How much money do you need to retire?
It’s a question that everybody asks themselves sooner or later. As the thought of retirement looms larger the questions becomes more pertinent. But it can be a complex question to answer. Where do you start? What information do you need to answer it? What other questions do you need to think about? What do you not know, but should?
In simple terms, start with the life you want, estimate what it will cost, then subtract the income you expect from other sources. Your pensions and savings need to cover the remaining gap, including tax and a margin for uncertainty.
There is no single number that makes retirement affordable for everyone. A couple with a mortgage and ambitious travel plans may need something quite different from a household with lower spending.
When I talk to people approaching retirement, the question behind the numbers is always more personal: “These are the things that are important to me, how can I make sure they are achievable and ensure financial security for as long as I/we live?”
Here is a practical way to begin answering it.
1. Start with what retirement means to you
Before reaching for a pension statement, talk about how you would like to spend your time. What would an ordinary week look like? What would you like to do while your health and energy allow?
Your plans might include travelling, helping family, volunteering or spending more time at home. If you need inspiration, try these 101 things to do in retirement. Choose what matters to you. If you are planning with a partner, discuss where your priorities differ. My article on understanding your lifetime priorities offers some questions to help you begin.
2. Work out your spending after tax
Use recent bank and credit card statements to build a realistic household budget. Start with the money you actually spend, rather than your salary before tax.
Separate your costs into three groups:
- Essentials, such as housing, food, utilities and transport.
- Enjoyment, including holidays, hobbies and meals out.
- Occasional spending, such as replacing a car, home repairs or helping children.
Some working costs may fall away. Others may rise when you have more free time. Include mortgage repayments or rent for as long as you expect to pay them. Keep an emergency reserve separate from planned spending.
Our lifestyle costs layer cake offers another way to distinguish essential spending from the extras you value.
Use the Retirement Lifestyle Calculator to explore the spending your preferred lifestyle might require. Its figures are illustrations, not a guaranteed pension target.
3. List your income and when it starts
Write down each source of retirement income, its starting date and whether it increases over time. This might include State Pensions, a defined benefit pension, employment or rental income.
Check your State Pension forecast, including how much you could receive and when it starts. If you have a partner, check each forecast separately. Do not assume you will receive the same amount or start receiving it together. Check your other pension statements too, including any benefits payable to a surviving partner where relevant.
Allow for tax and costs when estimating what reaches your bank account. Rental income, for example, needs an allowance for expenses and periods without a tenant.
4. Calculate the gap your savings must fill
Imagine a couple expects to spend £3,000 a month, or £36,000 a year, after tax. In their early retirement years, their other income provides £12,000 a year after tax. Their pensions and savings must therefore supply another £24,000 a year of spendable money.
Later, suppose their combined income from State Pensions and other pensions rises to £24,000 a year after tax. With spending unchanged, the gap becomes £12,000 a year.
These are invented figures in today’s money, not current State Pension rates or a recommendation. They show why retiring before your State Pension starts can require a larger bridge from savings.
Later: £36,000 spending − £24,000 other income → £12,000 gap.
All amounts are annual and after tax, in today’s money. This is an illustration.
The gap is an amount you need to spend. It is not necessarily the amount to withdraw from a pension. Depending on tax and how you hold your savings, you may need a larger withdrawal.
5. Turn the income gap into a retirement plan
Knowing the gap is useful, but it does not produce a reliable pension target on its own. You also need to consider how long retirement may last, when you can access each pension, investment returns, charges and future spending.
If you are still building your retirement savings, use the Retirement Savings Calculator to explore contributions towards an illustrative target. Test the assumptions before treating any result as your answer.
A fixed withdrawal percentage can help illustrate a scenario. It cannot promise that your money will last. Taking money from investments after a market fall can make recovery harder, particularly early in retirement. Read my article on sequencing risk in retirement to understand why the timing of investment returns matters.
Different ways of taking pension income involve different choices. An annuity can provide guaranteed income under its terms. Drawdown offers flexibility while leaving money invested, with a risk of running out. The right balance depends on your circumstances and the income security you need.
Explore these choices in the Pension Drawdown guide and the Pension Tax Free Cash guide.
6. Allow for inflation and changes in your life
Today’s budget will not buy the same things throughout retirement. A plan needs to allow for rising costs and check how each income source might keep pace.
Use consistent assumptions. If a projection shows everything in today’s money, its investment returns should also allow for inflation. Mixing today’s spending with future money values can give a misleading answer.
Test less comfortable possibilities too. What happens if markets fall, you live longer than expected, or your health changes? Could you adjust discretionary spending? If you have a partner, would the survivor still have enough income after either death? Consider possible support or care costs without assuming every household faces the same bill.
7. Review your answer regularly
A retirement plan needs revisiting as your circumstances change. Compare actual spending with your budget and review your income, savings and priorities regularly. Major changes deserve another look sooner.
You may find you can retire earlier than you thought. You may discover that working a little longer, reducing hours gradually or changing one spending priority gives you more room. The purpose is to understand your choices before committing to them. If you are still working, these 10 financial checks to make in your fifties can help you identify what to tackle next.
8. Would you like help working out your number?
I help individuals and couples approaching retirement connect their money with the life they want. We can explore your spending, pensions and savings, then test how different choices could affect your future.
Read about planning your retirement with me, or get in touch for an initial conversation.
This guide provides general information, not a personal recommendation. Pension and tax treatment depend on your circumstances and can change. Investment values can fall as well as rise.