Figures from Standard Life suggest that millions of us are relying on a hunch to work out how much money to put away. Some 39% of us haven’t worked out how much we might need at all, with 43% of Generation X and 34% of baby boomers in this position, despite the fact that many are approaching or past the state pension age.
Dean Butler, managing director for retail direct at Standard Life – part of Phoenix Group – said it isn’t surprising that people often resort to guesswork, because it can be daunting to plan for retirement.
“Part of the challenge is that calculating how much you’ll need involves a lot of moving parts – inflation and your date are considerations, as are your lifestyle goals and any additional income sources.
“Without the right tools or support, it can be difficult to know where to start,” he added.
Help with estimation
There are tools available to help you to work out how much you’ll need to live on in retirement. The Pensions and Lifetime Savings Association (PLSA) publishes Retirement Living Standards to help you to visualise how much you might need to live in different ways once you stop work.
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These are pitched at three levels – minimum, moderate and comfortable – and can help to give you an idea of how much you’ll need to spend based on your expectations.
Figures from Standard Life earlier this month indicated that single retirees would need an annual income after tax of £14,400 to achieve a minimum living standard, while a couple would need an annual income of £22,400 to reach the same standard of living.
For couple pensioners, all of this would be covered by the full state pension, but a single person would need an extra income of £2,884, taking account of tax each year, to maintain this standard of living.
But most pensioners would like a more comfortable lifestyle in retirement and will need to put away more, as a minimum income would only cover the basics and one week’s holiday in the UK per year, but no car.
Single pensioners seeking a moderate retirement standard of living, which allows for a car and one two-week foreign holiday per year, would need an after-tax income of £31,300 per year. Assuming a full state pension is received, they would need an annuity that provides £24,010 per year, taking account of tax. To achieve this, they would need to save around £439,000. Pensioner couples, meanwhile, need an annual income after tax of £43,100, meaning they would need to save £214,000 each – nearly half the amount of a single pensioner, assuming two full state pensions being received.
Butler said it is important to try to connect with your future self to help imagine how much you’ll need in retirement.
“Retirement can feel very distant, especially when you’re busy judging the demands of everyday life. It’s tempting to put retirement planning off or assume it will all make sense in the end, but the delay can be costly.
“The good news is that help is available and with a few small steps, like regularly reviewing your current level of savings and using an online pension calculator, you can start to build a clearer picture of what you’ll need,” he said.
Tips for pension planning
Butler shared tips for getting to grips with how much you’ll need in retirement.
- Think about when you want to retire
“The state pension forms part of most people’s retirement plans, and the age threshold for this is currently 66 (but will rise to 68 from 2026), so it’s important to be aware of the date that you’ll receive money from the Government, as this can be an important source of income.
“You should also check that the retirement age you have in mind is the one on your pension plans and see if it’s possible to update this if it’s different, as this will help give you up to date information about your retirement choices.
“If you’re part of a workplace pension scheme, your retirement age may have been selected for you by your employer. You can normally change this, but this can impact your investments, so check with your employer for more information,” he added.
- Learn your options
“You can normally take your money as flexible income (drawdown); as one or more lump sums; or use it to buy a guaranteed income for life (an annuity).
“You can also combine these options to suit your needs. You should check with your provider that your pension plan offers the options you want, and if not, you may need to transfer to another provider, although this won’t be right for everyone,” he said.
