You may have a long list of things you wish to achieve in retirement, such as traveling the world to remote locations or finally buying the set of golf clubs you’ve always wanted.
As such, your idea of a ‘comfortable retirement’ will likely be completely different from everyone else as your needs and goals will be unique. Therefore, the amount you’ll spend in retirement will also differ from those around you.
The most common error when it comes to defining how much you’ll need to retire comfortably is believing you can answer with a ‘one size fit all’ definition or a single number.
The best approach is to consult with a professional financial adviser, who can formulate the most appropriate plan, taking into account your current financial situation, and the lifestyle you wish to lead in retirement.
However, there are some methods and theories you can consider that help you evaluate how much you need in retirement, which we’ll explore in this article
What size pension pot and annual income do you need in retirement?
According to the Saltus Wealth Index, 64% of respondents — which consisted of high-net-worth individuals (HNWIs) with investable assets of £250,000 and above — believed they would need more than £50,000 a year for a comfortable retirement. One in seven (13%) said they would need at least £80,000 a year to achieve their desired standard of living.
This survey was conducted by financial planning and investment management firm, Saltus, and evaluated the views of HNWIs concerning their own financial and personal prospects, as well as their confidence in the UK economy.
On the other hand, research from The Pensions and Lifetime Savings Association (PLSA) and the University of Loughborough concluded that an individual requires only £33,000 a year in retirement, with couples needing just £47,000.
The results considered what is needed in retirement for home DIY and maintenance, household and personal goods, holidays, food, transport, clothing, and social participation.
As part of a comfortable retirement, they stated:
“Retirees could enjoy some luxuries like regular beauty treatments, theatre trips, and three weeks in Europe a year.”
Again, this is a pretty broad statement and doesn’t necessarily apply to everyone’s vision of a perfect retirement.
To accurately understand how much you need for a comfortable retirement, you should consult with a financial adviser. Together you can analyze your current expenditure, and how this may change when you reach retirement age, to formulate an appropriate pension plan.
The 4% rule
Most people underestimate the size of the pension pot they need, in order to withdraw the desired amount in retirement.
However, a good starting point is to use the famous 4% rule, initially developed by economist William Bengen. He determined that, in all circumstances, regardless of when someone retires(over a 50-year period), with annual withdrawals of4%, the pot would always last 30 years.
This method first takes into account, if you’re eligible for a full state pension. With 35 years of National Insurance contributions, you’ll receive £9,339.20 per year at state retirement age. This is also expected to rise with inflation for the foreseeable future.
The remaining income you’ll need in retirement can then be calculated, by dividing the shortfall by 4%. This will give you a rough estimate of the pension pot you might need.
For example, if we take the income defined by the PLSAfor comfortable retirement – £33,000 – and minus the State Pension of £9,339.20, we’re left with £23,660.80. If we divide this number by 4%, we can calculate a required pension pot of £591,520.
However, if take into consideration the Saltus Wealth Index and apply the same method for an HNWI’s definition of a comfortable retirement, we come up with the following calculations:
- £80,000 – £9339.20 = £70,660.80
- £70,660.80 divided by 4% = £1,766,520
If you’re not eligible for full state pension, you can still estimate the amount you may need using the above tables but adjust the shortfall accordingly. If you plan to retire earlier than the state retirement age, you will need to increase these sums substantially.
Thinking about your future and how much income you need in retirement is the first step. In order to determine whether you have a sufficient pension pot for your retirement needs, it’s best to have a bespoke cash flow plan, which can be created by an expert financial adviser.
Disclaimer: Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested.