life could look like if you retire with £100,000
In order to test some scenarios to show what may happen if you retire with £100,000, we are going to make some assumptions.
Of course, the main determinant of whether you can retire or not will depend on how much you want to spend in retirement.
Someone who wants to spend very little in retirement is always going to need less money and therefore retirement will be easier.
However, for others there is no point retiring if they don’t get to enjoy themselves in retirement and this means needing more money.
For the purpose of these scenarios I am going to use the spending figures from the Pension and Lifetime Savings Association Retirement Living Standards research.
They summarise three levels of retirement as follows:
This research is really useful and you will need to check it out to see what each level of retirement looks like in terms of the things you can spend your money on.
The next assumption I am going to make is that retirement will start for a single person or a couple aged 67 today and will last until age 100. For a couple with an age around 67 today, there is roughly a 10% chance one of you will make it to 100 so we need to build in this longevity risk.
Finally, we’ll assume that the £100,000 is in a defined contribution pension. Most likely built up through a workplace pension scheme.
So firstly, let’s take a look at what a £100,000 pension could buy you if you were to secure an income using an annuity from the open market.
Source: iPipeline 08/07/2024
Currently, the best annuity rate is £7,196 but this does not include any lump sum and stops as soon as you die with no pay out for a spouse or civil partner. Also, it stays fixed at this level for the rest of your life when we know inflation is going to mean your spending will increase over time.
So even using the highest annuity income option available it is not going to even cover the £14,400 per year spending required for a single person for a ‘minimum’ retirement.
So, in this scenario it would be impossible to retire with £100,000.
However, we have not included any State Pension.
Providing you have worked and paid 35 years of full National Insurance contributions, you will be entitled to a full State Pension which at the time of writing is around £11,500 per year. The State Pension is also currently protected by inflation.
Now, if we add the State Pension of £11,500 per year to the inflation linked annuity of £3,550 you will have a total income of £15,050 gross per year (£14,554 after tax). Plus, a tax-free lump sum of £25,000.
You can therefore cover the ‘minimum’ retirement spending standard for a single person meaning it could be possible to retire with £100,000.
You could also cover the ‘minimum’ retirement spending standard for a couple if your partner also has a full State Pension as two State Pensions alone (£23,000) will cover the ‘minimum’ retirement standard.
This then means you have the option of potentially retiring earlier than State Pension age as you could use the £100,000 pension to live off for a couple of years before you reach State Pension Age.
Is a ‘moderate’ life possible if you retire with £100,000?
So, we’ve worked out there is a way to retire with £100,000 even if you are a couple.
But perhaps the quality of life under the ‘minimum’ standard is not enough for you. You want to do more. Is this possible with just £100,000? Potentially yes, but it’s going to require a number of tweaks and a few lifestyle changes.
Remember, a ‘moderate’ standard of retirement is going to cost £43,100 per year for a couple.
Realistically you are probably going to need to wait until State Pension age to retire and even then, the two State Pensions are only going to bring in £23,000 per year between you. So, you are £20,100 per year short at this stage.
Before looking at how to use the £100,000 pension it’s worth exploring other ways to bring in income.
Nowadays it’s much easier to earn money without it feeling like work as after all we are trying to produce retirement here, not retirement where you still work.
Are you an animal lover? Is your house in a popular holiday location or an area of natural beauty? Do you have a larger house with a spare room? Do you live close to a popular sporting destination, music venue or train station?
Here are a few ways you could earn an income without really working:
- Dog sitting/walking. Check out the Rover.
- Renting out your house temporarily through a site like Airbnb.
- Rent a room out to a lodger.
- Rent your driveway out during popular events or during the week for commuters.
Alternatively, rather than earning an income from some of these ideas you could find others that help reduce your spending.
For example, when looking at holidays, find someone who is looking for house sitters, that way you get your holiday for free. Or rent out your home whilst you are away and it could pay for your holiday.
Of course, there will come a point in your life where even dog walking or organising the rental of your house may become too much for you in old age so you can’t rely on this type of income forever.
Longer term, it’s something you may not want to discuss but if you have a parent alive then there could be the possibility of receiving an inheritance one day.
Now, I would never advocate going into retirement relying on an inheritance as lots of things could happen that mean the inheritance never actually reaches you, the main one being the cost of long-term care.
I’ve come across many people and clients where the cost of long-term care has virtually wiped out the inheritance.
One thing you could do to ensure any potential inheritance is not lost is to take closer care of your parents yourself.
To start with, this could just mean spending more time with them which in turn will likely improve their quality of life and health at the same time. Then over time, they could eventually come and live with you.
Although perhaps an odd living arrangement for those of us in the UK but in Asian countries this is seen as normal. Your parents take care of you whilst you are young and then you take care of them when they are old.
Your parents could then sell their home and use this money to start helping you in retirement. It also has the potential to avoid Inheritance Tax.
So, let’s put some of this together and test a scenario for a couple retiring at State Pension age 67.
We will assume that one of them is able to earn £1,000 per month through dog sitting and walking up to age 75. Definitely possible as my own mum does it!
They then receive a £270,000 inheritance lump sum at age 75. I have chosen this amount as this is the current average UK house price minus selling fees.
They still have the £100,000 pension and we will keep this in a pension invested in a ‘balanced’ portfolio.
To test this scenario, I am going to use specialist financial planning software from our friends at Timeline.
Their software has built in capital market data from the last 100 years including inflation and investment returns from various asset classes.
We will test the scenario across rolling 33-year periods starting from each month from the last 100 years.
First of all, we can see that the scenario as described as above, trying to live a £43,100 per year inflation adjusted lifestyle does not really work with only a 17% chance of success.
Let’s see if we can improve this situation with a few tweaks. Firstly, lets look at the investment strategy for the pension and the future inheritance. If we were to change the underlying investments for the pension to a global equity portfolio and then use the same portfolio to invest the eventual inheritance this helps improve results.
We are now looking at a 57% success rate. So certainly possible but perhaps a little risky.
Another thing we could do if we don’t want to delay retirement or earn any more income is to change the level of withdrawals we need to make from the pension and future inheritance.
For example, rather than constantly withdrawing more to keep up with rising cost of living regardless of what happens to stock markets, we will instead only increase our withdrawals to match inflation when stock markets have delivered positive returns.
This means when the underlying investments of your pension and future inheritance deliver a negative return in a year, you will keep withdrawals at the same level.
This massively improves the picture again and produces a 92% success rate. The only downside is that over time, you have to adjust your spending and tighten your belts a bit as this could mean your spending drops to around £35,000 a year by the time you are 90.
This might be OK for you as the research does show that spending tends to reduce as you get older.
So, there is definitely the potential to retire with £100,000. Of course, there are big caveats here. We have used a lot of assumptions and there is no real protection for a couple if one of you dies early. The State Pension will tend to die with the deceased so this could put you in a tough position financially.
We are assuming you have paid off your mortgage and you may not ever receive an inheritance. But then you could look at using equity in your home by either downsizing or using an equity release mortgage.
The point is there are always options to explore and it will depend how desperate you are to retire vs how much you want to spend in retirement.
Don’t think you can’t do something until you have looked at all the possibilities.
If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
