Retirement planning is one of life’s big financial questions.
After working hard for decades, we all want to enjoy our later years without money worries, right?
But how much is enough?
What size pension pot will provide the retirement lifestyle you’re hoping for?
The honest answer is that it varies from person to person. Someone’s idea of a comfortable retirement might involve regular travel and dining out. Others might be perfectly happy with simple pleasures closer to home.
What’s certain is that planning matters. The earlier you understand how much you need to save, the more time you’ll have to work towards it. Even small changes today can make a big difference to your financial security.
This blog explores how to calculate how much you need to save for your retirement, looking at the factors that influence the size of your pension pot and practical steps to help you achieve it.
What does a ‘comfortable’ retirement look like?
Before working out how much you need to retire, it’s worth thinking about what kind of lifestyle you’re aiming for in retirement.
The Pensions and Lifetime Savings Association (PLSA) created its Retirement Living Standards to help people visualise different retirement lifestyles. These are updated regularly to reflect changing costs. They break down as follows:
- Minimum (£14,400 for a single person, £22,400 for a couple): This is the minimum amount you’ll need to cover your basic household expenses, with a little left over for some social activities, such as an annual UK holiday and occasional meals out.
- Moderate (£31,300 for a single person, £43,100 for a couple): This level provides more financial security and flexibility, including European travel, regular leisure activities and the ability to help family members out financially.
- Comfortable (£43,100 for a single person, £59,000 for a couple): This level provides more financial freedom and luxuries, including longer foreign holidays, a new car every few years and more money for hobbies or socialising.
These figures give a helpful starting point, but your definition of comfort might be different. Perhaps you’re passionate about certain hobbies, want to support family members or dream of moving abroad. So, take time to picture your ideal retirement day-to-day.
What activities would you enjoy? Where would you like to live? How often would you travel?
This vision will help you create a more personalised retirement target.
Calculating your retirement income needs
There are several approaches to working out how much income you’ll need in retirement.
The traditional rule of thumb suggests aiming for two-thirds (67%) of your pre-retirement income. The theory is that certain expenses – such as – commuting costs, mortgage payments or pension contributions – decrease in retirement. However, this general rule doesn’t account for your specific situation. A more accurate approach is to create a detailed retirement budget that covers your:
- Essential expenses, such as housing, utilities, food, healthcare, insurance and transport.
- Discretionary spending, including hobbies, entertainment, holidays, gifts and dining out.
- Occasional big-ticket items, like home repairs, a new car or a dream holiday.
You should also consider how your expenses might change over time. Some costs (like healthcare) might increase, while others (like travel) decrease as you get older.
Many Leicester residents find that their spending follows a ‘retirement smile’ pattern – higher in the early, active years of retirement, lower in the middle years, then potentially increasing in later life as care needs arise.
Your retirement might last 20-30 years or more, so it’s worth thinking about these changing needs when calculating your income requirements.
Sources of retirement income
Once you have a target income figure, you’ll need to identify where this money will come from. Most people have several potential sources.
The State Pension provides a foundation for most retirement plans. The full State Pension is currently £230.25 per week (£11,973 per year), but not everyone qualifies for the full amount. You can check your State Pension forecast on the HMRC app or Government website to see what you might receive and when.
Workplace pensions have become more common through auto-enrolment. These are defined contribution schemes, where you and your employer contribute a percentage of your salary. Check your annual statements to see how your workplace pension is growing.
Personal pensions are arrangements you’ve set up yourself, such as SIPPs (Self-Invested Personal Pensions). These give you more control over your investments but require more active management.
Other assets might include rental properties, investments outside of pensions (such as stocks, ISAs or bonds), or businesses you own. Some people also factor in potential inheritance or plans to downsize their home.
It’s essential to get a clear picture of all your potential sources of income, as they’ll form the building blocks of your retirement finances.
Working out your pension pot target
Translating your income needs into a pension pot size requires some calculations, which makes getting professional advice from an experienced financial adviser like BDWM essential.
One common approach is the ‘4% rule’, which suggests you withdraw 4% of your pension pot in the first year of retirement, then adjust that amount for inflation each subsequent year. This is designed to give your money a higher chance of lasting 30 years or more. Using this rule, if you wanted a pension income of £20,000 per year (on top of your State Pension), you would need a pot of approximately £500,000 (because £20,000 is 4% of £500,000).
However, this rule has limitations. It was developed in the US with different market conditions, so it may not be suited for people in the UK. A more flexible approach, starting with a lower withdrawal rate of 3% to 3.5%, may be more appropriate. Again, getting advice from a professional is key.
Another approach is to consider what an annuity might cost. Annuities provide a guaranteed income for life, removing the risk of running out of money. Current rates mean that a 65-year-old might need around £300,000-£350,000 to buy an annuity providing an income of £20,000 per year (though rates change regularly).
Many people now opt for pension drawdown rather than annuities, taking income directly from their pension pot while keeping it invested. This provides more flexibility but requires ongoing management of your investments and withdrawal rate.
And don’t forget to factor in inflation when calculating your target. What might seem like a comfortable income today will buy you less in the future. If inflation averages 2% per year, your purchasing power would halve over 35 years.
Factors that could affect your number
Several important factors can significantly impact how much you need to save.
The average life expectancy for a 65-year-old in Leicester is now into the 80s, but many people live well into their 90s. Your family history, health and lifestyle can give clues about your longevity, but it’s prudent to plan for a longer retirement.
Your healthcare needs will typically increase with age. While we’re fortunate to have the NHS, you might still want a financial buffer for private treatments, prescriptions, mobility aids or potential care needs.
And as we mentioned above, inflation will erode your pension’s purchasing power over time, so your retirement income will need to grow to maintain your standard of living.
Your investment returns before and during retirement will affect how much you need to save. Higher returns mean you can potentially achieve your goals with a smaller pot. But they usually come with greater risk. Your investment strategy should reflect your risk tolerance and time horizon.
Downsizing could also provide additional funds for your retirement. Many Leicester residents release equity from their larger family homes by moving to smaller properties when their children grow up and move out, boosting their retirement savings.
All these factors mean that retirement planning isn’t a one-off calculation, but an ongoing process that needs adjusting as your circumstances change.
How can BDWM help?
Working out how much you need for retirement isn’t an exact science. It depends on your idea of a comfortable retirement, your health, longevity and external factors like inflation.
Rather than focusing solely on a single target number, think about building flexibility into your retirement plans. Regularly reviewing your progress, adjusting your contributions when possible and being open to different retirement scenarios will help you create financial security for your later years.
Whatever your age, the best time to start planning is now. Even small steps today can make a significant difference to your retirement.
At BDWM, our team of qualified financial advisers in Leicester specialise in retirement planning. We can help you understand how much you need to save and create a personalised strategy to achieve your retirement goals. We offer detailed retirement forecasting, taking into account your current savings, future contributions and desired lifestyle to give you a clear picture of your financial future.
Contact us today for a no-obligation consultation to discuss your retirement plans and how we can help you achieve the retirement lifestyle you deserve.