Saving for a comfortable retirement can feel like trying to hit a moving target.
How much is enough? Will your money last? What if the unexpected happens?
These are questions we hear from many of our clients.
The anxiety around not having enough for retirement is natural. After all, you’re planning for a future with many unknowns.
The good news? With some thoughtful planning, you can build a clearer picture of your retirement needs. While everyone’s situation is unique, understanding the key factors that influence your retirement savings goals will put you in a stronger position to make informed decisions today.
In this blog, we’ll help you consider the lifestyle you want in retirement, how pension contributions work and the impact of inflation. Our aim is to give you the tools to calculate a realistic retirement budget that works for you.
Understanding your retirement lifestyle
Visualising the retirement you want is the first step in figuring out how much you’ll need to fund it. This crucial step isn’t about dreaming. It’s about creating a realistic monthly budget for your future needs.
Most retirement spending falls into two categories: your essential costs like housing, bills, food, healthcare and transport; and your discretionary spending on things like holidays, hobbies, dining out and gifts.
Your choices can significantly impact these costs. For example, if you want to retire to London or the South East, you’ll probably need a bigger pension pot than if you’re going to retire in, say, Yorkshire or further north. Similarly, having lots of hobbies or regular travel will need more funding than a quieter lifestyle in retirement.
So, how much do you really need?
The Pensions and Lifetime Savings Association (PLSA) has issued some guidelines to give you a better idea of what to aim for. Its Retirement Living Standards were designed to help savers understand how much money they will need to live the lifestyle they want in retirement.
According to the PLSA figures, a ‘minimum’ retirement, covering your basic needs and modest leisure activities, requires around £14,400 per year for a single person or £22,400 for a couple.
A ‘moderate’ retirement, allowing more financial freedom, including dining out, holidays and running a car, will require around £31,300 annually for a single person or £43,100 for a couple. And a ‘comfortable’ retirement, with more extensive travel, a newer car and some luxuries, might require £43,100 per year for a single person or £59,000 for a couple.
These figures provide a good starting point. But your personal circumstances matter most.
Do you own your home outright? Will you still support family members? Do you have expensive hobbies? You’ll need to take all these things, and more, into account.
So, take a moment to jot down your estimated monthly expenses in retirement. Include everything from Council Tax to Christmas presents. And be honest. Underestimating could leave you short, while overestimating might cause unnecessary anxiety about reaching your goal.
Remember, your spending habits might change throughout your retirement. Many retirees spend more in their active early years, less in mid-retirement and potentially more in their later years, especially if they need care.
The pension puzzle
How much should you contribute to your pension now to reach your retirement goal?
The traditional rule of thumb suggests taking the age at which you start your pension and halving it. That’s the percentage of your pre-tax salary you should ideally save. So if you’re 30, aim for 15%. While this provides a rough guide, your individual circumstances matter more.
Workplace pensions offer valuable advantages. Since auto-enrolment began, most UK employees contribute at least 5% of their salary, with employers adding a minimum of 3%. This employer contribution is essentially free money towards your retirement, so take full advantage if you can.
Delaying pension contributions can be costly. A 25-year-old saving £200 monthly until 65 could accumulate around £190,000 (assuming 5% growth). Start at 45, and you’d need to save £800 monthly to reach the same amount.
This doesn’t mean you’ve missed the boat if you’re starting later. But it does highlight the importance of reviewing your contributions regularly. Even small increases can make a significant difference over time.
Looking beyond your pension
While pensions form the cornerstone of retirement planning, a balanced approach includes other savings and investments.
ISAs offer excellent tax efficiency, with the current annual allowance of £20,000 letting you build a tax-free portfolio over time. Unlike pensions, you can usually access this money quickly when you need it, providing flexibility before retirement.
Property is popular for building a retirement income. Whether it’s through investing in properties or downsizing your home to free up equity, it can provide both income and capital growth. However, property isn’t always easily converted to cash and often comes with ongoing costs.
Diversifying your retirement portfolio can also provide greater long-term financial security. A well-balanced portfolio might include cash savings for your short-term needs and emergencies, regular pension contributions, bonds for stability and income, and shares or index-linked investments for growth potential. The right mix will depend on your age, risk tolerance and goals.
Younger savers might favour growth assets like shares, while those closer to retirement often shift toward income-producing, lower-risk investments.
When building your retirement plan, consider how each asset fits into your overall strategy. Different investment vehicles have different tax implications and access restrictions, so seek advice if you’re unsure.
The inflation challenge
Today’s pounds won’t buy as much in the future. Many people underestimate this simple fact when planning their retirement.
At 2% annual inflation, your spending power can halve over 35 years, roughly the length of a typical retirement. At 3%, it can halve in just 23 years. This means a £30,000 annual retirement income that feels comfortable today might need to grow to £60,000 to maintain the same lifestyle in your later years.
To combat inflation, your retirement strategy should include growth assets that have historically outpaced inflation, index-linked income sources where possible and regular reviews of your spending power with your financial adviser.
When calculating how much you need to save, factor in not just today’s costs but tomorrow’s, too.
Calculating your retirement number
Working out how much income you’ll have in retirement means piecing together several parts of the puzzle. Bringing all these elements together, how do you arrive at your ideal number?
Let’s start with the foundation, the State Pension. Currently, it provides a maximum of £230.25 weekly (about £11,900 yearly) at 2024/25 rates. You’ll need 35 qualifying years of National Insurance contributions to receive the full amount. It’s worth noting that this falls well below the PLSA’s minimum retirement standard for a single person.
There’s no need to guess your State Pension entitlement. You can check your forecast on the Government website to see exactly where you stand.
Your workplace and private pensions will form the next layer of your retirement income.
Annual statements from your providers will show the projected values at retirement age, though remember these are estimates based on various assumptions, not guarantees.
Most pension schemes now offer online portals where you can experiment with different contribution levels to see how they might affect your final pension pot.
Don’t overlook any additional income sources that can significantly boost your retirement finances. Rental income, part-time work, ISA investments or inherited assets can all play an essential role in funding your lifestyle.
A helpful starting point for many of our clients is the ‘70% rule’, where you aim to replace about 70% of your pre-retirement income. This recognises that certain expenses, such as commuting, mortgage payments and pension contributions, typically reduce in retirement, although other costs, like leisure activities or healthcare, might increase.
To put this in practical terms, if you currently earn £40,000, you might target an annual retirement income of around £28,000. Minus a full State Pension, you’ll need to fund approximately £16,500 from your other pension pots and investments.
This approach gives you a more realistic target than just picking an arbitrary figure. It connects your retirement lifestyle to your current one, making planning more personal and achievable.
How can Heathcote Financial Planning help?
Working out how much you need for retirement isn’t an exact science.
But having a realistic target can make a real difference to your financial security.
Starting early, contributing consistently and reviewing regularly are the key principles for success. Even if you’re playing catch-up, focused planning can still significantly improve your retirement outlook. Taking control of your retirement planning today will give you more choices and greater confidence tomorrow.
At Heathcote Financial Planning, we help clients build personalised retirement plans that evolve with their changing circumstances. Our approach considers your unique situation, preferences and goals.
So, if you’d like more clarity on your retirement number and a roadmap to achieve it, we’re here to help. Contact us for a friendly, no-obligation chat about your retirement planning.
Disclaimer:
The content of this blog is for general information purposes only and does not constitute personalised financial advice. While we aim to provide accurate and up-to-date information, individual circumstances vary and financial decisions should always be based on your personal situation. We recommend seeking independent financial advice before making any decisions regarding pensions, savings, or retirement planning.
Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up, and you may not get back the amount originally invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Tax treatment depends on individual circumstances and may be subject to change in the future.
Heathcote Financial Planning is authorised and regulated by the Financial Conduct Authority.
Company registration: Heathcote Financial Planning is a trading style of The Mortgage and Protection Partnership Ltd, authorised and regulated by the Financial Conduct Authority under No: 612049. Registered address: Olympus House, Olympus Park, Quedgeley GL2 4NF. Company No: 08734287.