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.
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.
But is that really the case? Which? has surveyed more than 6,800 real retirees in 2021 to find out their spending habits, to help you answer two key questions when it comes to planning your retirement:
- How much income will I need in retirement?
- How much money will I need to save in advance to deliver that income?
Video: how much do you need in retirement?
Our video below shows how real retirees have been managing their money in retirement.
How much do people spend in retirement?
Retirees in our survey spent around £2,170 a month per household
To help figure out how much you need in retirement, we've spoken to thousands of retired Which? members, both those living alone and couples, to see where their money is being spent.
Households with two people spent a shade under £2,170 a month, or around £26,000 a year, on average when we carried out research in 2021. People have spent around 4% to 5% less in as a result of the coronavirus pandemic.
This covers all the basic areas of expenditure (which had a combined cost of £18,000 per year on average) 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 £41,000 a year if you include luxuries such as long-haul trips and a new car every five years.
Which? retirement income targets
The overall Which? retirement income targets are shown below.
Travelling and holidays are a very important part of retirement for our members (at least in normal times), with people spending £4,640 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 retired single people
The charts below show annual spending for a single person and retired couples by different categories.
We’ve highlighted three levels of spending – paying for essentials, funding a comfortable retirement, allowing a few extras, and being able to have a more luxurious lifestyle.
Annual spending for a retired couple
How much money will you need in your total pension pot?
It's important to think about your pension income in building blocks - first with the state pension, then with your private or workplace pension savings, and then with any other additional income you might get, from investments or property.
Once you reach state retirement age, currently 66 for men and women, the government will provide a sizable chunk of your post-retirement money.
The full level of new state pension (for people qualifying for it on or after 6 April 2016) in 2021-22 is £179.60 per week, but not everyone gets that much. You can find out why in our guide to how much state pension will I get?
In August 2019, the average for a man who qualified after April 2016 was £160.18 a week (£8,329 a year), while the average for a woman was £152.55 (£7,933) a year. Combined, that's around £16,262 a year.
Final salary pensions
How much extra income you need to generate from your private pension savings will depend on the type of private pension you have.
Defined benefit and final salary pensions pay you a regular monthly income - how much you get is based on your earnings while you were working.
If you have one or more of these, you should receive annual updates telling you how much you can expect to get.
Adding that to your state pension (which you can find out by getting a state pension forecast) will help you understand how much you've got to play with in retirement.
Money purchase pensions
A money purchase, or defined contribution, pension sees you invest your pension contributions into a big pot. When you come to retire, you have to decide how to generate an income from it.
You can take your entire pension pots in one go, but this will mean it’s entirely down to you to make the money last and you’ll invariably pay a substantial tax bill.
If this is you, how much will you need in your pension pot to have enough in retirement? We've crunched the numbers.
If you were looking to get a comfortable post-tax income of £26,000 a year and wanted to get a guaranteed income paid to you via a joint-life annuity, you'd need a pot of £265,420, according to our calculations. This also factors in receiving annual state pension of around £16,000 as a couple, so you'd need to generate annuity income of around £10,000 per year.
To get the same amount from income drawdown, which sees you keeping your money invested in your pension and withdrawing a regular income, you’d need £154,700. This assumes your savings grow by 3% annually.
Producing post-tax annual income of £41,000, including the state pension, would mean an initial pot of around £757,000 to buy a joint-life annuity or £442,020 invested in income drawdown.
How much do I need to save into a pension at different ages?
If you wait until you are 40 to begin saving for the future, you and your partner will need to contribute a combined total of £351 per month to achieve a comfortable retirement by the time you reach state pension age.
The figure rises to £1,003 per month if you are aiming for a luxurious lifestyle.
The projections contain some quite scary numbers, although saving a few hundred pounds per month from your mid-20s is obviously more palatable than having to find much more if you leave your retirement saving until later in life.
If you already have £100,000 in your pot by the time you reach 30, you are already on track to secure a comfortable retirement and can revise your target upwards.
Your monthly income should rise as you move through the decades and if you are in a company pension scheme, your employer will be contributing some towards your target amount.
Under the rules of pension auto-enrolment auto-enrolment, a minimum of 8% must be paid into your pension, with 5% coming from you and 3% coming from your employer.
Someone earning the UK average salary of £28,000 will be saving £186 per month. The more you can contribute, or find an employer that matches your contribution or more, the closer you'll get to these targets.
The reassuring thing is that although you may not be saving at the above levels in your 20s or 30s, you’d have kicked off your retirement saving, and won’t have to start saving from scratch in your 40s and 50s.
Pension tax relief - free government money
When you save into a pension during your working life, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief.
When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.
Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:
- Basic-rate taxpayers get 20% pension tax relief
- Higher-rate taxpayers can claim 40% pension tax relief
- Additional-rate taxpayers can claim 45% pension tax relief
Things work slightly differently in Scotland. Find out more in our guide to pension tax relief.