How much money do I need to retire?

Have you ever wondered, "how much will I need to retire?" You're not alone. Planning your retirement is like staring into a crystal ball and trying to predict your future financial needs. But fear not fellow retirement calculators, our guide will help you figure out how much money you need to retire, and decide what steps you want to take now. 

Before we get started, ask yourself some questions to get an understanding of your own expectations: 

• What standard of lifestyle do I want in my retirement? 
• What do I plan on doing with my retirement years?
• What will my realistic expenses be, including accommodation, health, and entertainment?
• Will I want to go on lots of holidays?
• What large purchases am I  likely to need to make, like new cars or renovations?
• What money, if any, will I have coming in after I retire?
• How comfortable am I with taking risks with investment opportunities?

Answering these smaller questions will help you answer the big one: “How much do I need to have to retire?” based on what you want from your twilight years, and what you hope to achieve for you and your loved ones.

How much money do you need to retire?

So, by now you have an idea of what you want your retirement to look like, but how much money will you need to set aside? To work out what your retirement fund might look like, there are some calculations you can do to give you a rough idea of your standard goals and targets.

So, how much do you need to retire? Well, it is often suggested that you need around 20-25 times your predicted annual expenses. 

Here’s an example:

Let’s say your typical annual expenses are £30,000. 

• £30,000 x 20 years = £600,000
• £30,000 x 25 years = £750,000 

So in this scenario, you would ideally be aiming for retirement savings of somewhere between £600,000 and £750,000.

This might seem like a lot, but don’t panic. There are deductions that you will likely be able to make. Your workplace pension, state pension, and any other income you might have after your career ends will count towards your retirement budget. So, you might find that around £10,000 in an annual State Pension and workplace pension will reduce your expenses to £20,000.

Take reduced outgoings into account

When trying to work out how much money you need to retire, it’s common to think that you need more than you do because you have your current salary in mind when doing your calculations. But it’s important to remember that your living costs often reduce when you are older. You might have paid off your mortgage by then, or you might find that you’re saving money by  not commuting.

While it’s common to spend less on some things, it’s important to keep in mind that other expenses like heating, healthcare and insurance might actually go up. 

How much do I need to retire: Retirement living standards

The Pensions and Lifetime Savings Association (PLSA) can help you work out  how much to save for retirement using the Retirement Living Standards. So what are they, and how could they help you decide how much you should save for retirement? Retirement Living Standards are broken down into three lifestyle levels: minimum, moderate and comfortable.

• At the minimum retirement standard level you would be able to cover your basic needs and essentials. You could also expect to have some money for non-essentials after your expenses have been covered.
• A moderate retirement living standard is the next step up. You would expect to have more freedom with your money and have more expendable cash for the things you want beyond your living costs.
• At the comfortable retirement living standard level, you would likely have even more financial flexibility and freedom. You could expect to indulge in some luxuries like exotic holidays in 4-star hotels.  

So, which of these lifestyles are you hoping for in retirement? Of course, we all want the most comfortable, but realistically where do you think you are now? Working out how much money you should have to retire is made easier when you think about it in terms of your lifestyle expectations. Let’s look at how much each level should cost.

The PLSA suggests that minimum living standards for an individual can be accomplished with £14,400 per year, whereas a comfortable level might cost closer to £43,000 per year. But you can also calculate more individual and tailored annual costs by looking at your current expenses and excluding anything you won’t be spending when you retire. 

How much will I need to retire and where does the money come from?

Okay, so now you have an idea how much money to save for retirement, you might be wondering where on earth it’s all going to come from? Generally speaking, you can expect to gain income from two sources during retirement: retirement income and your capital. Let’s break those down more.

Your retirement income — by that, we mean the money paid to you every month during your retirement — will usually be made up of your State Pension, your workplace pension, savings interest payments, and any other income that you might have, for example from rental payments, etc. You can check your State Pension forecast online.

Remember, some incomes won’t start until you reach a certain age. For example, your State Pension won’t become available until you reach State Pension age.  And your workplace pension might be unavailable until you are 65. Consider this in your retirement timeline.

In contrast, your “capital” is money that you have accumulated before your retirement, for example your savings and investments. Because this money is in your personal accounts, you can access it at any age. It’s important to ration your capital to make sure that you don’t run out of money during retirement. Most advice suggests that you limit withdrawals to 4% of your capital per year to save retirement funds from running out.

Retirement savings by age

A comfortable retirement matches your pre-retirement lifestyle. Use this to work out how much you should have saved for retirement. It can be a good idea to aim for savings of 10x your salary by the time you retire. You can build up to this by aiming for 1x your salary at age 30, 3x your salary at 40, 6x by 50, and 8x by the time you hit 60.

Is that really how much I should have saved for retirement?

It looks like a lot, but most of us expect to live many years enjoying retirement. You might be able to get help from elsewhere, like friends or family. But it’s sensible to be realistic about where you are at and what you can do next to improve your chances of hitting a comfortable retirement living standards level.

It’s never too late to improve your situation. If you’re asking yourself: “How much should I have saved for retirement?” and you want to start saving more, why not get started with Loqbox? You can build your savings for your retirement fund while giving your credit score a boost at the same time!