Don’t want to wait until State Pension age to stop working full time? Find out how you can build a bridge to retirement – and how much money you will need.
In the UK, if you qualify, you can currently receive the State Pension from the age of 66. This will rise to 67 in 2028, and to 68 if you were born after 6 April 1978. (You can check your State Pension age here.)
If you are lucky enough to have a generous workplace pension, particularly a defined benefit pension, you may be able to start drawing your pension earlier. But if not, you broadly have two choices when it comes to stopping work:
- Waiting until you reach State Pension age
- Retiring earlier and using a ‘financial bridge’ to retirement
In this article we are going to look at what a bridge to retirement might look like, and how you can build one for yourself, if you need.
What is a retirement bridge?
A retirement bridge is a way of funding your lifestyle between stopping full time work and drawing the State Pension.
Most people factor in State Pension payments when planning their retirement finances, but may not be able to, or want to, work right up to State Pension age. In this scenario, they need to find a way to pay their bills and live until that date.
How can you build a bridge to retirement?
So how can you build your own bridge to retirement? How much money you will need to find will be unique to every person, as your outgoings and desired lifestyle will differ. So let’s look at the steps you need to take, and some of the options open to you.
Work out how much money you need to live on
The first, and most important, step is to work out exactly how much money you need to build a bridge between quitting work and receiving the state pension.
I recommend using tools like our free retirement gap calculator. This will help you identify how much you need to live on, including your basic household bills, and extras like running your car, pets, travel, eating out and shopping, etc. Remember too to factor in mortgage or rent, if you have these expenses.
When you have a full picture of how much you need to live on every month, you can make decisions on what is essential, and what are nice-to-haves. It may be that, in order to retire earlier, you need to compromise on some of the things that make this list for now.
Work out how much you might have to live on
The next step is to work out how much money you have available to you to live on (we’ll go into where you might find this money later on). Be realistic about what you can afford to withdraw or earn, and compare it to the calculations you have just done. Does it cover your lifestyle? If not everything, will it at least give you enough to cover the essentials?
One thing I have seen people do, which seems like a good idea, is experiment with their retirement budget before making the leap. They spend a year while still working strictly living just on what their retirement bridge income would be, and any extra income they save.
Over the space of a year you’ll get a good idea of whether this is doable, and enjoyable. If it is, great – you know you can afford to retire now if you wish. If not, then you can go back to your budget and lifestyle and see if you can either find more money, or cut out or reduce expenses.
How to find money to build your retirement bridge
So where can you find money to fund your retirement bridge? I am going to share with you some of the ways I have seen people find the income they need to retire before State Pension age.
Draw down your private or workplace pension
If you have a personal or workplace defined contributions pension, you can draw from it from the age of 55 (this rises to 57 in 2028). The first 25% of your money, whether you draw it down as a lump sum or instalments, is tax-free. The rest of your pension withdrawals are taxed.
It is up to you when you start drawing down your pension once you reach 55 or 57. Some people choose to start taking some money from it straight away, either to free up money for spending or to pay off a mortgage or debt. Or they use the opportunity to retire.
Others choose to leave their money in, giving it chance to grow further, and hoping to secure themselves a more generous pension pot for later, when they decide to give up work.
What you need to remember is that your pension is finite. Once you start drawing it, it needs to last you for the rest of your life. Yes, any money still invested can continue to grow, but you won’t be significantly contributing to it once you stop working.
In simple terms, this means the earlier you start taking from your pension, the less you’ll probably have each year to live on. So you need to pretty much choose between a longer retirement with less money, or a shorter retirement with more potential income.
Only you will know which option is more applicable or desirable to you. If you don’t have great health, you might want to enjoy your retirement earlier. Likewise if you really hate your job, you might value quitting earlier. Or you might decide that you would like to retire now and spend the next few years being active, and then settle down later, which would require less money.
Remember the 4% rule
If you decide to use your pension as a retirement bridge, it can help to know the 4% rule. This rule presumes that if withdraw 4% from your pension pot and increase it each year by the rate of inflation, you are unlikely to run out of money over a 30-year period.
So, for example, if your pension pot is worth £100,000, you could withdraw £4,000 in the first year. Then, if inflation is 2% in that year, the next year you would withdraw £4,080. However, if you are happy for your pension pot to run out earlier than 30 years, or you are using it just to bridge you until you will receive the State Pension, you can increase the percentage you withdraw.
Live off your savings and investments
If you’ve saved money outside your pension, you might decide that now is the time to spend it – buying you the freedom of stoping work earlier. This could be money you’ve invested or saved in an ISA, or Premium Bonds.
Just like with the option of drawing down your personal pension, remember that this money is finite; once you spend it, it is gone. So work out how long this money can fund your lifestyle, and whether it’s worth draining these pots now.
Use property to fund your retirement
If you have a large property, or live in an expensive area, you might choose to move and release some the equity in your property now in order to retire earlier. Downsizing might be possible if your children have left home, or you just don’t need such a large property. You may also decide to move to a cheaper area, where you get more for your money.
Or, you can choose to stay in your home and opt for equity release (we explain how equity release works here).
If you have invested in buy to lets over the years, these could also help build you a retirement bridge, by either selling them or living off the rental income.
Live off an inheritance
This isn’t something you can plan for, but you may be left an inheritance that allows you to stop working earlier. If you have, you’ll need to invest the money somewhere so it can keep growing while you withdraw what you need to live on each month.
Start a hybrid retirement
You don’t need to go all in with your retirement now, if you don’t wish; there is a hybrid option where you work part time, or in an easier role for while. This can be attractive if you don’t enjoy your current job, or find it too draining.
You may even negotiate to reduce your hours at your current job. When a GP friend turned 60 earlier this year, her defined contribution work pension started paying out. However, it’s not enough to stop work completely, and she doesn’t feel ready to quit her career just yet. So she’s reduced her hours to two days a week. This gives her the freedom and income she wants, while still enjoying work without the pressure and exhaustion of long days full time.
So work out what you want and need right now. Do you want to keep feeling useful and busy in some capacity? If so, how many days a week do you want to work, and what kind of thing do you want to do? And how much money, realistically, do you need to earn?
It may be you can withdraw some of your pension or savings now and, with some part time work, make semi-retirement earlier than State Pension age possible.
Start working for yourself
Some people use this time of life as an opportunity to do something completely different, and either start a business or go freelance. This gives them the freedom of choosing how they spend their day, the challenge of embarking on something new, and the prospect of being able to keep earning money.
As with part time work, you can either intend for this option to be your entire income, or you may combine it with some financial security from by drawing your pension or living off savings or an inheritance.
A few years ago, a friend’s mum left her an inheritance. It wasn’t enough to quit work for good, but it gave her enough money to buy a local business and quit her stressful NHS role. Today she spends her days outside painting beach huts and earns more than she did as a speech therapist.
Build a retirement bridge that works for you
As you can see, there are so many different options when it comes to leaving your career before State Pension age. Only you can decide whether you can afford or want to quit work earlier, and what kind of retirement bridge is possible or desirable for you.