Starting to plan your retirement
How much will you need to retire?
By Paul Davies
How much will you need to retire?
Our research will help you estimate how much you need to save for retirement based on your spending habits and what you're likely to receive.
Many people overestimate how much they’ll need to live on in retirement, thinking that they'll spend the equivalent of their wages. In this page, we cover how much is enough and what you need to save to generate it.
There are two key questions to consider:
- How much money will I need in retirement?
- Hw much money will I need to save in advance to deliver that income level?
Although this varies between households, some general rules will apply. While many individuals and couples still have some final salary pension to add into the pot, perhaps from a previous job, there's usually an element of building up a defined contribution (DC) pension fund big enough to last you your whole retirement.
The common perception is that you’ll need between half and two thirds of your final salaried income levels as a household, after tax, to maintain your lifestyle once you retire. It is less than 100% as you might have paid off the mortgage, will no longer be bringing up children and won’t face the cost of commuting.
A detailed survey from Nest – the government-backed pension provider – indicated that pensioners’ overall sense of satisfaction with life is a decent 75% when the household income is £25,000-30,000. This was for a mixture of one and two-person pensioner households.
How much do people spend in retirement?
Our retired member households spent a shade under £2,000 a month, or around £24,000 a year, on average when we carried out research at the end of 2015.
Retirees in our survey spent £2,000 a month per household
This covers all the basic areas of expenditure and relative luxuries such as holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement.
Travelling and holidays are a very important part of retirement for our members, with the 65-74s and those 75+ spending nearly £4,500 a year on this part of their life. This dispels the notion that people travel in the early part of retirement before becoming less adventurous in their later years.
Priorities change slightly as you move through your retirement years. Our members tend to spend relatively less on food/drink, housing payments and recreation as they get older, but there is increased spending on utility bills, health and insurance premiums.
How your spending changes in retirement
Your spending can change in retirement as you get older. We surveyed 2,321 retired Which? members aged 55-64 and 65-74 in September 2015, and we compare their annual spending in the chart below. Those aged 55-64 had an average monthly expenditure of £1,870, while those aged 65-74 spent an average of £1,913.
How much money will you need in your total pension pot?
There’s some good news and bad news in trying to achieve an acceptable level of income in retirement. Once you reach state retirement age, currently 65 for men and 63 for women, the government will provide a sizable chunk of your post-retirement money. The state pension is currently £238.60 per week for a couple (if you qualify for it before 6 April 2016).
Find out more: State pension explained
Tax and pensions
Even with defined contribution pensions, you’ll usually also get help from your employer by way of contributions into your workplace pension, so the burden isn’t entirely on you. The downside is that your income in retirement will be taxed. Income you receive from private pensions is paid with tax already deducted via PAYE.
Find out more: Tax and pensions
In the wake of the pension changes, most people with predominantly defined contribution pension provision will opt for income drawdown or an annuity, or a combination both, when it comes taking money out of their pension. Of course, you can now take the lot subject to taxation, but this will mean it’s entirely down to you to make the money last.
Even if you’re getting the state pension and aiming for a comfortable post-tax income of £24,000 per year, a lifetime income via an annuity will require a pot of nearly £250,000 according to our calculations.
Producing post-tax annual income of £36,000, including the state pension, would mean an initial pot of £546,000 to buy an annuity and £424,000 invested in drawdown (with 3% investment growth).
Annuity income will prove more expensive as the amount you get is guaranteed for the rest of your life.
- Last updated: November 2015
- Updated by: Paul Davies