How much money do you need to retire?

It’s the eternal question; ‘how much do I need to retire?’ Well, it’s positive that you’re asking that question for starters because the sooner you start planning and forecasting, the rosier your retirement prospects will be. The answer to that burning question, by the way, is probably more than you think, which is why Acumen has compiled some useful retirement calculations to guide your preparations.

‘Retirement – I’ll worry about when I’m older.’ How many of us have thought as much? Sooner or later, however, time has an infuriating way of catching up with us all and – if we’re not prepared – blindsiding us. With something as important as your retirement, you literally cannot afford to bury your head in the sand. Which is why Acumen is here to offer some practical hints and tips.

How much to retire on depends on your lifestyle

That might sound glaringly obvious. However, how much you need to retire is far from a ‘one size fits all’ figure and is dependent on your cost of living and lifestyle choices. If you aspire to enjoy expensive hobbies, lavish holidays and perhaps a nice new car in your dotage, then clearly your pension pot will need to be topped up higher than if you were to adopt a more frugal approach.

Auto-enrolment pension schemes have done much to boost the number of active UK savers. Plus, the average retiree’s living costs should be lower because most will have paid off their mortgage, their dependents are no longer dependent and (joy of joys) the daily commute no longer applies. However, having said that, many UK savers are still underestimating just how much they’ll need to set aside in order to live out their retirement in comfort.

Can I retire comfortably?

Let’s look at the numbers. As a general rule, industry experts recommend that you’ll need between half and two-thirds of your final salary earned before retirement to maintain your current lifestyle. Consumer watchdog Which? has suggested that retired couples need an annual average income of £18,000 to cover typical household bills and outgoings. Expect that figure to rise to £26,000 if you’re planning leisure activities and European breaks and £39,000 if you’re expecting to replace your car every five years and take long-haul holidays.

So, what does that mean in real terms? Well, according to Which?, even if you’re getting the state pension and aiming for a comfortable post-tax income of £26,000 per year, a lifetime income via an index-linked, joint-life annuity will require a pot of £370,000. With the average UK pension pot hovering closer to £50,000 at present, that leaves quite the shortfall to make up and acutely demonstrates the disparity between what we think we should save and what we need to have saved.

What are my retirement options?

Unsurprisingly, your retirement options completely depend on your age. According to Scottish Widows, to attain a retirement income of £23,000, a 25-year-old earning £30,000 a year (with 4% employer contributions and the state pension) would have to start saving £293 a month. For a 35-year-old starting from scratch, that figure increases to £443 a month, then £724 by age 45 and a whopping £1,445 for anyone leaving it to the age of 55 to start their pension savings*.

It’s worth bearing in mind that if you are self-employed and saving into a private pension, your monthly savings will have to be higher still because you won’t be benefitting from employer contributions.

These useful retirement calculator ‘rules of thumb’ can also be useful guides:

The ‘multiply-by-25 rule’ works by multiplying your desired annual income by 25 to generate an estimate of your total required savings. For example, if you plan to spend £30,000 a year in retirement, you’ll need to put aside £750,000. If you’d prefer to spend £40,000 annually, then your savings will need to be £1m.

The savings factor rule, devised by Fidelity, is also a useful retirement calculator strategy. You simply multiply your income by a factor, depending on your age. For example, by age 40, you should aim to have three times your salary at that point in your life saved for retirement. By age 55, you should aim to have seven times your salary saved**. Neither of these rules are perfect, but they can serve as a useful guide.

Acumen’s expert pensions advisers offer comprehensive advice and guidance tailored to your situation and needs. To speak to one of our advisers, or for more information about any of our pension services and products, please call 0151 520 4353, email info@acumenfinancial.co.uk or visit www.acumenfinancial.co.uk.

*These calculations allow for inflation and assume that your contributions increase annually in line with your salary.

** Based on a retirement age of 67 and the assumption that 15% of your income is saved every year from the age of 25 and that 50% of your savings are invested in stocks over your lifetime.