How much do I need to retire?
We’ll show you 3 easy ways to work out how much money you’ll need to afford a comfortable retirement. No complicated algorithms or charts, just simple, tried and tested tips from the experts that should let you know how much you’ll need to retire in just a couple of minutes.
Planning out a budget for the next 25+ years of your life is a daunting task for anyone to attempt. There’s the uncertainty of how much money you might need for retirement and also, how long you need your pension pot to last? So, first things first, you’ll need to make some assumptions on how long you’ll want your pension to last.
N.B. If you’re looking for a bespoke solution our Retirement Planning Service includes a full fact-finding and goal setting session to work out exactly how much you’ll need to retire
How long will my pension pot need to last?
Knowing how long your pension pot will need to last is like asking how long is a piece of string? None of us knows with complete certainty how long we will live for, but we can use a Life Expectancy calculator to work out what our likely average life expectancy is. Once you have a rough idea of how long you’ll need your pension pot to last for, you can put some contingency measures in place to provide for you should you live beyond the average life expectancy.
Bear in mind that one you reach state pension age, the state pension continues to pay out until you die.Once you know roughly how long you’ll need your retirement fund to last, you can start working out how much you’ll need each year to achieve the kind of lifestyle you’re hoping for in retirement. We look at 3 different ways you can use to work this out:
1) The two-thirds rule
The type of lifestyle or standard of living that you want will be a big part of determining how much money you’ll need in retirement. There’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 that you currently enjoy in retirement. This assumption is based on the idea that retired individuals generally tend to spend a bit more on leisure and travel but usually less on commuting, supporting children and mortgage costs etc.
Of course, exactly how much you’ll need depends on whether you have paid off your mortgage, plus any debt etc. We like to err on the side of caution, and also allow for life’s little luxuries like eating out and holidays, so we tend to go for the higher amount of two-thirds.
Use our handy calculator to work out how much you’ll need each year in retirement:
N.B. Many of today’s retirement calculations are based on retirement costs for a couple, however, the two-thirds rule works for both singles and couples in retirement.
The two-thirds rule and average UK income, how does the State Pension stack up?
The UK’s average household income in 2017 was £27,200 (ons.gov.uk) so using the two-thirds rule the average household will need £17,953 per year in retirement to sustain their pre-retirement standard of living. If a couple were both claiming their full state pension of £159.55 per week, they’d be receiving £16,593.20 per year in state pension and they’d only need to find £1,360 a year between them to plug the gap.
Obviously, if you’re used to earning an above average household income you’ll need to plug a much bigger gap between your state pension income and what you need to sustain your pre-retirement standard of living. Say your pre-retirement household income was £80,000, you’d need £52,800 per year to maintain your standard of living, as a couple, assuming you both qualify for the full state pension, you’d need to find £36,206.80 a year.
2) The Which? approach
Which? recently published an example that estimates retirement costs based on the kind of lifestyle you want to live. It is based on their research of average spending in retirement. If you’re not money-minded this is a great way to approach your retirement planning as most people have some sort of idea for the kind of lifestyle they want in retirement.
The Which? calculation looks at 3 tiers of retirement lifestyles, we’ve named them Basic, Comfortable and Luxury, which account for different levels of spending on
- Treats and Extras and
These calculations are based on spending amounts per couple. If you’re a single person then you’ll want to adjust for between 65-75% of the suggested amount, taking into account that whilst you’ll only be spending for one person, you won’t be sharing your living costs and may be paying single person supplements.
How much does a Basic Retirement cost?
To cover basic expenses like food and drink (no alcohol), utilities, housing payments, insurance, household goods, clothing and shoes and health products, Which? estimate that you’ll need a minimum of £18,000 per year per couple. Bear in mind that this frugal existence really does only cover the basic essentials and doesn’t include things like Christmas presents, eating out, holidays or entertainment.
You’ll notice that this figure is very close to the two-thirds example we gave above of the average UK household income. It’s just above the £16,593.20 a couple both claiming the maximum state pension would receive, so you’d still need to find £1406.80 a year to fund your retirement. If you plan on having a bit more fun in retirement then you’ll need to save more to enjoy a comfortable retirement.
How much does a Comfortable Retirement cost?
A comfortable retirement should allow for you to enjoy a similar standard of living to your pre-retirement days (assuming you weren’t living on the breadline before). Planning for treats and extras in retirement allows for ‘fun’ things like European travel and holidays, recreation and leisure, alcohol (within reason) and charity donations on top of your basic expenses. This kind of retirement would cost a couple on average £26,000 per year. That’s nearly £10,000 a year over and above the state pension (based on the current rate of £159.55 per week, assuming you both qualify for the full amount).
How much does a Luxury Retirement cost?
If you have grand plans for your retirement you’ll need about £39,000 a year. Added luxuries including frequent and extended holidays, health club memberships, meals out and regular new car purchases on average add an extra £13,000 on top of ‘comfortable’ retirement spending. So you’ll need to find £22,406.80 between you over and above the state pension.
3) Budgeting for retirement
Rules of thumb like the previous two planning calculations are a helpful place to start if you have no idea how much money you’ll need in retirement, or if retirement is still a long way off. But, Rules of thumb are based on averages, and none of us like to think we’re average. As you get closer to retirement you’ll need to take a more tailored approach to your retirement planning – it has to fit for you and your lifestyle.
Once you have a good idea of the kind of outgoings you’ll have in retirement and the type of activities you’ll be doing, you can reach a more scientific estimate for how much you’ll need in retirement by creating a budget.
If you want to work out exactly how much you’ll need in retirement we recommend using a tool like the Money Advice Service’s budget planner, it’s a free, simple to use tool that takes you through the main areas of expenditure that include:
- Household Bills
- Living Costs
- Finance and Insurance
- Family and Friends
Try our brand new Retirement Calculator
Our super simple retirement calculator will help you build a budget based on the type of lifestyle you want to enjoy in retirement. All the hard work is done for you, you simply click on the activities you’d like to enjoy and we’ve worked out the average cost based on our research.
Work out how much your dream retirement will cost in under 60 seconds.
If you need a Retirement Calculator for a single person try this.
Want to know where we got our retirement costs from? You can find details of all the assumptions and figures used here
Changing Needs in Retirement
Some expenditure will change through retirement. As the chart shows below, travel spend tends to be higher in early retirement and tails off in later retirement, where you may have to consider the cost of carers or assisted living. For more details check out our blog post on Things that could influence your retirement income needs
If you’ve used one of the 3 suggested calculation tools, you should have an idea of how much you are going to need per year in retirement and if you’ve used the longevity calculator you’ll also have an idea of roughly how long you’ll need to sustain this income for. This will give you your total retirement target. So now is the time to work out what you already have and how far away from that target you are.
You can find out whether you are on track to meet your retirement target by asking your pension provider/s 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.
How much will I need to reach my Retirement target?
There are a number of ways to reach your Retirement target:
- State Pension
- Personal or Employee Pension
- Money from Downsizing
- Investments & savings
- Income from Earnings
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.
Most people now know that they can access a tax-free lump sum from their pension from the age of 55, but what they don’t know is that this doesn’t need to be taken all in one go, you can spread this across a number of withdrawals. You could, for instance, use this money to subsidise an early retirement before you receive the state pension.
How much will I need to save?
According to Which? 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 £210,000 to provide the extra income you need as a couple, assuming that you are both going to receive state pensions.
To reach a post-tax income of £39,000 for that luxury retirement lifestyle you’ll need an initial pension pot of around £550,000, again per couple including the state pension.
If this seems daunting, remember, this is to provide an income for a couple. If you are both working then you’ll have two sources of income and therefore twice the savings ammunition. Plus, you may be able to top up your pension pot with money from savings and other assets such as downsizing your home and there can be other ways to make it work. Your dream retirement might not appear as unrealistic as you think.
How much should I be saving every month?
Which? Money calculations suggest that you’ll need a pension pot of £210,000 to earn the £26,000 a year you’ll need for a comfortable retirement and £550,000 to earn the £39,000 year for a luxurious lifestyle.
A 30-year-old saver looking to generate a pension income of £26,000 a year would need to start saving £198 a month. At 40, if you’ve not started saving yet, you’ll need to put £338 away a month and if you’re 50 it goes up to £633. However, if you already have pension savings, you may only need to top them up, which means you won’t need to save quite so much to bridge the gap.
If you want a more luxurious retirement lifestyle then you’ll need to be saving much more to reach your retirement goals as the second chart shows.
That might seem like a lot but don’t forget that tax relief will provide some of the contribution (20% for lower rate taxpayers, 40% for higher rate taxpayers and 45% for top band taxpayers) and also if you’re paying into a workplace pension, your employer will also be contributing to your pension pot every month too.
Paying into a private pension can also be a hugely tax-efficient way for self-employed business owners to save and extract money from their business.
One of the keys to a happy and stress-free retirement is having a robust financial plan that lets you sleep at night.
With Retirement planning, the best advice is to save as much as you can, for as long as you can. Time is money, and when it comes to pensions, your best friend is compound returns. The same is true when it comes to keeping your money invested throughout retirement, the longer you can keep your money invested, the longer you can keep it working for you.
Once you’ve worked hard to build your pension pot, your financial plan should make sure that money works hard for you i.e. taking advantage of tax-efficient investments and taking a sustainable income. It’s also important to understand your options for withdrawing your pension, especially if you opt for a flexible drawdown pension – many people are taking their whole tax-free lump sum in one go, only to put it in a low-interest bank account. For a number of reasons, this isn’t necessarily a good move. Tax is the first reason: money held within your pension pot grows free of income and capital gains taxes, while interest on bank accounts is taxed at a person’s marginal rate once the interest earned exceeds their personal savings allowance. Secondly, with today’s low-interest rates, you are unlikely to achieve any growth in a cash savings account.
Our Financial Advisors can help you build a robust retirement plan that will help you manage your money through your retirement and keep you on track with your retirement goals both before and after you retire.
What does our tailor-made retirement plan include?
- Assessing your pension/s – making sure you have the right one for you
- Looking at all of your assets and investments
- Creating a plan to clear any debt before you retire
- Creating Income and spending projections
- Setting retirement goals
- Tax-efficient planning for your money
- Investing to maximise your pension
- Annual reviews to keep you on track with your goals
Once you’ve got your Retirement Plan in place, you can put your feet up and rest easy!