How much money do you need to retire?

To build a pension pot big enough to enjoy your golden years, you first need to know how much money you need to retire

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According to research, 45% of British people hoped for a yearly retirement income of at least £20,000.

For most, this is unlikely to be enough. So the question is, how much money do you need to retire?

Based on a separate report, 77% do not know, and only 20% are confident they are saving enough for retirement.

In this article, we look at the cost of retirement and the methods to help you build your pension pot.

Factors to consider when saving for retirement

To determine a retirement savings target, there are some key factors to consider, such as:

Retirement lifestyle

How much money you need to retire all comes down to the type of lifestyle in retirement that you want.

How many holidays do you plan on taking each year? How often do you want to buy a new car? Do you plan on taking up a new hobby?

These are important questions to ask. They can help you determine how much annual income you need and make planning for retirement more focused once you have a savings goal to work towards.

Retirement age and life expectancy

Two essential factors to consider are your retirement age and life expectancy.

Today, a 30-year retirement is not unusual, especially for those who retire early. One of the main reasons is due to us living longer.

According to the Office for National Statistics (ONS), the model (most common) age at death was 87 for males and 89 for females. Ultimately, this means we now spend longer in retirement than in previous decades.

Simply put, the longer you spend in retirement, the longer your savings need to last.

Costs of healthcare and other expenses

The bills don’t stop when you stop working. These need to be accounted for as part of your retirement planning strategy.

With life expectancy increasing, you may need to factor in the cost of long-term care in later life. And for expats who plan to retire abroad, there may also be medical costs to consider.

Unlike in the UK, you are responsible for medical expenses in some countries. Healthcare costs depend on the country, but medical expenses can be high.

Inflation

Inflation erodes the purchasing power of money over time. And while it’s difficult to account for future inflation, it should be considered.

What is the cost of retirement?

That is the million-dollar question.

Speaking of a million dollars, that number often comes up when talking about retirement nest eggs.

It’s also the golden number for a ‘comfortable’ lifestyle, based on research by the Pensions and Lifetime Savings Association (PLSA).

Data from the Retirement Living Standards report suggests the cost of a ‘comfortable retirement’ is as follows:

  • Single – £37,000 per year
  • Couple – £55,000 per year

According to Moneyhelper, the average time spent in retirement is 20 years. Based on this and the figures from the PLSA, the total retirement funds needed are:

  • Single – £740,000
  • Couple – £1,100,000

However, it should be noted that the data from the Retirement Living Standards report is derived from very specific profiles. It’s unlikely that high-net-worth individuals (HNWIs) or ultra-net-worth individuals (UNWIs) will fit these profiles.

In reality, there is no definitive answer on how much money you need to retire. That’s because the number will be different for everyone.

Your lifestyle and the number of years you spend retired are the two biggest contributors to the overall cost of retirement.

For those looking to maintain their current lifestyle in retirement, there is a common rule of thumb used by financial experts. As a guide, your annual retirement income should be around 80% of your pre-retirement income.

That means if your annual salary is £200,000 by the time you reach retirement age, you would need around £160,000 annually.

Why 80%? Because typically, there are fewer expenses in retirement to worry about. For example:

  • Lower housing costs if you have paid off your mortgage
  • Reduced daily costs associated with going to work
  • You no longer have to think about saving for retirement

How much should you save?

The first step is knowing how much income in retirement is needed.

From here, you can work out how much you will need to save to generate your desired annual income. One way to do this is to use the 4% rule.

What is the 4% rule in retirement?

The 4% rule is commonly used in retirement planning to help retirees determine how much they should withdraw from their pension fund annually.

The idea is to ensure a steady income that lasts throughout your retirement. In fact, this strategy is intended to make your savings last over the course of a 30-year retirement at a minimum.

Using the 4% rule, you divide your yearly retirement income by 4%. For example, let’s say your desired annual income is £150,000. In that case, you would need a retirement fund of roughly £3.75 million.

The ‘4%’ figure is just a guide for how much of your savings you use in the first year of your retirement. In the following years, you may wish to increase or decrease that amount to account for annual inflation rates.

Another option is to use our retirement calculator below to see if you are on track to reach your retirement savings goals.

Retirement Planning Calculator | Holborn Assets

What will your pension be worth when you retire?

Knowing what your pension might be worth when you retire is critical to planning ahead for your retirement.

If you know where you are now, and where you want to be, the journey will be easier. Use our calculator to work out what your pension will be worth when you come to retirement age. You can also see how small differences today can have a huge impact on your financial future.

Sources of retirement income

There are various sources of income that can be used to fund your retirement. Some of the typical options include the following:

Defined benefit pension

Defined benefit (DB) pensions, otherwise known as final salary pensions, guarantee a set income for life. These are usually workplace pensions that your employer will arrange.

The amount is based on one of two things:

  • The average amount you earned throughout your career or;
  • The salary you earned when you retired

For expats looking to transfer a DB pension, be aware that under UK Law, a scheme with a value of more than £30,000 requires advice from an adviser regulated by the FCA.

The adviser must have permission for the activity of ‘advising on pension transfers and pension opt-outs’.

Defined contribution pension

Defined contribution (DC) pensions are typically either stakeholder or personal pensions. DC pensions can include the following:

  • Workplace pensions
  • Private pensions

State Pension

The UK State Pension is based on your National Insurance (NI) record.

You will need a minimum of 10 qualifying years to get any State Pension. To receive the maximum amount, you need at least 35 qualifying years.

Passive income sources

Additional retirement income can be generated through passive income streams.

Passive income sources can include things such as:

Retirement income options

There are several options for accessing your pension pot. Speaking with a retirement expert first is advised to ensure you have the information needed to decide on the best strategy for you.

Some of the most common options include:

Pension drawdown

Pension drawdown allows you to regularly withdraw pension income. You can take up to 25% of your pension pot tax-free while the rest remains invested to provide an income.

Annuities

You can take up to 25% of your total pension pot tax-free, while the rest is used to purchase an annuity. Annuity products provide a guaranteed income for life.

Lump-sum

From the age of 55, you can take lump sums from your pension. Like the other options, you can take up to 25% of your pension pot tax-free. The rest can either be used to buy an annuity or be left to grow.

How much money do you need to retire?

Reaching your retirement goals with Holborn Assets

Retirement planning is the process used to ensure financial security when you decide to stop working. Understanding how much money you need to retire is an essential first step.

After all, if the end goal is unclear, it’s hard to create a structured plan to help you reach it.

At Holborn Assets, our financial experts can help you determine your cost of retirement and provide the guidance needed to reach your goals.

Make sure your retirement plans are on track and make the most of your golden years. Book a free pension review with Holborn and find out how we can help you.

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