In the month of January, many people are reviewing their finances, especially those heading towards retirement age. A common question we are regularly asked is “how much do I need to retire?”. So, we’ve put together a quick guide with the latest recommendations.
What retirement income do I need?
Comfortable or luxurious retirement
The first question you need to ask is, what kind of retirement are you seeking? If you want a luxurious retirement, your financial plans will look very different to a comfortable retirement. Think about where you want to be and what you want to be doing when you retire. Also, consider your current lifestyle and whether you would like this to be improved.
At the time of writing, most financial professionals recommend aiming for around £12,800 minimum retirement income for single people. For couples, the recommended minimum figure is £19,900 a year. You will need to factor in the changing inflation rate, which could go up or down after you retire. Also bear in mind this would only cover basic needs, a week’s holiday and a weekend break in the UK per year.
- If you’re single and looking for a comfortable level of retirement – you would need around £37,000 of income each year. This would give you some degree of financial security and the ability to afford a few luxuries. You would be able to spend 3 weeks a year on holiday, replace your car every 5 years, and make home upgrades every 10 – 15 years.
- For couples seeking a comfortable level of retirement – you would need £54,500 a year in income. In the UK, the average length of retirement is 22.5 years. So, if you calculate your estimated income by this amount, most couples need around £1,215,000 to cover their retirement.
If you want a luxurious level of retirement, you’ll need to invest more into your pensions and savings strategy. Your private or workplace pension, combined with your state pension, should cover most of your retirement income. For more information, see this website: https://www.retirementlivingstandards.org.uk/
How much pension income do I need?
[Q] Apply the two-thirds rule
According to most financial experts, if you want a comfortable retirement, you should apply the two-thirds rule to your pension. This means that if you earn £30,000 a year, you’ll need the equivalent of £20,000 of pension income a year when you retire.
It’s also worth checking that you have or will make the necessary 35 years of contributions towards your state pension. The current state pension income is £203.85 per week, which equates to £10,600.20 a year (note in the Autumn Statement, it was announced state pension would rise by 8.5% from April 2024 to £221.20 per week equal to £11,502.40 per year). Over the 22.5 years of average retirement, this equates to £238,504.50. This is around a fifth of the estimated income for a comfortable retirement.
Until April 2028, you can drawdown from your private pension when you reach the age of 55 years. After that date, the age will rise to 57. This age threshold applies to most personal and workplace pensions, including defined contribution schemes. It’s worth bearing in mind that most people will be 66 years or older before they can access their state pension.
It’s important to have a sensible financial plan in place to help you plan for your retirement. You’ll be able to plan those big future spends, such as the luxury cruise or relocating to sunnier climes. A financial plan also helps you to build in some contingency for unexpected costs such as house repairs and care fees, if needed.
Pension advice in Nottingham and Lincoln
Retirement planning is an important process because it will give you clarity on what you can and can’t afford to do. The sooner you start planning and saving, the more you will be able to achieve during your retirement.
Before you retire, it’s important to have a realistic financial plan in place, so you can manage your savings, investments and pension income. This involves checking your pension forecast and carrying out a cash-flow planning exercise. It also entails structuring your wealth in a way that ensures it stays tax efficient, making use of any allowances.
Our financial planners will produce a Lifetime Wealth Forecast, which will help you prepare and plan for your retirement. We have teams in Nottingham and Lincoln, or we can start the process on a Microsoft Teams call. For more details, go to our Retirement planning page.
If you want to know how much you need to retire, get in touch to speak to our financial planning team.