How Much Do I Need In Retirement?

Being fully prepared for retirement can be complicated. One of the most important aspects to plan is ensuring you have enough income to support your needs and lifestyle into old age. But how do you figure that out?

Estimate your required income

As a first step, estimate how much you might need (in today's money) each year. In retirement, you may finish paying off a mortgage which could reduce your expenditure, allowing you to maintain your current needs and lifestyle for less. However, it's also important to consider that your expenditure could increase, for example to pay for care costs or fund additional holidays.

One of the simplest ways to secure your retirement is to treat your pension pot(s) as income.

With private pensions, this might come in the form of income drawdown or annuities. For defined contribution (DC) pensions, the pot should have a single (total) monetary value, whereas defined benefit (DB) pensions typically have an annual income value.

To learn more about different UK pension types, check out our primer article.

The state pension is an additional guaranteed income of £221.20 per week (current amount - assuming you have qualified for the full amount).

Keep in mind that income from private pensions is subject to income tax (but not national insurance), so you are coming up with a pre-tax income figure here. Use the free tool to convert pre-tax income to post-tax income. The state pension is tax-free.

Working out how much you need

Once you know the value of all your private pensions and have an estimation of the income you need, you will be able to determine 2 things:

1. The level of income needed in retirement, before state pension age: (Estimated Annual Expenditure - D.B. Pensions Annual Value)
2. The level of income needed in retirement, after state pension age: (Estimated Annual Expenditure - D.B. Pensions Annual Value - State Pension Annual Value)

Next, you need to think about how long you want the income to last for. As with estimating required income, you can choose to be more or less conservative here: a more conservative person might assume that income needs to last all the way to age 100, or theoretically indefinitely (see "Withdrawal Rate" below).

Note: it is useful to use today's money for both expenditure and expected required income, as this effectively neutralizes inflation from the calculations.

An example

Let's say I want to receive £35,000 (pre-tax) income each year. At today's tax rates, this equals £28,721, which covers my needs and lifestyle.

This can drop to £17,218.60 once I reach state pension age, because I expect to get the full amount (£11,502.40 / year). In turn, this would translate to needing a little over £19,000 in pre-tax private pension income combined with the state pension.

Let's also say that I'm retiring this year at age 57 with a state pension age of 68. I will cover myself up to age 100. This means I need roughly: 11x £35,000 + 32x £19,000.

Note: if I had any DB pensions, I could reduce what I need during both stages by the relevant value(s).

Simply adding these together equals quite a rather hefty amount of £993,000. Such a calculation fails to take into account the fact that we can benefit from investment growth and compounding returns.

In practice, this result could likely be achieved with a substantially smaller starting amount of around £414,000, depending on your approach and risk appetite.

As can be seen from this example, working out how much you need is complex.

A Saving Tool UK Calculator

The Saving Tool "How Much Do I Need?" Calculator is available now to make these calculations a breeze.

Simply specify your retirement age, desired annual income as a starting point and get an instant insight into how much you need in your DC pension(s) to achieve your goal.

The calculator displays what your combined DC pension pots would look like over time, according to your inputs. You'll also see your anticipated drawdowns and state pension income.

Flexible Controls

The calculator also allows you to control:

• Growth Rate (default 5%)
• Fund Fees (default 0.35%)
• Fund Fees Cap (default £250k)
• If you want to allow your pot to deplete by the target age, or if you want to use a withdrawal rate

Growth Rate lets you decide what level of growth your pot investments achieve, after inflation. 5% is a generally recommended baseline, but you can adjust this according to your risk appetite.

Specifying Fund Fees and Fund Fees Cap is optional; the defaults represent a low-cost index fund using a low-fee platform.

Withdrawal Rate vs Depleting Pot

This option allows you to decide if withdrawals from your DC pension pots are at a certain rate, or simply guaranteeing the goal is reached until a certain age.

Picking a Withdrawal Rate lets you pick a % of the pot value that is drawn down each year. This is commonly used against a certain Growth Rate to try and guarantee that the value of the pot never decreases i.e. always has a net growth above 0. Although this option is "safer" because the pot is typically not depleting over time, it has a relatively high capital requirement. In simpler terms, you will need to have more saved up in DC pension pots at the start of retirement vs allowing depletion.

Picking the depletion option allows you to instead specify an age where the pot is allowed to deplete. This usually has a much lower capital requirement to achieve, but is a riskier approach in general, because your assets are decreasing as you get older.

Try the How Much Do I Need Calculator Today

DISCLAIMER: The information in this article does not constitute financial advice. Always do your own research and speak to a professional if you are unsure.