How much do I need to retire?

How much you need for your retirement is partly down to your own dreams and lifestyle expectations. But you also need to take into account rising life expectancy. Choose your retirement savings vehicles carefully to maximise your pot.

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How much do I need to retire?

On a grey Monday morning as you trudge towards the office, the idea of early retirement has never been more tempting. After all, who wouldn’t want the luxury of a lie in, the whole day ahead of you, free from any responsibilities?

The reality is that without careful planning, that day may be further away than you realise. Where once it was assumed that you would retire at 60 and live out your days in comfort, the state pension age is now rising,1 and the cost of living is higher than ever. If you want to make the most of your retirement, you have to start planning now.

You can check how much you will need for your retitrement with our pension calculator.

Where do you start?

As depressing as it might seem, when you think of retirement you also have to think about your life expectancy. The average life expectancy in the UK is around 81 years old,2 but if you are in excellent health with no bad habits you have a good chance of making it into your 90s. In fact, according to some studies, most babies born in the 2000s and beyond will live to be 100.3

So if you plan to retire at 65, you will need to make sure that you have enough in your retirement fund to last for 25 to 35 years.    

The benefits of retirement

Once you have retired, you will find that your day-to-day living costs naturally drop. For a start, you can say goodbye to expensive commuter fares, and you can stop investing in itchy suits and uncomfortable shoes. By the time you are in your 60s, the chances are that your kids will have left home so you will have fewer mouths to feed. And if you have been prudent with your finances, you should have a few assets to your name — perhaps a mortgage-free property, a car or two, or a few nice pieces of art. 

You will also be eligible for some government support once you reach retirement age. Bus and tube travel is free for over-60s across the UK, and train travel is heavily discounted. A winter fuel allowance of between £100 and £300 is also paid every year to anyone in their 60s (the exact age changes every year), and you can apply for a substantial reduction in your council tax.

All in all, just by being a pensioner, your cost of living should go down by several thousand pounds per year.

Calculating your retirement needs

But of course, you probably don’t intend to spend your retirement sitting quietly by the fire counting pennies. Most of us have big plans for our golden years — a long-awaited holiday, a ‘bucket list’ adventure, the sports car of your dreams, or an idyllic new house in the country. Your retirement income needs will very much depend on your preferred lifestyle, so do a little research to work out the cost of fulfilling your post-employment dreams, and factor this into your pension savings. For instance, if you want to take three holidays each year, you will probably need an extra £3000 to £5000 per year, on top of your day-to-day living expenses. 

Those day-to-day expenses will again depend on the lifestyle you wish to have. Recent reports have estimated that the average pensioner spends more than £10,000 per year on basic living costs such as food, bills and housing,4 but the basic state pension currently stands at just £155.65 per week, or £8,093.80 per year. That’s a gap of £1,906.20 per year, or £57,186.00 over 30 years, just to ensure that your minimal living requirements are met. If you have a taste for the finer things in life, you may need to double, triple or even quadruple that amount.

How to save for your retirement

This may seem like a lot, but luckily there are lots of ways to save for your ideal retirement. By April 2018, every employer in the UK will be legally bound to offer a private pension plan to every employee over the age of 18 who earns at least £10,000 per year.5 Under new laws, the employer has to contribute 1-3% of the employee’s salary, while the employee can opt to have up to 5% deducted from their own pay check and paid directly into the pension scheme. Additionally, you could invest in an insurance policy which guarantees annuity payments to you and/or your spouse after you retire. Or you could create your own private pension scheme through a SIPP, or ‘Self-Invested Personal Pension’, a tax-free programme where you essentially create and manage your own pension portfolio.

You can also start up your own pension fund by investing your money in a tax-free wrapper such as a cash ISA or a stocks and shares ISA. In the 2017-18 tax year, you will be able to invest up to £20,000 in ISA accounts. Any interest you make will be free from all taxation, and you can roll over your savings year after year when your allowance resets. Unfortunately, record low base rates mean that most Cash ISAs are offering returns of just 0.1% at the moment, so more and more people are opting to invest through a Stocks and Shares ISA instead. If you are unsure how to choose your stocks and shares portfolio, simply opt for a low-fee index-tracking fund or an Exchange Traded Fund which follows stock market movements. Despite well-publicised volatility, the FTSE 100 has risen by more than 14% over the past year, and by 18% over the past five years.6 Even after fees and inflation, this is still a much, much better return than any high street bank account could offer.

If you are able to save your ISA maximum year after year, and gain even 4-5% in yearly interest from your stocks and shares investments, you will soon build up a solid nest egg which will help you make the most of your retirement. And the sooner you start, the sooner you can stop worrying about your old age and enjoying the present.

1 https://www.gov.uk/state-pension-age

2 https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies 

3 https://www.theguardian.com/society/2009/oct/02/babies-likely-to-live-to-100

4 http://www.thisismoney.co.uk/money/pensions/article-2680608/Pensioners-spend-10-000-year-basic-living-costs.html 

5 http://www.thepensionsregulator.gov.uk/employers/contributions-funding.aspx

6 http://markets.ft.com/data/indices/tearsheet/charts?s=FTSE:FSI

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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