How Much Do I Need to Retire Comfortably?

By April 10, 2020Pensions

Many people are unaware of how much they need to save for retirement. We sometimes speak to clients who overestimate the amount needed, believing their retirement income should be the equivalent of their wage. Quite often this is unnecessary, as your outgoings are likely to be lower due to your mortgage being repaid, children leaving home and reduced outgoings (no more travel costs to work!).

On the other hand, there are also many people who vastly underestimate how much income they’ll need in retirement. Amounts vary depending on a client’s personal situation but currently, covering the basics is likely to cost £11,830 per year, per person. This average figure changes depending on where you are in the country; in Wales, the figure might be closer to £10,520. Here in Kent and the wider South East, the average could be significantly higher at around £14,270.

Of course, most people don’t just want to survive in retirement; they want to thrive too, enjoying a comfortable, well-earned “life after work”. However, how can you ensure you get there? We have devised this short 2020 guide to get you started.

 

What is a “comfortable retirement?”

According to Nationwide Building Society, 33% of British people expect their State Pension to meet their retirement needs. Yet in 2020-21, the full new State Pension is £175.20 per week, equivalent to about £9,110.40 per year. Looking at the aforementioned figures, this is lower than the regional average needed for covering the basics across the UK, let alone covering the extra expenditure you might need for meals out or the occasional holiday.

Indeed, people who rely on the State Pension (as important as it is for retirement planning) could be in for a nasty shock. Again, Nationwide’s research shows that, based on current pensioner spending habits, many of these people could face a £68,000 shortfall in their pension savings; equivalent to being about £400 out of pocket each month.

We can help you roughly calculate what you might need for a comfortable retirement but bear in mind that, as things stand currently, you could need at least two-thirds of your salary for a comfortable annual retirement income; e.g. possibly £27,000 – £42,000 per year. That said, this is a very broad estimation as your needs might produce a lower or higher figure.

 

How to make up a shortfall

There are many ways to address a potential shortfall in retirement income, and the sooner you act, the better. Here are some ideas to consider:

 

Maximise your State Pension

Whilst your State Pension is unlikely to cover all of your retirement expenditure, it is an important component of your retirement income. You need to make at least 35 years of qualifying National Insurance Contributions (NICs) to receive the full new State Pension. If you have gaps in your record, consider making voluntary contributions to “top them up”.

 

Workplace Pension

In 2020-21, if you are employed then you are required (under Auto-Enrolment rules) to contribute at least 5% of your salary into your workplace pension. Your employer must also put in at least 3%. Here, there can be significant opportunity to boost your pension pot by negotiating a higher contribution rate from your employer (amounting to “free pension money”), or by increasing your own contributions.

Suppose you earn £30,000 per year. If you contribute the minimum 5% to your pension and your employer 3% of your qualifying earnings, then your annual pension savings are likely to be £1,900.80. If you both continued to commit this total each year over 30 years, then with an average annual return of 5% on your investments, you are likely to accumulate about £132,601.31 (setting aside any tax relief, which would boost the pot further).

However, suppose you increased your contributions to 8% and your employer to 5%. This total annual contribution would, instead, be £3,088.80. Taking the same saving scenario, timeline and annual return outlined above, you could expect the total pot to reach £215,477.13. In such a case, increasing your monthly contributions by about £59.40 (i.e. from £99.00 to £158.40) and by persuading your employer to put in a bit more, you could grow your pension by £82,875.82.

 

Other assets

Of course, there are other ways you might address a future retirement income shortfall. If you have a second home, for instance, then this might release funds for your pension through its sale. The same might be said for a business or shares which you own. However, it’s important to consider these assets carefully, as a potential source of retirement income. Illiquid assets can be hard to sell, for instance, and you might not get as much for the sale as you currently hope.

If you are interested in discussing your financial plan or retirement strategy with a member of our experienced financial planning team, please do give us a call.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

 

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