How Much Money Do I Need for Retirement?
Retirement requires a lot of planning and it’s best to have a good idea of how much money you’ll need for retirement.
Over 38% of pensioners over 65 find themselves broke and unable to see their family, care for their basic needs, or pay medical expenses.
You don’t have to be part of that statistic.
With astute financial planning, you can retire comfortably.
As experts in our field, we discuss the following in this article:
With over 5 years of thorough research, our retirement experts have compiled a comprehensive list of everything you need to know about retirement plans.
Let’s take a look.
How Much Annual Income Do I Need to Retire?
The annual income you’ll need should be half to two-thirds of your final annual salary.
£41,000 would cover the basic monthly amenities and luxuries such as an annual holiday.
The average spending on luxuries and a vacation is in the region of £4,6401.
However, this amount may decrease as people get older, however with inflation2 it’s best to plan for a larger expenditure upfront.
How Much Does a Couple Need to Retire?
For a couple to retire moderately, they would need an annual income of £26,000 post-tax.
Research in 2021 showed that the amount could increase to as much as £47,500 if the couple decides to live a more comfortable lifestyle.
Planning for Your Needs
It’s essential to plan with your future needs in mind.
Here’s some considerations:
When Do You Plan to Retire?
You should plan to retire between the ages of 50 and 653.
Although the average pensioner would have retired by the time they turn 65, it’s advisable to work on your retirement plan between the ages of 45 and 55.
How Do You Want to Live in Retirement?
You should want to live comfortably more than moderately and plan according to your future financial needs.
Your medical and household expenses will increase yearly, and a moderate annual retirement income might not cover these costs.
It would always be in your best interest to plan accordingly with the assistance of your financial advisor4.
How Much Money Do You Need to Retire as a Single Person?
As a single person, you’ll need to start saving £20 000 every year to have a reasonable retirement.
If you want to retire in luxury, you’ll need to consider saving £33 000 every year starting in your 20s.
Your retirement planning checklist5 should include as many items as you would have to pay while you’re home and not earning a steady income.
Let’s look at what you need to consider:
- You need to decide the exact age at which you want to retire.
- The consequences and risks of accessing your pensions too early.
- Consider getting professional pension advice.
- Get a pension forecast.
- Calculate your existing debt and work towards paying it off before retirement.
If you plan on retiring with your partner, then the 2 of you can consider a state pension to boost your income should you be eligible for one.
The new state pension offers £19,256 to a couple as an annual pension which can be helpful if you have a moderate lifestyle.
How to Calculate Retirement Savings
To calculate your retirement savings, you need to take your annual expenses and multiply them by 25.
For example, if you spend £40,000 per annum during retirement and multiply it by 25 years, you’ll need a retirement savings of £1 million.
How Much Do You Need to Save Into a Pension at Different Ages?
How much you need to save into a pension at different ages will all depend on how you want to retire. This will dictate the percentage of your salary that you need to save.
Percentage of Your Salary
The percentage of your salary that you’ll need to save at different ages in order to retire comfortably will depend when you start saving.
Here’s more information.
In your 20s your employer will start paying towards a pension for you, and you can opt out, but staying is advisable.
You should also start saving at least 5%of your monthly salary towards your pension.
This is the ideal time to invest as much as possible while you don’t have many expenses like children and home investments.
When you head into your 30s there’s no set percentage that you need to put away, but it’s advised to add your pension into a higher growth savings plan.
Life may take sudden turns with weddings, children, and home investments, so keeping an eye on your contributions is especially important.
In your 40s a final salary plan can help you to have a comfortable pension structure.
If you’ve been putting money into this scheme along with your pension contributions from your employer, you should have a sizable amount invested in the stock exchange.
The scheme caps the amount at 2,5% with a protection plan that guarantees your money will increase annually with the stock market interests.
You’ll have 20-25 years left before you retire.
By the time you’re in your 50s, you should be able to access some of your pension.
It would be an ideal time to consider increasing your contributions to provide for your beneficiaries..
How Much Do You Need to Retire as a Single Person?
To retire in as a single person in your 60s, you’ll need 20-35 times more than your monthly expenses saved up.
If you started saving in your 20s, you should be set for any health care needs and a comfortable retirement home or renovations you want to make your life easier.
If you haven’t been cautious with your money and only started saving later in life, you’ll need to consider living on a budget until you have enough to cover your basic costs for 15 years.
How Much to Save for Retirement by Age
How much you need to save for retirement by your age is determined by when you start.
You should save 5% of your monthly salary in your 20s and, between your 30s and 40s, increase the amount to 12.5%
An Alternative Formula
An alternative for retirement would be to save 10-15% of your monthly salary as a part of your pension.
What Is the 4% Rule?
The 4% rule guarantees a steady income stream and suggests that a retiree withdraws that percentage annually from their fund to ensure that it remains sustainable.
The rule is to secure the safety of finances, but values can be adjusted to individual needs.
What Are My Retirement Income Options?
Retirement income options6 range and depend on which retirement plan you opt for.
Here are the top 5 retirement income otions:
- State pensions
- Workplace pensions
- Tax-efficient investments
- Lifetime ISA
Defined Benefit vs Defined Contribution Pensions
The difference between defined benefit pensions and defined contribution pensions is that defined-benefit pensions have employer contributions based on the employee’s history.
The defined contribution pension is a savings investment plan that provides employees with an income after they stop working at the company.
Plan For Unexpected Expenses in Retirement
Planning for unexpected expenses in retirement is a crucial aspect of your savings.
You need to have confidence in where your retirement income will be paid from.
This will then allow you to make provisions to cover your day-to-day expenses and unexpected expenses like medical, frail care, and home repairs.
A fixed annuity plan could ease the pressure of retirement. Most programs pay out over a 5-10 year period.
Fixed annuity or income rider plans are optional enhancements to your existing retirement plan, but these add-ons can make all the difference to your retirement income.
Inflation & Retirement
Inflation can make planning for your retirement difficult.
If you don’t have the additional monthly funds to cover the ups and downs of inflation7, you may find your retirement purchasing power very low.
Investing your retirement savings in equities that can grow with interest is better than leaving your money in the bank.
Banks don’t guarantee growth if the money you’re saving is not attached to a product that grows with interest.
What if I Can’t Afford to Save for a Pension?
If you can’t afford to save for your pension, then you need to consider downsizing.
Pay off as much of your debt as possible and bank any excess you may have in your bank account.
Consider a smaller home and a more economical car.
Trade take away or restaurant food choices for more affordable home-cooked meals to save on expenses.
It may seem like you won’t be able to enjoy your life, but you’ll be guaranteed spoke form of retirement, which is more important.
How Much Tax Will I Pay on My Pension & How Can I Avoid It?
You can withdraw 25% of your pension tax-free, but you’ll have to pay the income tax rates for any other withdrawals.
The only way to avoid tax is to make one withdrawal for the stimulated tax year and keep your tax income at a lower rate.
How Much Should I Save for Retirement Each Year?
You should save at least 10% of your annual income each year for retirement.
This total should increase every decade according to your salary increases.
What if I Don’t Have Enough to Retire?
If you don’t have enough to retire, you can delay your retirement and work for a more extended period to save some more capital.
Reassessing your lifestyle can also up your savings so you can invest in products that can increase your financial portfolio before retirement.
What Percentage of Your Salary Should Go Toward Retirement?
5-10% of your monthly salary should go towards your retirement.
Investing that money early on can increase the interest you accumulate to counteract living expenses in your 40s and 50s.
How Much Do Millennials Need to Save for a Comfortable Retirement?
Millennials should save between 7 and 10% of their annual income in their 20s for comfortable retirement
Over half of millennials between 22-30 have no savings, so they must implement a retirement plan to prevent poverty in their retirement years.
What’s a Good Monthly Retirement Income UK?
An good monthly retirement for a retiree between 55-65 will be £2150 if you want to live comfortably.
Although many pensioners won’t be able to save that much by the time they retire, they could live moderately or invest in equity release to supplement their income.
Retirement should be the time in your life when you can relax and take time to rest and enjoy growing old.
However, this does require financial stability.
If you’re unsure about your retirement, it’s best to speak to a professional who can help you plan, decide how much you’ll need to save for retirement and how to achieve your goals.
Editorial Note: This content has been independently collected by the EveryInvestor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.