How Much Money Do You Need At Retirement?

When you retire, you’ll live off of a pension. Most people receive a State Pension from the government, which takes care of their necessities. It makes sense to put aside some additional cash in a pension fund to maintain a respectable living level.

How long you save determines how much you’ll need to put away for your pension; Also, what you can reasonably set aside and what your requirements will be after retirement. You might have to rely on your pension for a considerable time if your retirement lasts between 20 and 30 years.

What is the UK retirement age?

Men typically retire at age 65 as of 2021, and women typically retire at age 64. The average retirement age for both sexes in 2021 has decreased by 0.23 to 0.3%.

To reduce the cost of expanding state pension payouts, there have been suggestions for raising the UK retirement age to 68. Since the middle of the 20th century, the average retirement age has been rising, and as it does, so will the average retirement age for both men and women.

The state pension, company pension, or personal pension all have ages at which you can access them. For these pensions, several minimum retirement ages must be met.

The state pension age in the UK

For both men and women, the current retirement age for the state pension is 66. The state pension age has changed recently depending on the year you were born. For those born on or after April 6, 1978, the state pension age is currently 68. For people born before April 6, 1970, the retirement age is still 67. Depending on their date of birth, people born between April 6, 1970, and April 5, 1978, range in age from 67 to 68.

Therefore, the age you receive your pension in the UK depends on your birthdate. Before 2018, when the state pension age for women was 60, there was no longer a historical gender difference in the state pension age. But as of November 6, 2018, both men and women had to retire at 65, and that age rose to 66 in October 2020.

British average retirement income

According to government data (from 2017–18), the average weekly pension is £304 after deducting direct taxes and housing expenses. This equates to around £15,080 net each year.

Regions also impact the typical retirement income in the UK. Your retirement income is probably lower than the national average if you reside in London. However, you’re more likely to have more money to spend on average if you live in Scotland or the North East. The disparity typically boils down to a discrepancy in housing and living expenses.

In 2017–18, private pensions accounted for 67% of a retiree’s income. Although the percentage coming from private pensions has grown in recent years, state pensions, employer-sponsored pension plans, and investments are also significant sources of income for retirees in the UK.

Can I easily retire in 2020 with the average retirement income?

According to the comparison above, the average retired person’s salary may not differ significantly from the average wage earner’s discretionary income. However, given that many wage earners still view themselves as struggling or “just getting by,” this does not always imply that such an income offers a comfortable or desired standard of living.

What then constitutes a “comfortable” retirement income? According to research, a couple in the UK needs a combined annual income of £47,500, compared to £33,000 for a single person, to have a financially stress-free retirement. This estimate is based on a lifestyle with annual clothing expenditures of £1,500, weekly food expenditures of £56 and three weeks of vacation in Europe (per year).

These presumptions are not extravagant, but neither are they cheap. Therefore, if you envision yourself leading a more modest life with, perhaps, fewer new clothes, shorter holidays spent in the UK, and cheaper grocery stores, you could survive on considerably less. According to research, a person’s annual income of £10,200 is sufficient for a modest retirement; however, anything less may require significant sacrifices.

A £100k pension fund would provide you with an income of between £4,000 and £5,000 per year, as well as a lump sum of £25,000 tax-free cash, to give you an indication of how much you would need to save. If you also receive the full new state pension, your annual income might range from £13,000 to £14,000. (plus the tax-free lump sum). Keep in mind that the state pension age will eventually climb.

These numbers make it obvious that aiming for a pension plan of at least £100,000 or more is advised. Fortunately, as seen below, this is a reasonable goal.

How much does the typical retiree make compared to the typical worker?

It’s fascinating to compare the disposable income that the typical retiree now receives to that of the typical worker. Before taxes or housing costs, the average UK salary is £30,420. This is decreased to £23,111 after deductions for income tax, national insurance, and the required 5 per cent pension contribution. On the surface, this appears to be around 50% higher than the typical retirement income.

Housing expenditures are not taken into account, though. The typical monthly mortgage payment in the UK is £669, or £8,028 annually. This results in a reduction of £15,083 from the average net income.

By a startling coincidence, it appears from these numbers that the average net income for today’s retiree and working generation is practically the same. This is clearly in major part owing to the high expense of housing. The working generation spends a significant portion of its increased income on housing. In contrast, the retired generation may own their homes in large part entirely and have no future mortgage payments to make.

How much will you need to save aside for retirement?

To determine how much retirement income you might receive from a personal, stakeholder, or workplace pension when you retire, you may use an online calculator such as the Money Advice Service pension calculator. This will enable you to estimate the amount of savings required to obtain the retirement income of your choice.

When you contribute to a pension, you receive tax relief at your existing tax rate. Keep this in mind as you determine how much to pay.

Organising your needs

It may be challenging to forecast your needs when you retire if you don’t start pension savings early in your career. Try to save max but don’t worry if it’s less than you initially planned. Saving little sums of money with a long period to grow in value may be preferable. You’ll be able to increase the amount you save for your pension if your salary rises.

If you begin saving later in your working career, you may be more aware of your prospective financial situation. You might already be a parent or a property owner, for instance. This may make calculating the amount of income you’ll need for retirement simpler, but it will also give you less time and possibly more money to save. To be able to afford to contribute more to your pension, you may need to reorganise your budget’s priorities. To be able to afford to save a little money for your pension, for instance, you might reduce your spending on discretionary items like going out.

Pension planning requires long-term planning. Make sure you can afford the regular deposit into your pension pot by working out your budget.

Working out the retirement income budget

You should either address the following queries or ask your financial advisor:

• What is the minimum amount of revenue I need to bring to cover my expenses? Think about anything from your mortgage or rent payments and utility expenditures (which are likely to go up if you’re spending more time at home) to your transportation costs and grocery shopping. These are the key essentials that you have to be able to pay for in retirement in order to do so comfortably.
• Do I qualify for benefits from the state? If you have worked for at least 35 years or have qualified for specific benefits during that time, you will be eligible to receive a state pension once you reach the age of 66 as long as you have made National Insurance (NI) contributions during that time. You can receive a maximum of £179.60 a week, which totals £9,339.20 per person per year. This sum is well below even the minimum necessary level of income if it is your primary source of retirement income.
• How much money would I like to have available to spend on things that aren’t absolutely necessary? It is crucial to prepare for non-essential expenditures as part of your budget, whether you want to go on vacation, treat yourself to a little more dining out, or spend more time with your grandchildren.
• Check out our earlier piece on retirement age if you’d want to learn more about when you might be able to stop working and start enjoying your retirement.
• How much money am I putting away for retirement, and how much more am I able to put away? It is in your best interest to start investing money for retirement as soon as possible. Tools like the pension calculator offered by Unbiased can help you determine how far your money will go regardless of whether you have already started building up your pension pots or simply want to get started.

Retirement income options

It is important to have an understanding of your choices well in advance of your retirement. Before taking any action that could put your money in jeopardy, it is imperative that you discuss your strategy with a certified public accountant or an independent financial advisor. This is because there is no answer that is applicable to all situations. The following are some of the most frequently encountered choices that are worth addressing with an expert:

• Drawdown is a strategy for managing the pension that enables you to maintain a steady income stream while allowing the remainder of your fund to accumulate through investing. You run the danger of losing everything if the stock market goes against you, despite the fact that this investment approach is a relatively low risk overall.
• Take a lump payment from a pension. Some people who are retired would instead take a lump sum, which is something they can do after they reach the age of 55. They might decide to pay off their mortgage, cut down on their spending expenses, or give money to their children for a down payment on a property. You are permitted to withdraw up to twenty-five per cent of your pension without being subject to income tax, with the remainder being able to continue growing or to be applied toward an annuity at a later time.
• Annuities are insurance contracts that ensure you will get a certain amount of money each and every year for the rest of your life. The cost will differ for each individual based on their present state of health, their age at the time they take out the loan, and the amount of income they wish to receive. Your money will not have the opportunity to continue increasing through investment or generating interest, despite this choice being risk-free and reliable.

Semi-Retirement

Many people aren’t quite ready for full retirement yet, either emotionally or financially, and semi-retirement is a sensible move that can be taken as a stepping stone for them. You will be able to acclimatise to gradually having more free time, and you will be able to supplement the income from your state pension and private pension with a paycheck.

Be absolutely clear that pushing into a semi-retirement state is a viable option before you make the leap. Suppose you walk away from your job without taking into consideration potentially discouraging obstacles, such as the fact that candidates over the age of 40 are 50% less likely to receive a job offer. In that case, you might find yourself in a precarious financial situation.

If you want a comfortable income and live by yourself, you’ll need to make sure that the amount you can claim from state or private pensions (or both), in addition to what you earn, adds up to about £19,000. This minimum amount will allow you to have a comfortable lifestyle.

You may also be able to enjoy a form of retirement known as semi-retirement if the profits you receive from assets such as real estate are pretty reliable. If you are not qualified, don’t want to claim your pension yet, or want to give up work altogether without depleting your retirement savings too much, this is an excellent choice for you to consider.