How Much Do You Need to Retire?

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Planning for your future can feel like looking into a crystal ball.

However, there are practical ways to work out how much you need to retire. In this article, you’ll learn how to plan your retirement so you have enough in your pension.

What Income You Need in Retirement

The first step is to think about how much you’ll spend when you’re retired. Because that’s what your pension will need to cover.

A common mistake is thinking you’ll spend the same as when you’re working. Instead, your spending habits are likely to change. When you’re retired you may have paid off your mortgage, stopped commuting and no longer be raising children. Although you may choose to spend more on travel or eating out.

There are lots of factors that will affect your spending, including:

  • What type of retirement you expect e.g. basic, comfortable etc
  • Whether you will have paid off your mortgage
  • How many dependants you have
  • When you plan you retire
  • How long you expect to live in retirement

What does this mean in actual numbers?

A survey by Which? in 2023 found that on average households spent £2,333 a month or £28,000 per year in retirement.

From the group of 5,231 retired people surveyed, average spending was £20,000 for a single retired person with a comfortable lifestyle. Whilst a retired couple living a more luxurious lifestyle spent £44,000 on average.

Another way to think about what income you’ll need is by looking at your current salary or income. Many online pension calculators suggest you’re only likely to spend a proportion of your current income in retirement.

However, everyone has different circumstances so these fixed assumptions are just a guide and are unlikely to meet your needs. As a result, it’s important to receive personal financial advice.

When You Plan to Retire

You can only spend your pension once.

So the earlier you retire, the longer your pension will need to last. However, whatever the size of your pension, the earliest you can retire is when you reach retirement age.

In the UK, the minimum retirement age has increased in recent years as people live longer. The state pension age was raised to 65 for both men and women in 2018, but it will increase further to 68. Check your own state pension age with this tool.

The personal pension age is now 55. However, this is also due to rise to 57 in 2028.

Other factors that can affect when you retire include:

  • What plans you have for your retirement
  • How much income your spouse or partner receives
  • Whether you have other income like interest on savings or non-pension investments

As a result, some people choose to delay retirement to make sure they have enough in their pension.

How to Make Sure You Have Enough in Your Pension Pot

Now you need to check if your current pension plans match what you’re likely to spend in retirement.

State Pension

Firstly, check what you’re due to receive from the state pension.

Updated in April 2022, the full state pension is currently £185.15 per week for people who reach state pension age after 6 April 2016. However, this depends on your National Insurance record and whether you delay taking your pension.

Personal and Workplace Pensions

Secondly, look at your current personal and workplace pensions.

Ask your current pension providers for a pension statement or a forecast of your future pension income.

If you have a defined benefit pension, the amount you receive will be guaranteed. However, for a defined contribution pension this will only be an estimate based on assumptions like:

  • Returns on your investment
  • Charges you pay
  • Average rate of inflation
  • Future pension contributions you make

If you’ve lost track of one or more of your pensions, a financial advisor can help you trace all your lost pension pots.

Other Income in Retirement

Finally, think through any other income and assets you’ll have available in retirement, such as Individual Savings Accounts (ISAs), rental income, interest on savings etc.

Compare Your Current Pension with the Income You Need

With these figures, you can use a pension calculator or a pen and paper, to get an idea of how close your current pension plans are to what you will need.

The Money Advice Service who provide free and impartial advice set up by the government offer a simple pension calculator. This compares your current pension plans against what you may need when you’re retired.

Pension calculators make a number of assumptions though. For example, the Money Advice Service estimate how much income you need based on a fixed percentage of your current salary or working income. For personal recommendations, speak to a financial advisor because they use more sophisticated cash flow and pension projection modelling to analyse your situation.

Also, remember that you still have to pay income tax during retirement. So taxation is a crucial factor when you look at your total pot and the amount you’ll need to withdraw to receive a certain ‘net’ income.

What you learn from this comparison may change your plans about when you retire or how much you choose to save.

How to Make Changes to Improve Your Pension

Increase Your Pension Contributions

A pension is one of the most tax-efficient ways to save and invest. This is because for every £800 a nil rate or basic rate taxpayer pays into a pension plan, you receive an extra £200 in tax relief, making the total investment up to £1,000. A higher rate taxpayer can also reclaim a further 20% tax relief, making a £1,000 contribution effectively cost only £600.

Any growth in a pension fund is also free of UK income tax and capital gains tax.

Improve Your Pension Investments

It’s important for your investments to grow as what your money can buy reduces over time with inflation. For example, a loaf of bread costing 0.57p 20 years ago would cost £1 in today’s money.

Investing in a suitable fund strategy helps to offset the effects of inflation on your pension fund. When you invest over the medium to long term you can grow your money above inflation.

However, you should bear in mind that investing involves balancing risk and reward. Your advisor should assess your willingness to accept investment risk as well as your capacity to absorb losses.

Start Saving Earlier

Time is money with your pension.

That’s because the earlier you start saving into your pension, the longer you have to save. As a result, you’re able to put more money into your pension pot over your working life.

Stock Market

To achieve growth within your pension funds you’re likely to be invested in stocks and shares and so it pays to invest for the long term.

If you only invest a few years before you retire, there’s a greater chance that markets may have dropped in value when you take out your pension. This means your pension could be smaller too.

Instead, if you add to your pension over many years, you’ve got a greater ability to make up for the ups and downs in the stock market.

Tax Relief

Tax relief on your pension makes it a tax-efficient way to save for your retirement. However, there’s always a risk that the government changes the rules to reduce the amount can claim. So make the most of the tax relief rules by paying in now.

Compounding Interest

When you hold investments like your pension over a long period of time, you’re able to benefit from compounding. That’s because the amount of time you’re invested for is as important as how much you invest.

Shareholders receive dividends as their share of company profits. Which is like the interest you get paid on a savings account. So when these dividends are reinvested to buy more shares, you have the chance to grow your pension without paying in extra money.

Employer Contributions

When you’re in a workplace pension scheme your employer pays into your pension. So the sooner you opt into your workplace pension, the sooner you receive free contributions from your employer. The earlier you start the more contributions you’ll get in total.

Review and Improve Your Retirement Plan

With a better view of how much you need to retire, you can review and improve your retirement plans.

If you want help or advice with your pensions and investments, contact us for a call with one of our independent advisors. Give us a call on 0345 224 3175 to book an appointment.

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