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How much money do I need to retire?

Considering your retirement saving needs now could mean that you are in a much better position to realise your goals later in life. Whatever your retirement plans, you’ll need ask yourself: how much money do I need to retire?

Topic: Investing

One of the best things about retirement is finally having the time to do what you want. For some, it’s a chance to slow down and spend time with the grandchildren. For others, retirement is the opportunity to fulfil long-held ambitions and explore exotic destinations. Whatever your retirement plans, you’ll need ask yourself: how much money do I need to retire?

Considering your retirement saving needs now could mean that you are in a much better position to realise your goals later in life. Unfortunately, with many people preparing too late, not everyone in the UK finds themselves in a position to live out their retirement goals. It’s worthwhile to start thinking sooner rather than later about how you intend to pay for day-to-day living, healthcare, unexpected costs and lifelong dreams.

The situation: Pension dreams versus pension reality

Research has found that the average UK pension pot may fall short of providing a generous retirement income. According to The Telegraph, the average UK pension pot size for those aged 55-65 is just over £105,000. That would give annual retirement income of around £5,000. Add in the current full state pension of £8,296.60 and an average 65-year-old retiring today would receive an annual income of £13,296.60 before tax, depending on the annuity they purchased.

Worryingly, that’s less than the average retired household actually spends according to research by the consumer group Which?.

To help you avoid these pitfalls, we’ve put together some questions for you to begin considering as you think ahead about your retirement.

1. How much will my living costs be in retirement?

Different people have different ideas about what makes a comfortable retirement, so when you ask yourself ‘how much do I need to retire?’ you should also ask ‘what type of retirement do I imagine?’
According to a survey by consumer group Which?, the average household spends around £2,200 a month in retirement – that’s a little over £26,000 a year. This spending includes the basics like food and utilities, as well as one European holiday each year.
If you’re looking forward to a luxurious retirement, of course, this will cost significantly more. The same survey reports that adding an annual long-haul holiday and a new car every five years increases average spending to £39,000 per household. Or for a no-frills retirement, the average household needs £18,000 to cover essential costs.
It might help you to have one of these figures in mind when you’re planning your retirement savings.

Annual UK income needed (on average) for different retirement plans:

No frills – essential living costs

Comfortable retirement – with one European holiday per year

Luxurious retirement – with one long haul holiday per year and a new car every five years




2. How will I cover my living costs in retirement?

The full state pension in the UK, for those that are eligible, is currently £8,296.60. So there’s a significant shortfall between this and the average household spending – around £18,000 a year.

If you’re lucky enough to have other income streams, savings and investments you should take these into account. But often people rely on their pension savings, held in personal or workplace pensions.

The amount people need to save into a pension pot is significant. Which? found that for an annual retirement income of £26,000 including state pension, you need to build a pension pot of £370,000 over your working life and use it to purchase a lifetime income via an index-linked, joint-life annuity. To achieve the more luxurious annual retirement income of £39,000, you’ll need a pension pot worth £550,000, investing it in income draw-down with 3% investment growth.

3. How can I reach my retirement savings goal? 

How much you need to save depends on the age you start saving. In a nutshell, the sooner the better.

To reach a total of approximately £210,000 at retirement, you’ll need to start saving £131 per month from the age of 20, increasing to £198 per month from the age of 30 according to Which?. Wait until you’re 40 and this rises to £338 per month, and from 50 it’s £633. The total saved is dependent on how your investments perform so could be more or less than £210,000.

Investing your savings over the long term could be one of the best ways to reach your retirement goal. The combined power of inflation protection, drip-feeding funds and compounding could mean that this is a good solution for many people considering their retirement goals. To find out more about investing, and explore whether it is right for you here is a simple video guide.

4. What if my savings aren’t enough?

The answers to the questions ‘how much do I need to retire’ and ‘how much do I have in pension savings’ are often very different.

If you’ve identified a gap, and know that you’re not saving enough each month, consider whether this is something you can address now. One option is to increase your contributions, if you have some time before retirement and you can afford to do so.

Another option is to look at reducing your spending in retirement. The retirement options we’ve looked at here range from £18,000 a year to £39,000 – a significant variation. If you can cut inessential items from your budget, this might help to make your savings last longer.

Finally, you can consider postponing your retirement. According to figures from the Office of National Statistics, there are just under 1.2 million people in the UK currently working past the retirement age of 65 – a number that’s doubled since 1992. This option will give you longer to add to your pension, and potentially allow you to take advantage of employer contributions as well as your own. Plus, if you defer your state pension, the payments you receive will increase.

If you’re over 50 and would like more information about your pension options, you can also contact Pension Wise, a free guidance service offered through the government, to book an appointment .

All investment carries risk and it is important you fully understand these risks and are willing to accept them. You may get back less than you invested. The information contained in this article does not constitute advice and the information referred to may not be the same for all, therefore we strongly recommend you seek professional guidance from your independent advisor before taking any action.

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