The question we’re most often asked in retirement planning is ‘how much do I need to retire?’. Which is understandable, it’s essential to have a goal to work toward when planning your retirement saving, because, if you don’t know where you’re going, how will you know when you get there? Working out the cost of retirement is vital if you’re going to set a realistic savings goal.

To know how much money you’ll need to retire, you need to know a couple of things.

  1. Roughly how much you plan on spending every year in retirement
  2. How long you want your retirement fund to last

The first part is easy, at 2020 we would normally take our clients through a budgeting exercise that would look at your likely expenditure to work out how much you’d need, but if you’re looking for a quick and easy ‘ballpark’ figure, there are two methods listed below.

Working out how long you want your retirement fund to last is slightly more tricky since none of us knows how long we are going to live. To help, we have included a handy life expectancy calculator that you can use to see the average life expectancy for someone of your age. Obviously, each person is individual and this is just a general guide to work to, but it should give you an idea of how many retirement years you are likely to have to fund.

Working out the cost of retirement

The two-thirds rule

We referred to the ‘two-thirds’ rule in our 4 awesome types of retirement blog post, it’s a general rule of thumb that states you’ll need anywhere between half and two-thirds of your pre-retirement income to sustain the same standard of living in retirement.


We like to err on the side of caution, and also allow for life’s little luxuries, so we tend to go for the higher amount of two-thirds.

Today’s annual household income x 0.66 = likely retirement income

Minus the amount of any state pension you’re likely to receive and you’ll get to the figure you’ll need to find through pensions, savings or investments.

The cost of retirement will depend very much on your lifestyle choices. Personal planning is essential to make sure that you don’t miss out in retirement.

The Which approach
Which? approach the cost of retirement in a different way, based on the average spending habits of those already retired. Which? Published an example that breaks down retirement costs into three tiers: Essentials, Treats and extras and Luxuries.

typical spending in retirement
  • Essentials cover basic expenses like food and drink, utilities, housing payments, insurance, household goods, clothing and shoes and health products
  • Treats and Extras include ‘fun’ things like travel and holidays, recreation and leisure, alcohol and charity donations
  • Luxuries include frequent and extended holidays, health club memberships, meals out and regular new car purchases.

What will I need to reach my target?

With the new pension freedoms, most people with an employee pension (defined contribution plan) will opt for a flexi-access (income-drawdown) or a guaranteed lifelong regular income (annuity) or a combination of both when it comes to taking money out of their pension.

You may be eligible to receive the state pension, which currently stands at around £8500 per year (check the government website for an estimate of what you will receive). But, even if you are receiving the state pension, if you’re aiming for a comfortable, post-tax income of £26,000 a year via an annuity (lifelong guaranteed income)- you’ll need a pension pot of nearly £250,000 to provide the extra income you need as couple once you have taken into account both of your state pensions

To reach a post-tax income of £39,000 including the state pension, you’ll need an initial pension pot of around £546,000.

If this seeming daunting, this is to provide an income for a couple, if you are both working then there are 2 sources of income and therefore twice the savings ammunition, it might not appear as unrealistic as you think.

How close am I to those targets

You can find out whether you are on track to meet your retirement target by asking your pension providers to send you a forecast of what your pension will be worth. Don’t forget to add in any income that you will receive in state pension. Visit the government website to check your state pension forecast.

Which? Money calculations suggest that a 25-year-old saver looking to generate a pension income of £15,000 a year should be saving £165 a month, for a £30,000 pension that rises to £502 monthly. At age 35, these figures rise to £215 and £654, respectively; to £322 and £981 at age 45; and to £644 and £1,962 at age 55.

 how much do i need to save for retirement

Don’t forget that tax relief will provide some of the contribution (20% for lower-rate tax payers, 40% for higher-rate tax payers and 45% for top-band tax payers) and also if you’re paying into a workplace pension, your employer will also be contributing to your pension pot.

If the thought of contacting pension companies fills you with dread, why not contact us for a pension review? We can give you a complete overview of where you are and work with you to sort out a retirement plan that suits you.

If you’d like to speak to a Financial Adviser call us on 02380 981161 or send us an email at [email protected]