- Discover how much money you need to retire to live comfortably in retirement.
- How to calculate the amount of money you need in retirement to suit your standard of living.
- Find out how much you need to save into your pension pot and what to do if there’s a pension savings shortfall.
One of the best things about retirement is finally having the time to do what you want. For some, it’s a chance to slow down and spend time with their grandchildren. For others, retirement is the opportunity to fulfil long-held dreams and explore exotic destinations. Whatever your retirement plans, you’ll need to ask yourself: how much money do I need to retire?
A comfortable retirement requires enough money to cover everyday living costs, along with some extras to help you realise your retirement dreams. The amount required may be more than you think. It’s worth regularly taking stock of your retirement savings and assessing if you’re saving enough to provide the level of retirement income that will fund the lifestyle you want.
Pension savings versus pension reality
Research has found that the average retirement savings in the UK may fall short of providing a generous retirement income. According to The Telegraph, the average UK pension pot size for those aged 55-65 is just over £105,000. That would give an annual retirement income of around £5,000. Add in the current full state pension of £8,296.60 and an average 65-year-old retiring today would receive a yearly income of £13,296.60 before tax, depending on the annuity they purchased.
Worryingly, that’s less than the average retired household spends according to research by the consumer group Which?.
How much do people spend in retirement?
Which? surveyed its members to find the amount of money people spend in retirement. It found that the average retired household spends around £2,200 each month (around £26,000 each year) on food, utilities and other bills, as well as one European holiday a year.
If your retirement plans include an annual long-haul holiday and a new car every five years, then expect annual retirement spending to increase to £39,000. Even without holidays and a new car, an average household needs at least £18,000 for a no-frills retirement covering household costs according to Which?.
Some studies go further. According to a report by the Pensions and Lifetime Savings Association, there are three levels of retirement spending – minimum, moderate and comfortable. Its research found that a single person needs £10,200 in annual retirement income at a minimum and a couple £15,700 per year. This rises to £33,000 for singles and £47,500 for couples in annual income to enjoy a comfortable retirement.
These are average figures, and your circumstances will vary. It’s worth calculating how much you think you’re likely to need. You should seek independent financial advice to ensure you’re paying enough into your pensions savings.
How much money do I need in retirement savings?
The amount people need to save into a pension pot is significant. Which? found that for an annual retirement income of £26,000 including state pension, you need to build a pension pot of £370,000 over your working life and use it to purchase a lifetime income via an index-linked, joint-life annuity. For an annual retirement income of £39,000, you need a pension pot worth £550,000, investing it in income drawdown with 3% investment growth.
Saving into an ISA for retirement? Learn the 7 reasons to transfer your ISA and get the best savings rate for your money.
How to calculate retirement savings
Calculating retirement savings isn’t an exact science. Factors such as your lifestyle, health, and how you plan to take your retirement income will impact the amount you need to save.
If you’re asking the question ‘how much do I need to retire’, knowing roughly what you should save into a pension pot is a good first step in reviewing your retirement income needs. Here are three handy ways to begin calculating your retirement savings amount:
1. Work out a rough retirement income.
This approach assumes a retirement income that’s two-thirds of your current income. The theory is this amount will enable you to maintain your current standard of living once costs such as mortgage payments and work-related costs such as commuting are removed.
2. Follow the multiply-by-25 rule.
Another approach is to assume you’ll live approximately 25 years in retirement. Calculate how much you’ll likely spend in one year and multiply it by 25, giving an overall retirement savings goal. For example, if you plan to spend £20,000 per year in retirement, you’ll need a pension pot size of approximately £500,000. Deduct the state pension of £8,296.60 per year over 25 years – assuming no inflation – to give a more realistic pension pot savings requirement of £292,585.
3. Use age factoring.
This method multiples your salary by a factor that increases by 1 every five years from the age of 30. It’s an effective measure to check if you’re on track. For example, by age 30, you should have a pension pot saved that is a single factor of your salary. At age 35, you should have twice your annual salary saved in a pension fund, and by age 40 you should have three times your annual salary saved, and so on.
How much you need to save depends on the age you start saving. To reach a total of approximately £210,000 at retirement, you’ll need to start saving £131 per month from the age of 20, increasing to £198 per month from the age of 30 according to Which?. Wait until 40, and this rises to £338 per month, and from 50 it’s £633. The total saved is dependent on how your investments perform so could be more or less than £210,000.
What to do if there’s a pension shortfall
If you discover you’re not saving enough into a pension fund, or your investments have not performed well enough, review how much you’re contributing. One option is to add more to pensions savings.
As a basic rule of thumb, you can put up to 100% of your income – up to the annual allowance of £40,000 – into your pension to qualify for 20% tax relief private pension contributions. It’s also worth checking in case you have unused annual allowances from previous tax years that you can carry forward into the current tax year.
When it comes to planning for retirement, it’s also worth considering an investment strategy that extends beyond saving into pension savings, especially if you’ve used up your annual allowance for tax relief.
If all else fails, you can retire later. The longer you defer your pension and state pension, the more income you’ll receive.
If you’re over 50 and would like more information about your pension options, you can also contact Pension Wise, a free guidance service offered through the government.
Facing a pension shortfall? Don’t panic! Read our expert guide to topping up your private pension.
The information contained in this article does not constitute advice and the information referred to may not be the same for all. We strongly recommend you seek professional guidance from your independent advisor before taking any action.