How much do I need to retire?
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?
- How 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 people have some final salary pension to add into the pot, perhaps from a previous job, you'll likely need 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 the final salary you had when you were working, after tax, to maintain your lifestyle once you retire.
This is because as you might have paid off the mortgage, will no longer be bringing up children and won’t face the cost of commuting once you've retired.
Our video shows how real retirees have been managing their money in retirement.
How much do people spend in retirement?
To help figure out how much you need in retirement, we've spoken to thousands of retired Which? members to see where their money is being spent.
Households spent a shade under £2,200 a month, or around £26,000 a year, on average when we carried out research at the start of 2018.
Retirees in our survey spent around £2,200 a month per household
This covers all the basic areas of expenditure and some luxuries, such as European holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement.
You’d need £39,000 a year if you include luxuries such as long-haul trips and a new car every five years.
Travelling and holidays are a very important part of retirement for our members, with people spending nearly £4,500 a year on this part of their life.
Priorities change slightly as you move through your retirement years. Our members tend to spend relatively less on food and drink, housing payments and recreation as they get older, but more on utility bills, health and insurance premiums.
Average annual spending for a retired couple
The chart below shows annual spending for retired couples.
We’ve highlighted two levels of spending – those with a comfortable retirement, allowing a few extras, and those with a more luxurious lifestyle.
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 £251.90 per week for a couple (if you qualify for it before 6 April 2016).
Find out more: Your state pension and benefits
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 your entire pension pot in one go, 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 £26,000 per year, a lifetime income via an index-linked, joint-life annuity will require a pot of £370,000 according to our calculations.
Alternatively, you’d need £210,000 in an initial defined contribution pot, which then goes into income drawdown at retirement.
Producing post-tax annual income of £39,000, including the state pension, would mean an initial pot of around £1m to buy an index-linked, joint-life annuity or £550,000 invested in income drawdown (with 3% investment growth).
Annuity income will prove more expensive as the amount you get is guaranteed for the rest of your life.