How much money do you need to stop working?

• How much money do you need to stop working?

A common question our clients ask is how much money they will need to stop working. If you are considering when you will be able to retire, you’ll need to know your numbers and make a realistic financial plan. January is a good time to review your finances; you might even find that you can stop working sooner than you think. We’ve shared a detailed step-by-step guide to help you work out your figures.

“Retirement is a blank sheet of paper. It is a chance to redesign your life into something new and different.”
Patrick Foley

Step 1: Choose your retirement lifestyle

The first step is to decide what type of lifestyle you would like in retirement. The level of retirement income needed will depend on whether you are seeking a comfortable or luxurious lifestyle.

According to some financial experts, most people need around 70-80% of their pre-retirement income to maintain their current standard of living in retirement. However, this will vary depending on your circumstances.

If you plan to downsize your home or move to a less expensive area, your expenses might be lower. But if you plan to buy a holiday home or travel extensively, you may need higher than average retirement savings.

Step 2: Estimate your expenses in retirement

The next step is to calculate your estimated annual expenses in retirement. Think about the lifestyle you want and consider factors like housing, food, utility bills, transport, travel, and leisure activities. Don’t forget healthcare costs, which may increase as you get older. Although you might have paid off your mortgage, you may have to factor in care home costs.

There are figures available on the Retirement Living Standards website that can help you determine the level of income you might need. These figures are updated regularly to reflect changing financial conditions and are broken down into different categories.

The current recommendation to achieve a comfortable retirement is £59,000 per year for a couple and £43,100 for an individual. This figure has increased over recent years, and it’s important to account for inflation, as this erodes the purchasing power of money over time. Although historically, inflation in the UK has averaged around 2-3%, we’ve experienced large spikes in recent years. Multiply your annual spending by an assumed inflation rate until you retire.

If you want a more luxurious retirement level, then you may need to create a robust pension, investments and savings strategy.

Step 3: Calculate your income sources

Next, make a list of your expected income during retirement, which may include:

  • State Pension – The full UK State Pension currently pays £11,502.40 per year (2024-2025). Check your State Pension forecast to see how much you are likely to receive. You will need 35 years of National Insurance Contributions (NICs) to be eligible for the entire State Pension.
  • Workplace pensions – Review your defined benefit or defined contribution pensions to estimate your annual income from these sources.
  • Private pensions – Include any additional personal pension savings.
  • Savings and investments – Consider income from ISAs, investment portfolios, or rental properties.
  • Other sources – Factor in any potential inheritance or side-hustle income you might earn during retirement.

Add up all of your expected income sources to gain an understanding of how much money you are likely to receive once you have retired.

Step 4: Decide your savings target

If your expected retirement income falls short of your projected expenses, you’ll need to fill the gap with savings. One method to estimate how much you might need is the 25x rule. This states that you should aim to save 25 times your annual expenses to achieve financial independence, assuming a 4% withdrawal rate. This is based on the idea that people live for an average of 25 years after they retire, and this approach could ensure a stable income.

By only withdrawing 4% of your savings annually, you are less likely to run out of money. However, this rule should be tailored to your circumstances, especially in today’s volatile economic landscape.

Ultimately, the amount you need to save will depend entirely on your personal aims and aspirations. Everybody is different, so every savings strategy should be tailored to the needs of the individual.

Step 5: Build a realistic financial plan

If you find that you’re behind on your savings goal, it’s important not to panic. By building a financial plan, you can create a sensible savings strategy and make your money work harder.

There are several practical steps you can take:

  • Maximise pension contributions – Take advantage of available tax relief by contributing to workplace or private pensions. Higher-rate taxpayers can claim significant relief on contributions, making this a tax-efficient way to save.
  • Invest strategically – Make sure your investments align with your risk tolerance and time horizon. Investing in diversified assets can help you grow your wealth over the long term.
  • Reduce unnecessary expenses – Cutting back on your current spending can free up extra funds to boost your future savings.
  • Delay retirement – If needed, working just a few extra years or part-time might significantly improve your financial situation. It could allow you to save more money and it will reduce the number of years your savings need to last.

Step 6: Regularly review your plan

Retirement planning is not a one-time exercise. Big life events can occur, economic conditions will vary, and your personal goals might change. By working with a financial planner to create your financial plan, you can include a series of “what if” scenarios. This will enable you to both plan and protect your income for unexpected events in the future.

A financial plan will determine how much money you need to stop working. Your financial planner will schedule annual financial reviews to adjust your plan as needed, ensuring you stay on track.

“Go confidently in the direction of your dreams! Live the life you’ve imagined.”
Henry David Thoreau

Retirement Planning, Nottingham and Lincoln

The question of “how much is enough” is a personal one and will depend on your aims and aspirations. By understanding your numbers, planning ahead, and seeking expert advice, you can look forward to a comfortable or luxurious retirement.

At Balance: Wealth Planning, we can help you with your retirement planning. By working closely with you, our team will build a tailored financial plan to reflect your retirement goals. We will identify any gaps in your savings, and we can optimise your money with tax-efficient savings and investment strategies.

If you want to know how much you need to retire, get in touch to speak to our financial planning team.

 Sources:

https://www.southernliving.com/culture/retirement-quotes

https://www.thetimes.com/money-mentor/pensions-retirement/state-pension/how-much-state-pension-will-i-get#:~:text=For%202024%2D25%20the%20current,or%20%C2%A311%2C502.40%20a%20year.

https://www.gov.uk/state-pension-age

https://www.investopedia.com/retirement/retirement-income-planning/

https://www.investopedia.com/terms/f/four-percent-rule.asp

https://www.retirementlivingstandards.org.uk/

https://www.nextlevel.coach/blog/175-quotes-about-working-hard-to-achieve-your-goals