How much do I need to retire?

Saving for Retirement

Saving for Retirement

How much people will need in their retirement pot when they retire is one of the most frequent questions for any finance professional. But retirement is one of those thorny subjects because like most things to do with money, it is extremely personal and dependent on individual circumstances.  

When you are in your 20s and 30s, retirement seems so far away – at least 20 or 30 years but that time flies. While you need to live today you also need to budget to see how much you can put into a pension pot. 

  ‘So, how much do I need to retire’  

It’s difficult to imagine how much money you will need when you do retire but it’s safe to assume you will spend roughly the same as you do now for at least 10 to 15 years from the day you retire. After that, you may spend less. 

You may no longer have a mortgage or the children at home, but you will likely spend more on travel, new hobbies, and an increase in your social life. 

So, if you currently live on say £20,000 a year, you should aim for around the same amount when you retire, maybe reduce that by around 15% maximum if you plan on being a little frugal. 

To help you understand the fundamentals of retirement planning what we can do is look at how we have seen many of our clients manage in retirement over the last 37 years and create a scenario which will to help you to decide on how much you personally need to live comfortably when you retire. 

 Spending habits in retirement 

In the first ten years of retirement, people tend to spend their money easily. They do all the things they have wanted to or have been dreaming about; they travel and buy things. 

During the next ten years of retirement, they tend to slow down.  

By the time people are in their early 70s expenditure can start to drop and then when they are in their 80s, people do not tend to travel as much or go out for meals – except for special occasions.   

So, while we may spend more than our planned ‘£20k’ in the first part of retirement, we often spend a lot less as we get older. Therefore, the need for £20k per year, every year for your entire retirement is unrealistic, a typical retirement spending pattern could look like this: 

 – £20k – First 10 years 

 – £15k – Next 10 years  

 – £10k – Next 5-10 years 

During later life, we also spend less because the material aspects of living seem less important. 

 How big does my pension pot have to be? 

If you told me, you wanted £20k per year when you retire and live for an average of 20 years, then you are going to need £400k. However, when you consider the effects of inflation, to keep your spending power real, that figure can be much more.  

So, the first thing you need to do is be realistic about the income you want when you have stopped working. You can choose what you want but remember what it is you are asking because it can take a while to build up £560k. 

To give yourself a starting target figure for your pension savings, take your desired income, calculated like the example above and add it up –  

 – £20k – 10 years = £200,000 

 – £15k – 10 years = £150,000 

 – £10k – 10 years = £100,000 

 Total = £450,000 

You can then adjust this using an inflation calculator like the one at www.officialdata.org  

 Be realistic 

When considering retirement and how much you will need, it’s always good to be realistic about: 

  • What you want 
  • How long it is going to take to get that 
  • What you are going to spend your money on 

Make sure you identify what is reasonable for you to live on.  

Retirement is personal to you. It is down to your budgets and your personal choice. What I will always say with certainty is while it can never be too early to start planning your retirement, it can be too late. 

Regardless of how young you are, start considering building your pension pot today. Your older self will thank you! 

If you want to discuss your retirement investment plans or for more information about how you can work with Middleton Private Capital, click here! 

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