Do I Have Enough Money To Retire On?

How much do I need to retire?

The vast majority of people living in the UK overestimate how much money they will need to live on during retirement. One common misconception people have is thinking they will spend the equivalent of their wages. It is thought you should need somewhere between half and two-thirds of the final salary you had when you were working, after tax, to maintain your lifestyle once you retire.

This is because by the time you retire, you might have paid off the mortgage, will no longer be bringing up children and will no longer face the cost of commuting.

A recent survey of over 6000 retirees by ‘Which?’ investigates if this is really the case by taking a look at retiree spending habits.

The study aims to help you answer two key questions when it comes to planning your retirement:

  • How much income money will I need in retirement?
  • How much money will I need to save in advance to deliver that income?

How much do people spend in retirement?

On average households spent a slightly under £2,200 a month (£26,000 a year).

This covers all the basic areas of expenditure and some luxuries, such as European holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement.

You’d need £39,000 a year if you include luxuries such as long-haul trips and a new car every five years.

Travelling and holidays are a very important part of retirement for members of the survey, with people spending nearly £4,500 a year on this part of their life.

Priorities change slightly as you move through your retirement years. Which? Found those surveyed tend to spend relatively less on food and drink, housing payments and recreation as they get older, but more on utility bills, health, and insurance premiums.

How much money will you need in your total pension pot?

It’s important to think about your pension income in building blocks – first with the state pension, then with your private or workplace pension savings, and then with any other additional income, you might get, from investments or property.

State pension

Once you reach state retirement age, currently 65 for men and women, the government will provide a sizable chunk of your post-retirement money. The State Pension is a regular payment from the government most people can claim when they reach State Pension age. Your State Pension age depends on when you were born. You can find out your State Pension age by using the calculator on the GOV.UK website.

The state pension is currently £251.90 per week for a couple (if you qualify for it before 6 April 2016). This is equivalent to £13,098, bringing a couple of half way towards the £26,000 annual income level (before tax).

The full level of the new state pension (for people qualifying for it on or after 6 April 2016) in 2018/19 is £164.35 per week, but not everyone gets that much.

In April 2018, the average for a man who qualified after April 2016 was £151.84 a week (£7,895 a year), while the average for a woman was £143.85 (£7,480 a year. Combined, that’s around £15,375 a year.

You can get an estimate of how much State Pension you could get on GOV.UK. This is called a State Pension Statement.

Final salary pensions

How much extra income you need to generate from your private pension savings will depend on the type of private pension you have.

Defined benefit and final salary pensions pay you a regular monthly income – how much you get is based on your earnings while you were working.

If you have one or more of these, you should receive annual updates telling you how much you can expect to get.

Adding that to your state pension (which you can find out by getting a state pension forecast) will help you understand how much you’ve got to play within retirement.

Money purchase pensions

A money purchase, or defined contribution, pension sees you invest your pension contributions into a big pot. When you come to retire, you have to decide how to generate an income from it.

You can take your entire pension pots in one go, but this will mean it’s entirely down to you to make the money last and you’ll invariably pay a substantial tax bill.

Most people with these pensions will opt for income drawdown or an annuity, or a combination of both when it comes taking money out of their pension.

If this is you, how much will you need in your pension pot to have enough in retirement? We’ve crunched the numbers.

  • £267,800 – How much you need in your pension to get £26,000 a year from an annuity
  • £206,500 – How much you need in your pension to get £26,000 a year from the income drawdown
  • £615,500 – How much you need in your pension to get £39,000 a year from an annuity
  • £455,500 – How much you need in your pension to get £39,000 a year from the income drawdown

If you were aiming to get a comfortable post-tax income of £26,000 a year and wanted to get a guaranteed income paid to you via a joint-life annuity, you would need a pot of £267,800, according to Which?.

To get the same amount from income drawdown, which sees you keeping your money invested in your pension and withdrawing a regular income, you’d need £206,500. This assumes your savings grow by 3% annually.

Producing post-tax annual income of £39,000, including the state pension, would mean an initial pot of around £615,500 to buy a joint-life annuity or £455,500 invested in income drawdown.