How to work out how much you need to retire

Planning your finances has never been more important, but deciding how to do this can be difficult. We can’t predict the future, but we can put plans in place to ensure that we are prepared. Research from the Office for National Statistics suggests that the average retired household now spends £21,770 a year.

Considering the full state pension is only around £8,000 a year, it’s clear that most people have quite a shortfall to make up through their pension savings.

How much money do retired people spend?

Research from consumer guide Which? in 2017 attempted to establish the outgoings of the average retired person.

Which? carried out their research and found the average household expenditure for retirees is slightly higher than that of the Office for National Statistics. Retirees who responded to the survey spent around £2,200 a month per household, including basic expenditure and some luxuries such as eating out and European holidays. This equates to around £26,000 per year.

If you wanted to include long-haul holidays and an upgrade to your car every five years, your cost of living in retirement rises to £39,000 a year.
The Which? research found that retired people tended to spend less on food and drink, housing and recreation, but more on utility bills, health and insurance premiums.

How to work out how much money you’ll need in retirement

Follow these steps to work out how much retirement income you’ll need.
1. Add up all your current living costs.
2. Work out whether any of your expenses will change in retirement. For example, travel costs may reduce as some public transport is free when you meet state retirement age. You may have paid off your mortgage, but your utility bills may be higher if you spend more time at home. Factor in other costs such as care costs of insurance premiums.
3. Add in a small monthly buffer for unexpected expenditure.

Once you have done this, you’ll have a rough idea of how much income you will need per year when you retire.

Establish that you’re on track to generate enough pension income

Once you have worked out how much money you will need to live on when you retire, you should work out whether your current pension provision will provide that level of earnings.

Firstly, you should calculate what state pension you are likely to receive. You can check your state pension online to find out how much state pension you could get when you could get it and if you could increase it.

Then, you should work out what pension you’re likely to receive from any private contributions you have made – perhaps to a private or company pension scheme.

Don’t forget that you then may have to take away any tax that you’ll pay on your pension.

How much you’ll need to contribute to get the pension you need

If you qualify for a full state pension, you will currently get just over £8,000 a year. Therefore, based on the above assumptions that you are likely to spend between £20,000 and £26,000 per year in retirement, the average household will then need to find up to £18,000 a year in additional pension income.

If you’re currently on the average salary of £26,364, securing a retirement income of over £20,000 a year needs very careful planning.

So how much do you need to contribute to generate a retirement income of £20,000 a year? Figures from the BBC say that:

• If you start saving at the age of 25, you would need to put away £246 a month, net of tax.
• If you start saving at the age of 35, you would need to put away £404 a month, net of tax.
• If you start saving at the age of 45, a man would need to contribute £826 every month, and a woman £861 per month.

These calculations are based on a complex model that predicts the investment return over the lifetime of the pension.

Patrick Bloomfield, a partner at Hymans Robertson LLP, which did the calculations for the BBC, said: “The biggest message from this analysis is the cost of delaying when you start to save.”
“The challenge is when they’re in their 20s, and 30s people are trying to save, they’re trying to get on the housing ladder, they’re being young and having fun. There are lots of calls for that money.”

“Twenty thousand pounds on average national earnings is quite an ambitious target. It would have them replace three-quarters of their pay with a pension. But I think it is an excellent target to aim at.”

There are ways you can work out roughly how much you need to retire, but there is no guaranteed calculation as we can’t predict how long we will live or how the economy will behave. It is essential to bear in mind the likes of inflation and retail price index, so review your retirement plan regularly.

Discover our article on how to decide what is a good time to retire to help you with your retirement planning.

Please note: All information within Your Resource Centre is correct at the time of publication, and we make every effort to keep content accurate. However sometimes information may be out of date. You should not rely on this information when making financial decisions as no financial advice has been given. The information reflects the view of the author and not that of Shepherds Friendly Society.

If you’re not sure what to do when making financial decisions then you should consult a financial adviser, who will likely charge for any advice that is given.

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