How much do you really need to retire comfortably?

How much money we will need in retirement is a question we will all need to answer.

And the older we get, the more pressing it is likely to become.

One thing we can all agree on is that the UK state pension isn’t enough to provide a comfortable living on its own. Currently the full new state pension is £179.60 a week.

The actual amount you get will depend on your National Insurance record, and if you have fewer than 35 years of contributions you will receive less than this. Even if you get the full new state pension, however, it won’t cover much more than the bare essentials.

It’s therefore vital to have other income streams to supplement your state pension. These may include workplace and/or private pensions and perhaps other investments like property or ISAs.

You will need to save for these out of your earned income – but how much will you need in your ‘pension pot’ to retire comfortably? A survey recently conducted by Which? magazine offers some clues…

Which? Survey Results

Which? surveyed over 6,800 retirees earlier this year to find out what they actually spent. 

For what Which? defined as a comfortable retirement – which still sounds fairly modest to me – they found couples typically need £26,000 a year and single people £19,000. This amount would cover “essential bills plus regular short-haul holidays, leisure activities, alcohol and charity giving”.

That’s still a long way from a luxurious retirement, including long-haul holidays, a new car every five years, and so on. For that, they found couples would typically need £41,000 a year and single people £31,000.

So what would you need to save during your working life to make up the shortfall from the state pension to provide a comfortable retirement?

According to Which? if you were to invest your pension pot in a traditional annuity, a couple would need £265,420 for a comfortable retirement and an eye-watering £757,000 for a luxurious one.

Alternatively, if you opted for the slightly riskier (but nowadays much more popular) drawdown option, a couple would need £154,700 for a comfortable pension and £442,020 for a luxurious one.

The figures above factor in receiving an annual state pension of around £16,000 as a couple. If you are set to receive less than this, you would of course need a bigger pension pot to make up the difference.

Complications

In my view the Which? results are a good starting point for planning your pension requirements but not enough on their own.

Here are some further things you may need to take into account…

• None of us knows how long we are going to live, so it’s clearly sensible to try to ensure that enough money will remain in your pension pot to see you through to deep old age (e.g. 100). 
• If, however, you have a life-limiting condition, there is a case for spending more to enjoy life to the full while you can. You can’t take it with you, as the saying goes!
• If you’re keen to pass on a legacy to your children (or some cause dear to your heart) you will need to save more and/or be more cautious about how much you withdraw in retirement.
• Tolerance for risk is another factor. If you opt for a drawdown pension, a common rule of thumb is that you should draw no more than 4% of your pot a year to preserve its value so it lasts your whole lifetime. If you worry the 4% rule is too chancy, you could reduce your withdrawals to 3% or less. But you will of course then need a bigger pot to draw the same amount of income.
• There is also the matter of whether you own your home. If so you will have the scope to raise extra money if needed by downsizing or using equity release. So you may not need quite as much in your pension pot.
• And finally, if you have a particular ambition or goal you wish to achieve during retirement (e.g. going on a world cruise), you will of course need to ensure enough money is available to cover that when the time comes.

I hope you find these thoughts and figures interesting and they help you assess how much money you will need to save during your working life to finance the retirement you desire.

Nick Daws writes for Pounds and Sense, a UK personal finance blog aimed especially (though not exclusively) at over-fifties.

Reference: How Much Will You Need to Retire? from Which? magazine.

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