This is a question we get asked a lot. There is a simple answer to this question and a more complicated answer.
The simple answer is: you need enough retirement income to meet all of your monthly outgoings.
The complicated answer is: it depends on a number of factors, including
what age you want to retire
Whether you are single or partnered
When your partner wants to retire and what pre- and post-retirement income they have
What your outgoings are
Whether your outgoings will increase, decrease or stay the same throughout your retirement
Whether you have any capital expenditure requirements in retirement (e.g. paying off the mortgage)
What your sources of retirement income are and when they start (e.g. your state pension, final salary pensions or personal pensions)
Whether you expect to receive any capital sums (e.g. sale of a business or property, or a substantial inheritance from your parents)
Everybody is different, and everybody’s retirement plans are different, too.
Some people are happiest with a quiet life, with time spent at home and with the family being their main priorities. Generally speaking this should be a relatively inexpensive lifestyle to maintain.
Others have different expectations, and hope to spend their retirement years doing all of the things they’ve always wanted to do. Holidays, meals out, home improvements, theatre visits and hobbies…. sometimes this can lead to quite an expensive retirement!
The more expensive your lifestyle is in retirement, the more income you’re going to need.
Just like during our working years, sometimes there is a gap between the lifestyle we want, and what we can afford. You may need to adjust your expectations if these costs are higher than the income you’re going to receive.
Following these three steps is a good start in working out what your outgoings are going to be in retirement:
1. Work out what your current outgoings are by going through your bank and credit card statements. Be sure to include all direct debits, recurring card payments, and your lifestyle expense such as the weekly food shop, meals out, takeaways, and other discretionary spending. You also need to factor in annual or one-off expenses.
2. Remove/reduce all items that will cease/reduce when you retire, such as commuting costs, mortgage payment (if this will be repaid by the time you retire), pension contributions, and any other work-related expenses.
3. Add/increase any items that will start/increase when you retire, such as extra holidays, meals out, golf club membership, hobbies, or any other anticipated costs. Be sure to include things that are annual or one-off costs, as well as regular monthly expenses.
You may find our outgoings spreadsheet useful – we encourage all of our clients to use this (both pre- and post-retirement) so that they have a good grip on what their outgoings are each month.
Now you know how much income you need, you need to work out where this income is going to come from – our article 'What Retirement Pot Do I Need' is a great place to start.
The contents featured in this article are for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
All information It is based upon our current understanding of current legislation and HMRC guidance. While we believe this interpretation to be correct, it cannot be guaranteed that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Thresholds, percentage rates and tax legislation may change in Finance Acts and bases of, and reliefs from, taxation are subject to change and their value depends on an individual’s personal circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028).
Investments carry risk. The value of your investments (and income from them) can go down as well as up, and you may get back less than you invested. Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.