How much money do I need for a comfortable retirement?
This is a very popular question for financial advisors. Generally, people want to know how much they’ll need to have saved in their pension pot to retire comfortably. The easy answer would be “lots of money” however, building a pension pot requires you to sacrifice some things today to prepare for a brighter tomorrow.
The best way to visualise retirement is like this: You’ve stopped working. Your children have grown up and flown the nest. You don’t have a mortgage and own your home outright. There’s no travel to and from work, no after work drinks on a Friday to buy, and no lunching out every day. Life should be cheaper, right?
Related reading: How to retire early
Article summary
Here’s what you will learn by reading this article:
- The importance of saving and planning for a comfortable retirement
- Visualising your retirement lifestyle and assessing how much money you will need to retire
- Comparing annuities and drawdown as options for retirement income
- Calculating pension pot requirements for a desired retirement income level
- The benefits of engaging a financial adviser to help you plan for a comfortable retirement
Looking to learn how much money you need to retire comfortably?
Let’s get started.
Is life cheaper post-retirement?
Generally, the answer is yes, but I’ll also throw an “it depends” into the mix. This is because, sometimes, the daily grind is so hectic that you don’t have time to spend. Weekends may involve flaking out in front of the TV building our reserves for the week to come. Living like that, costs very little.
When you retire, you generally have a lot more time to kill. Some call retirement “the longest holiday of your life”. Can you imagine being on a long holiday and being skint? Unthinkable. So yes, life should be cheaper post-retirement, but your lifestyle and hobbies could decide otherwise.
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What will my retirement look like?
The first step is to picture how you’d like to spend your time. Some dream of a quiet life tending the garden and doing a bit of DIY whilst others envisage lots of activity, travel and time with friends and family.
Whatever floats your boat, it’s important to determine the lifestyle you may live and how much money you’d need to support it. Instead of thinking how much you’d need in your pension pot, think instead of how much your lifestyle would cost you monthly in today’s terms.
Once you have this income figure (or combined income figure if you are married), ensure that you’d be able to pay all your bills and have enough of a surplus to support your lifestyle. Your retirement age is also important. This money needs to last for the rest of your life so the earlier you retired, the more money you’d need.
Annuity or drawdown?
In the old days, your only choice at retirement was to purchase an annuity. You’d give the insurance company a lump of money in exchange for a guaranteed income for life. On the positive side, there’d be very little risk as you’d know from the outset exactly how much was coming in. On the negative side, this would be an irreversible decision.
The other option, Drawdown, was introduced in 1995. Here, your pension pot would remain invested, and you would draw a regular or variable amount as and when required. On your death, whatever remained in your pension pot would pass to your beneficiaries, in some cases, tax-free. The danger with drawdown is that drawing too much could erode your pot.
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Crunching the numbers
There are many ways to calculate how much you’d need in your pension pot for a specific income. These calculations are complex and need to consider whether you’d be going down the annuity or drawdown route. This is where engaging a financial adviser could help. They would crunch the numbers for you and help you plan properly for the longest holiday of your life. Not to be taken lightly.
Article FAQs
Please find below some questions and answers covering the topics raised in this article.
How can I determine the right amount for a comfortable retirement?
First, assess your desired lifestyle and estimated monthly expenses to determine how much money you will need for a comfortable retirement.
Consider costs like bills, healthcare, travel, and hobbies. Also, factor in inflation and longevity and try to build up an emergency fund to cover you when needed.
Lastly, use retirement calculators or consult a financial adviser to create a tailored retirement plan ensuring your savings match your later life goals.
How much money do I need to retire in my 50s or at 60?
If you are hoping to retire in your 50s or 60s, you will need to build up a significant pension pot sooner rather than later. If you start investing early you will benefit from compound interest.
To retire at 55 with a moderate income, we believe you would need £600,000 or more in your pension fund. If you are looking to retire at 60, with a moderate income then a pension of £550,000 would be needed.
Please note: This is merely an illustration. What some people consider a moderate income is different from what others consider a moderate income.
How can I estimate my monthly retirement expenses?
Start by listing current monthly expenses and adjust for retirement lifestyle changes.
For example, if you will be mortgage-free by the time you retire, you do not need to account for those monthly payments in retirement.
If you are thinking about travelling the world, start thinking the yearly costs involved. Do you want to travel in luxury, or are you happier taking a different approach?
Also, it is important to account for inflation and unexpected costs. Use budgeting tools and financial cashflow modelling software, or seek guidance from a financial adviser to ensure accurate estimates.
What are the benefits and risks of annuities versus drawdown?
Annuities provide a guaranteed income for life, reducing longevity risk but offering less flexibility. On the other hand, drawdown allows flexible withdrawals and potential ongoing investment growth.
However, to offer balance, you will still be exposed to risk and the chance of your funds depleting. It is important to always consider your risk tolerance and financial goals when choosing between these options.
How can a financial adviser help me plan for a comfortable retirement?
A financial adviser can help in many ways.
They will assess your financial situation, estimate your retirement income and expenditure needs, and create a tailored plan.
Additionally, they use specialist financial software tools for cash flow analysis and long term planning. Lastly, financial advisers also provide guidance on investments, tax planning, and adjusting your plan should your circumstances change. If you would like to talk to one of our financial advisers, simply call us on the number below.
