How much do you really need for a comfortable retirement?

mature couple sitting outside their caravan reading books and drinking wine

This summer, the Centre for Better Ageing reported that 90% of people saving for retirement through a defined contribution (DC) pension are at risk of not achieving a decent retirement income. But how much do you really need for a comfortable retirement?

Around 5 million people are approaching retirement without adequate pension savings. The study, carried out by the Pensions Policy Institute, sponsored by the Centre for Better Ageing, warns that a growing number of people are at risk of being unable to afford a decent standard of living after retirement.

Over 90% of defined contribution savers risk inadequate pension income

Low State Pension, increasing unemployment, and workplace pension schemes being reliant on employee contributions all add up to leaving many without enough savings in retirement.

While this is an immediate concern for those in their 50s and 60s, younger generations also risk poverty in retirement if action is not taken.

90% of people at every age with DC pensions are at risk of having less income than they need or expect when they retire.

Many people overestimate how much retirement income they will need

Many people fall into the trap of overestimating how much they will need when they retire. This is because they expect to need the equivalent of the salary they have been used to earning.

However, to maintain your lifestyle when you have retired, realistically you’re likely to need somewhere between half and two-thirds of your last salary, after tax.

Hopefully, you will have paid off your mortgage, your children will probably have left home and be living independently, and you won’t have the costs of commuting to work to cover either.

Think about how you intend to spend your retirement years

Recently, Which? asked retired people about their spending habits. The research revealed that if you are a couple, you will need a retirement income of around £26,000 a year, or £2,170 a month. This sum covers the basic areas of spending as well as a few of life’s luxuries, such as meals out, European holidays, and hobbies.

Should you be seeking a more luxurious retirement, perhaps a new car every five years and holidays to more exotic destinations, you should expect to need £41,000 a year.

While the amount of income you need in retirement will be specific to you and your goals, this research provides a useful starting point when considering how much might be “enough”.

Your spending habits will alter as you age

As you think about the money you need in retirement, it’s also useful to remember that you’re likely to spend less as you age. Initially, you might go out and about to meet friends, travel several times a year, or enjoy regular meals out.

But as you age your spending will change. In later life, you’re likely to spend less on food and drink or recreational activities, but more on utility bills, health, and insurance.

What does all this mean for your pension savings?

It’s helpful to think about your pension income in blocks.

Start with the State Pension, then consider your personal or workplace pensions, and then add any additional income you might get from other investments you hold or rental property you have.

State Pension

The full level of the State Pension for the 2021/2022 tax year is £179.60 a week, or £9,339 a year. However, you may not qualify for the whole amount. Visit the government website to find out what you can expect.

The amount of extra income you might need to generate from your pensions and investments will also depend on the type of pension you use.

Final salary pension

Defined benefit (DB) or final salary pensions pay a regular monthly income, which is based on your earnings while you were working. Your annual statement will tell you how much you can expect to receive in retirement.

Defined contribution (DC) pension

A DC, or money purchase, pension is a savings pot you (and sometimes your employer) will have contributed to during your working life.

When you retire, you’ll need to decide how to draw an income from it. Although it’s possible to take the whole pension amount in one go, it could lead to a substantial tax bill, and you would be responsible for ensuring the money lasts for the duration of your retirement.

The most common way to generate an income from this type of pension pot is through income drawdown, or using the value of the pot to purchase an annuity. Some people opt for a combination of both.

So, having saved throughout your working life, how much do you need in your pension pot to have enough to retire?

The numbers below show you what you might need in your defined contribution pension for a comfortable retirement and a luxury retirement, depending on whether you opt for an annuity or use income drawdown.

Source: Which?

There’s a lot to think about when you’re planning for your retirement and it’s important to understand the implications of all your decisions.

We can talk you through all your options and help you take the right actions now, and when you stop work, to ensure you’re using your accumulated wealth to the best advantage.

You also need to think about how to draw your income tax-efficiently, which we can also help with.

Get in touch

Our team of experienced planners will help you make a clear plan for generating your retirement income and ensure that you have an achievable plan to make up for any shortfall.

Email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your annuity income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Bowmore Financial Planning Ltd is authorised and regulated by the FCA