Retiring at 45: how much do you need to save?

Important information - investment values and income from investments can go down as well as up, so you may get back less than you invest.

Retiring at 45 is ambitious. It means stopping work more than 20 years before you are likely to receive your State Pension. But if you can do it, it also means gaining decades of extra freedom while you are hopefully still in good health to travel, pursue hobbies, spend time with family and much more.

So how much money might you need to achieve that dream? In this article, we break down how much you'd need to save to retire at 45, based on your current age.

How much income will you need in retirement?

One of the first questions to answer is how much you'll spend in retirement.

Predicting spending post-work is tricky, especially when your retirement date is well into the future. It’s also likely to fluctuate over time and there could well be unexpected expenses, like care costs.

To keep things simple, we have used the Retirement Living Standards created by trade body Pensions UK. These estimate the income needed for a minimum, moderate and comfortable lifestyle 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

Starting age 21

If you start early, it is possible to save up enough money to retire at age 45 and enjoy the kind of “moderate” retirement outlined above. However, it would require some diligent saving.

Let’s take an example of someone aged 21 and earning £50,000 on average throughout their career. This is high for a typical 21-year-old, but they may earn more later in their career, so we have used a constant salary assumption for simplicity.

Each month, they would need to put away £910 into a stocks and shares ISA and 26% of their salary into their workplace pension (including their employer's contribution) to be able to retire at 45 on their desired income.

For some savers, an ISA can be a useful way to build money alongside their workplace pension. In this example, those savings could provide income in the years between retiring early and being able to access workplace pension savings.

Under our assumptions, they could retire in 2050 with around £1.65m and their money could last to age 100, with potentially around £235,000 remaining.

If their employer only contributes the minimum to their workplace pension (3%), that means they themselves need to put in 23%. This is a significant amount to save and, after tax and their ISA and pension contributions, much of their monthly income would already have disappeared.

But if our 21-year-old can find a generous employer who would contribute above the minimum amount (say, 10%) into their retirement pot each year, that would make their savings goal much easier.

Even saving a fraction less could mean they fall short of their goal. Our modelling suggests that contributing 25% of their salary to their workplace pension rather than 26% could mean they run out of money by age 98.

Aside from the workplace pension, the ISA savings are also critical because, under current rules, you cannot access your pension until age 55 (rising to 57). That means our 21-year-old is likely to be relying on their ISA for their income for the first 12 years of their retirement.

Assumptions

The calculations in this article are illustrative and are based on outputs from our proprietary financial coaching tool. They use 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 examples are illustrations rather than guarantees. Investment returns, inflation and future spending needs may differ significantly from those assumed here.

It's also worth remembering that even small increases to workplace pension contributions can make a meaningful difference over time. Fidelity's Power of Small Amounts calculator 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 (the age the UK State Pension is expected to rise to between 2044 and 2046).

Starting age 30

Starting later, at age 30, makes things even harder.

Take a 30-year-old on a salary of £50,000. They have £70,000 in a stocks and shares ISA and £70,000 in a workplace pension.

This is an impressive amount to have squirreled away by 30, but as we will see, extremely high levels of saving are still required to meet their goal of retiring just 15 years later.

They would need to contribute a total of 27% of their salary to their workplace pension, including employer contributions, and £1,400 into their ISA each month to build up enough money to retire at age 45 and not run out before 100, we calculate.

They could stop working with just under £1.2m saved and may still have around £190,000 remaining at age 100, we estimate.

Assuming they pay 24% of their salary into their workplace pension (with their employer adding 3%), they would be left with less than £15,000 per year to live off after tax and their ISA and retirement savings. This shows that, while a salary of £50,000 is above average, it does not stretch far when working towards such an ambitious goal.

Starting age 40

Someone aged 40 will need a significant amount already saved to retire in five years because they do not have the benefit of time for their investments to grow.

In this scenario, we have increased the assumed salary to £60,000 to make their savings goals more realistic.

Even so, they would still need to have £240,000 in workplace pensions and a further £240,000 in ISA savings by age 40. They would then need to add £1,500 a month into their ISA and 33% of their salary into their pension (including employer contributions).

That could allow them to stop working at 45 with a pot worth approximately £880,000, enjoy a “moderate” retirement, and still potentially have around £190,000 remaining at age 100.

Having almost half a million pounds across ISAs and pensions by age 40 would be very tricky to achieve unless the individual has benefitted from an inheritance that they have diligently put towards their retirement goal.

The bottom line

Retiring at 45 is possible, but it requires exceptional planning and commitment. Our modelling suggests that even someone earning £50,000 a year would need to save aggressively throughout their career and build substantial ISA savings alongside their workplace pension to bridge the gap until they can access their pension.

Our assumptions for their annual expenses pre-retirement are very low, and it would be difficult to achieve this in practice. We have not factored in any housing costs or a downpayment on a property, so these expenses would all need to come out of their remaining spending.

The biggest advantage you have is starting early. Someone who starts saving in their early 20s gives their investments far more time to grow than someone pursuing the same goal later in life.

Remember that these examples are illustrative only and based on a specific set of assumptions. Investment returns, inflation, spending needs and pension rules can all change over time, so it's worth reviewing your plans regularly.

For a more personalised view of your retirement, you can also log in to PlanViewer and use our tools.