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How much do you need to retire?

No matter how far away you are from retiring, it’s important to plan for the future. You’ll be glad that you did once you get there.

It’s hard to know exactly how much you’ll need because everyone has different circumstances and different expectations.

But there’s no need for it to become stressful. You can reduce any anxiety by planning how much you’ll need to retire and working out how best to build up your pension pot. 

What lifestyle do you want in retirement?

Research by the Department for Work and Pensions (DWP) shows that the income people expect they’ll need in retirement varies greatly depending on how much they earn.

Those on the lowest incomes – less than £12,199 a year – expect to need 80% of that amount per year when they retire.

But for those earning over £51,300, that percentage drops to only 50%. 

Of course, people also have different expectations of how they might live when they’ve finished working.

The DWP broadly categorises these into 3 lifestyles

  1. Basic - geared towards paying for essentials.
  2. Comfortable - allows for more leisure activities and maybe some domestic help.
  3. Wealthy - provides for a more luxurious lifestyle with high-end holidays and home improvements.

None of us knows exactly how long our retirement will be. But having a rough idea of when you plan to stop working can help you to start thinking about how many years it might be.

Research by the consumer organisation Which? suggests that retired couples in the UK are spending around £25,000 a year on average – although they have been spending a little less since the start of the coronavirus pandemic. 

That sort of amount should be enough for what the DWP calls a ‘comfortable’ lifestyle.

As well as paying for all your everyday spending, it should cover some extras, such as eating out and holidays in the UK and Europe. 

To achieve a ‘wealthy’ lifestyle, including things like long-haul trips and buying a new car every few years, you’d need a figure closer to £40,000 a year. 

How much will you need?

A good starting point is to work out how much money you think you’ll actually need when you retire.

It’s easy to make the mistake of basing that figure on your salary while working. That means you’re likely to think you need more to live on than you actually do.

Bear in mind your living costs will probably change when you’re retired – often significantly.

People tend to spend less in retirement on food and drink and housing costs, but more on things like heating bills, healthcare and insurance. 

Many people's spending also goes down after they stop working because they no longer have to worry about things like commuting and pension contributions.

You might have also paid off your mortgage and no longer have childcare costs.

A goal of £25,000 a year can be a good starting point when working out how much you’ll need as a couple for a comfortable lifestyle in retirement.

The Money Advice Service has a useful pension calculator, which forecasts your likely income in retirement. It can also highlight any shortfall based on your current pension contributions.

How much should you save into your pension?

The next challenge is to work out how much you need to save to build up your pension pot to that level.

Here’s one way of calculating this: at the time you start saving for your pension, halve your age, then use that number as the percentage of your salary you should aim to save each year. 

Many experts recommend this rule of thumb. It would mean you should aim to be saving 10% of your annual income towards your pension if you start at 20, rising to 15% if you're 30 and so on.

For most people, your pension income will come from 3 sources:

  • your state pension
  • a private or workplace pension scheme
  • any other income, from property or investments, for example

In cash terms, research by Which? estimates that a couple who begin saving at 20 would need to pay in £213 per month between them to achieve a comfortable retirement. If they left it until they were 40, they would have to contribute £384 per month.

What next?

Saving for your pension is clearly a significant chunk of money so you’ll need to make sure you’re on top of managing your finances.

We have a helpful guide to creating a budget which you could use to take account of your pension savings as part of your regular outgoings.

And if you have the HSBC Mobile Banking app on your iPhone or iPad, our Balance After Bills tool helps you manage your money until payday.

You can find out more on the GOV.UK website about the state pension

The Pensions Advisory Service also has more detailed information, including how different pension schemes work.

And you might also like to read our decade-by-decade retirement checklist.