How Much Money Do You Need To Retire

It’s a big question isn’t it?  We’re constantly hearing that people aren’t saving enough for their retirement, and this is countered by the thought that many of us actually overestimate how much money we’ll need to live on in our retirement years.  

It’s not unusual to think that replicating your final net income is necessary in retirement, but in actual fact, with the mortgage paid off (whoop!) and the kids having left home (please), no more commute, or work related expenses (no more birthday whip rounds, or leaving pressies, but don’t forget my retirement gift), our expenditure will generally decrease in retirement.

The contributing factors to working out this goal figure, include:

  • When will we start to take our pension (not the State Pension, but our private provision)
  • And, when will we die?

Okay, so the latter point isn’t cheery.  Shuffling off this mortal coil isn’t something one should become fascinated with, so maybe let’s consider some facts.

Looking at the World Health Organisation (WHO), and their “highlights” document for Europe 2018;  “In 2015 a male could expect to live 74.6 years, on average; a female 81.2 years”.
With the Pensions and Lifetime Savings Association PLSA suggesting that just “23% of people are confident they know how much they need to save for their retirement”, it’s time for us to get organised, and have a solid retirement goal. Easier said than done with pension pots all over the place. 

Your pension and benefits

Taking money from a pension can have an impact on any benefits that are being received.  The effect of this should be checked prior to making any changes that can’t be reversed.  Such benefits could include:

Income-based Jobseeker's Allowance

Jobseeker’s Allowance, or JSA as it’s also known, provides extra money when people are looking for work.

Pension Credit

Pension Credit is paid in addition to the State Pension.  It provides extra money to help with living costs for those over the State Pension age and on a low income. Pension Credit can also assist with housing costs, like services charges or ground rent.

Universal Credit

Universal Credit is a monthly payment to help with living costs. It’s accessible to those who are on a low income, are out of work, or cannot work. Universal Credit is replacing the following benefits:

  • Child Tax Credit
  • Income Support
  • Housing Benefit
  • income-based Jobseeker’s Allowance (JSA)
  • income-related Employment and Support Allowance (ESA)
  • Working Tax Credit

How much money do you need to retire at 60?

There are different thought processes behind working out the target retirement pot.  Some consider it a goal figure in a one-size-fits-all manner, saying that whatever your retirement expenses are, you’ll need a pension pot of 20 to 25 times this.  Given that people may well have income from other sources, ie State Pension or a final salary pot, this amount would need to be deducted from the income figure.

For example, if you calculate that you’re likely to need £30,000 per year to cover your expenses (ie house, holiday, food, bills, gifts), and you receive a State Pension of £8,000 per year, the target amount is therefore £22,000.

This £22,000 target supplementary income, using the 20 or 35 times rationale, would require a pot of £440,000 to £550,000.

I prefer to think of it in the manner of our friends at the Pensions and Lifetime Savings Association (PLSA).  The PLSA have some useful resources, particularly their Retirement Living Standards, produced using independent research from Loughborough university.  Rather than an arbitrary multiple figure, the Retirement Living Standards look at varying lifestyles and use these to predict what level of income might be required.  The Lifestyles are realistic and categorised as:

  1. Minimum
  2. Moderate
  3. Comfortable

The categories are then considered in relation to whether you are single or a couple.   More info can be found on the website or this Retirement Living Standard video  ( containing more faceless animations that we all seem to love in this industry - Zippen included!) 

Warning: third party content may contain adverts

The Retirement Living Standards also have a number of example personas on their website - maybe you fit one of them?

Where will your retirement income come from?

So we’ve thought about what we might need in retirement to create our Minimum, Moderate or Comfortable lifestyle, but from what sources will this come?

  1. Income
  2. Capital

Just like when we’re working, income is paid into your bank account each month.  As well as final salary pension income, this could include: state pension, rental income, interest from savings or dividends.  

The start date of certain incomes will vary.  Your State Pension may start at age 66/67, you might have a final salary pension scheme that starts when you reach your 65th birthday.

Conversely, capital will be the money that you have saved up in your name.  This capital will include your personal/workplace pensions, any other savings and investments you may have.

Whilst we’ve separated out Income and Capital, in retirement, they’re both intended to achieve income and lump sums for you to live.  With the income stream coming in regularly, it’s then possible to supplement this via the capital saved.

Of course, the key element here is ensuring that the money doesn’t run out.

Retirement savings by age

We’ve seen that everybody’s capital and income requirements at retirement will vary greatly, depending on wants and needs, and what’s available of course.  Everybody’s circumstances are different.

What we can say for sure is that, the earlier you start making payments into a pension, the greater your chance of a comfortable lifestyle in retirement.  The sooner a pension starts and the younger you are, the longer your pension has to grow.  This longer pension saving period will then mean the less is needed to be paid in each month

There’s lots of different Pension Calculators out there, we like this one from Age UK.

How long will you need your pension?

Whilst we’ve established that a fascination with mortality isn’t jolly, when we’re thinking about how much pension we might need, we also need to consider how long it will have to produce an income for.  There’s that joke about “too much month left at the end of the money” (oh how we laughed) but the joke about “too much life left at the end of the money” isn’t quite so droll.  Fortunately, the State Pension will pay for as long as we live, but this is only going to stretch to cover some, and quite possibly not all, essential costs.

Annuity vs Flexi Access Drawdown – what's the best option?

“Pension Freedom” - Gosh, that sounds liberating! Announced by the Government in the 2014 budget, Pension Freedom gave us greater choice regarding the way in which we may take benefits from our pensions.  Choice is positive, and the freedoms give us more choice, but don’t think for a moment that the nest egg you’ve accumulated can be accessed like a bank account.

At Zippen, we think the security of financial advice is key, arguably more importantly in our decumulation years than at any other time.  What’s “decumulation” you ask?  Yes, I jargoned you, sorry about that.  Accumulation is saving up into your pension, Decumulation is taking from your pension. 

Essentially, when you come to take pension benefits, there are two routes:

  1. Purchasing an annuity
  2. Going into flexi access drawdown

Having now pelted you with excess jargon, what do these two terms actually mean?

1 Annuity - what is it?
You buy an annuity with your pension pot.  In return the annuity provides an income for life, continuing to a spouse if you were to die, in full or part, if you choose.

Annuity - the pros

The income is guaranteed for life.  No worrying about how much life is left at the end of the money.  You’ll know what you’ll receive, and when. There is little risk.  When you die, the payments stop, or continue to a spouse if that’s how you set it up.

Annuity - the cons
Annuity rates, much like interest rates at the moment, are pretty feeble.  Therefore, the income/annuity you buy with your pension pot will also be low.  If you choose to build in features such as escalation and a full or partial spouse’s pension upon your death, this income will be even lower.  You could choose a level annuity, to increase your initial income level (it wouldn’t increase by RPI/CPI or a set %), but this means that the income isn’t inflation proofed and the value of it will dwindle in real terms.  

2 Flexi Access Drawdown - what is it?

Flexi Access Drawdown allows you to keep your pension pot invested, and choose how and when to then take withdrawals from it.

Flexi Access Drawdown - the pros
Unlike the annuity option, you are in control of your Flexi Access Drawdown pot and have the flexibility that this choice creates.  You can time withdrawals as life/tax/need requires, whilst still having the pot invested.

Flexi Access Drawdown - the cons
Whilst you’re in control of the Flexi Access Drawdown pot, it needs to last a lifetime and, of course, none of us know how long a lifetime is.  You may look at your family’s longevity and decide that living life in the financial fast lane until you’re 62, when you assume you’ll die, is the way ahead - but what happens when your love of a plant based diet and yoga sees you living until the telegram arrives from the Queen?  Think of your Flexi Access Drawdown as a bank account, yet it has no overdraft and once it’s gone, it’s gone.

Annuity vs Flexi Access Drawdown

Tax planning aside (for the purposes of this article only mind you!), what’s best; annuity or Flexi Access Drawdown?

You guessed it, the most appropriate option will depend entirely on your personal circumstances.

If you’re fortunate enough to have sufficient income to cover the essentials, and your mortgage is paid off, then Flexi access Drawdown might be best.  You could use it to top up your income as and when you need to cover extra spending on leisure activities.  Even if the Flexi Access Drawdown pot runs out, you can still cover the essentials.

However, if you aren’t meeting the basic needs or food bills, utilities etc, it may be best to purchase an annuity to give reassurance that the essentials are covered.

For many, it’s often the case that planning and using a combination of income sources works best.

Key takeaways

Who doesn’t love a rule of thumb (anybody that knows where the saying comes from, actually), but, as a rule of thumb, our friends at Fidelity suggest that one should aim to:
save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.”

However, these guidelines are impacted by such things as your chosen retirement age, when you’ll access your pot and how you plan to live out your golden years.

I hope I’ve not sent you into a pension pot panic….  If you’re wondering whether or not you’re on track, there’s things you can do:

  1. Find all your pension pots*
  2. Get up to date valuations of all your pots*
  3. Find out if any of these pots hold unique or guaranteed valuable benefits*

*Zippen can do all of this for you, for free!

Once you know what you have, ask your providers for an illustration of your pension at varying retirement ages.  This will tell you what your pot may be worth, assuming certain growth rates.  Trying to do this with multiple pots can be time consuming and confusing, as can dealing with multiple pots at retirement - maybe consider consolidating your pots conveniently in one place before embarking on this mission (Zippen can help with that too!).

Once you know your projected pot value, you can ask your provider(s) how much more you can contribute each month to hit certain targets.  Don’t ever be afraid to question your provider.

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