How much do I need to retire?

As we live longer, it becomes more important than ever to plan for our retirement. According to the Office for National Statistics, a man who turned 65 years old in 2020 can expect to live until he is nearly 85. A woman in the same position will on average live until she is 87. Given that the state pension age will be 67 by 2028 (and many people retire earlier), most people will enjoy a retirement of at least two decades. Despite this, surprisingly few people have a plan in place to fund their retirement.

According to an article published by FT Adviser in 2018, 35% of people in the UK didn’t have a pension. Of those that did, 36% didn’t know how much money was in their pension pot. Worryingly, 43% of people said they didn’t know how much they needed to save for their retirement, with significant numbers of people on course for a pension under half the recommended amount.

That said, working out how much you need to save for retirement isn’t simple. Any calculation will be influenced by a wide range of factors, not all of which are under our control. For example, if a significant part of your pension pot is invested in stocks and shares, its value will be affected by stock market volatility. Inflation can eat away at the value of your pension if it isn’t growing enough, while interest rates will, in part, determine returns on money invested in bonds.

However, despite all these variables, it’s always a good idea to work out how much money you will need to retire so that you can formulate a plan to get there.

The cost of a comfortable retirement

How much you need to put into your pension depends on the kind of lifestyle you want to maintain during your retirement.

The Pensions and Lifetime Savings Association has developed The Retirement Living Standards (TRLS) based on independent research undertaken by Loughborough University. This project has identified how much income you need per year in retirement to maintain the following three types of lifestyle:

• Minimum. Enough to cover your needs with some disposable income left over.

• Moderate. What you need for extra financial security and flexibility.

• Comfortable. To give you a lot of financial freedom and some luxuries.

The annual income the TRLS suggest you need to maintain each lifestyle are shown in this table.

How are these retirement costs calculated?

While these costs provide you with a useful benchmark, it’s important to note that they are based on several assumptions. Most importantly, they assume that you will be mortgage and rent free by the time you retire, meaning these figures don’t include housing costs. In addition, they don’t cover social care costs which may be applicable if you or your partner are in poor health. Nor do they consider the cost of financially supporting any dependents you may have. Finally, if you choose to downsize and move into a smaller home when you retire, you will be able to free up capital which can be put towards your income.

However, what the TRLS costs do offer you is a good outline of the different levels of incomes needed for different kinds of lifestyle, based on expenditure such as household bills, food and drink, transport, holidays and leisure, clothing, and personal care. For example, a ‘minimum’ lifestyle would give you enough to have a week-long holiday and a weekend break in the UK each year, to decorate one room annually and to do a £41 weekly food shop. But, it would not give you enough to own a car.

By contrast, a ‘comfortable’ lifestyle would allow you to spend three weeks in Europe each year, replace your kitchen or bathroom every 10 or 15 years, do a £59 weekly food shop and own a two-year-old car (which you could replace every five years).

You can find out more about the three types of retirement lifestyle here.

How to I calculate how much I need to retire?

One of the simplest ways of calculating how much money you need to retire is by using the Pension Calculator provided by the Government’s MoneyHelper service.

This helpful tool allows you to input your preferred retirement age and specify the target income you’d like in retirement. You then enter details about your current pension pots, contributions, and other sources of income. The tool will then forecast your pension amount (including any state pension entitlement), allowing you see whether you are on track to meet your goals.

How much do you need to retire at 55, or 77?

When you reach the age of 55 you are allowed to begin drawing from your private pension (although this will change to 57 in 2028). For this reason, many people wonder how much they need to contribute in order to retire at 55.

In short, the amount you need to contribute will depend on variables such as the current size of your pension pot and the number of years you have left before you turn 55.

For example, for a single male with a life expectancy of 85, using the TRLS’s figure for a ‘comfortable’ lifestyle, he would need an annual retirement income of £43,100. To retire at age 55 he would need a larger pension pot to achieve this income than if he was to retire at, for example, age 77. Of course, your income in retirement can be made up from a variety of different sources, including the state pension.

A note about these pension calculations

It’s important to remember that pension calculators such as the one provided by MoneyHelper only give you estimated results. No calculator can accurately predict factors such as inflation, changes to the state pension age or income, the performance of your pension fund, changes to your income and pension contributions, or any circumstances that are personal to your situation.

However, calculators are useful for getting a quick insight into whether your pension contributions are on track. It can be a mistake to assume that the minimum contributions through a workplace pension will generate enough income for the retirement lifestyle you want, meaning the quicker you learn of any shortfall the more time you have to do something about it.

Ways to reach your retirement income goal

While it’s best to seek expert financial planning advice, there are some things you can do to help reach your retirement income goal.

Firstly, if you haven’t paid enough qualifying years of National Insurance to receive the full state pension, you may want to consider making voluntary contributions. You can normally backdate your credits by up to six years, ‘buying’ a qualifying year retrospectively. However, if you act before April 2023, you can plug any gaps in your record back to 2006.

Secondly, where your pension money is invested will depend on your attitude to investment risk. For example, some people may want a pension that invests more of their money in stocks and shares. While they have the potential to deliver better returns over the longer term, the value can fluctuate significantly over the short term. Others may want to put more of their pension pot into lower risk investments, which have the potential for lower returns. Where your pension money is invested will depend on your personal circumstances, getting financial advice will help you decide on the most appropriate investment approach for you.

Finally, if you’re a business owner you may want to consider using your pension to purchase commercial property, which would provide a premises for your business as well as regular payments into your pension through the rent, plus the benefit of certain tax efficiencies.

Getting help with your retirement planning

The value gained from seeking help with your retirement planning will help you to understand the type of lifestyle you want during retirement, and how you’re going to achieve it.

As we’ve seen in this guide, there are a lot of variables to consider that are highly individual to your own personal circumstances. While the calculators in this guide will give you an idea of your projected retirement position, they are no substitute for tailored advice from a qualified adviser with decades of experiences and access to specialised systems like cashflow modelling. If you’d like help with planning for your retirement, speak to our team who are perfectly positioned to help answer your pension planning questions on 01603 967967.

Please note, the value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.

None of the information in this article represents a recommendation about the income you may receive in retirement.