5 key steps to understanding how much income you'll need in retirement

Pension Awareness Week ran from 11 to 15 September. Now in its 10th year, it’s a time when providers, consumer groups, and the Department of Work and Pensions come together to run a series of events promoting issues around pensions and retirement planning.

One of the key issues that’s always on the agenda is the importance of planning ahead and not leaving things to chance.

After all, if you’ve worked hard to build your wealth for retirement, you should be looking to ensure that you’re able to live in comfort and be able to do the things you’ve looked forward to doing once you’ve stopped working.

Furthermore, according to the Office for National Statistics (ONS), today a 50-year-old man has an average life expectancy of 84. Meanwhile, the average life expectancy for a woman the same age is 87^[1].

This means that if you stop working when you reach 65, there’s a decent chance that your retirement may last for 20 years, and your retirement fund will need to last, too.

As a result, it’s crucial to factor life expectancy into your calculations when thinking about funding your retirement.

If you’re planning your retirement, a good starting point is to have an idea of how much money you’ll need to live on. So, read about some key steps you can take while you’re still working that could help you enjoy the retirement you’ve looked forward to.

1. Have a plan for your retirement

Retirement goals and objectives are different for everyone and there’s no one-size-fits-all solution for how much income you might need to fund your desired lifestyle.

Consequently, it can make sense to start putting a plan together setting out what you want to do with the time you’ll have.

For example, you may have plans to spend a lot of time travelling overseas – something you probably can’t do very often when you’re in full-time employment. Alternatively, you may be thinking about a far less expensive retirement, working in your garden and spending time with your grandchildren.

Your plans may only be an outline and some vague thoughts at this stage, but the sooner you start setting your ideas out, the easier it will be to begin to quantify how much retirement income you’ll need.

You should also make sure you take into account any financial commitments you may have, especially those related to family members. You may, for instance, have elderly relatives you might need to support, or children who may need financial assistance when buying their first home.

2. Have an idea of how much you might need to fund your lifestyle

At this stage it may be difficult to envisage how much income you might need once you’ve stopped working. This may especially be the case if you are still some way off retiring.  

Handily, the consumer magazine, Which? carry out an annual survey about how much British retirees spend in retirement, giving valuable insight into the level of income you could require[2].

The survey breaks down the results into three distinct lifestyles:

• “Essential” includes the cost of providing somewhere to live together with basic needs such as food, clothing, travel, and standard household expenses such as heating, council tax, and broadband.
• “Comfortable” covers all the essential items above, along with some discretionary spending for taking European holidays and pleasurable pastimes such as eating out or enjoying alcohol.
• “Luxury” spending includes all the above items along with other high-end spending such as long-haul holidays, home improvements, upgrading your car every five years, and gym membership.

Type of lifestyle	Annual household income required
	Single person living alone	Two-person household
Essential	£13,000	£19,000
Comfortable	£20,000	£28,000
Luxury	£32,000	£44,000

Source: Which?²

3. Review your current spending

With an outline retirement plan in place, and an idea of the cost of different lifestyles, a good next step is to assess your current expenditure.

You may think that your outgoings will reduce once you’ve stopped working, but that may not necessarily be the case.

For example, it’s likely that much of your current discretionary spending is done at weekends, but once you’ve retired your weekends will effectively extend to seven days a week.

While you won’t face certain work-related expenditure such a commuting costs anymore, you may find that some household costs, such as heating, may go up as you’re likely to spend more time at home.

So, putting together a schedule of your outgoings – both regular monthly commitments and discretionary spending – could give you a good idea of the level of income you’ll need to provide for your planned lifestyle.

4. Plan to be as debt-free as possible

Ideally, you don’t want to be servicing debt in retirement.

Having to repay debt could unhelpfully add to your monthly expenditure. If you don’t take steps to deal with it, you could find yourself with less disposable income than you may have hoped or planned for.

This is especially the case with credit card debt, which tends to attract a much higher rate of interest than secured debt such as your mortgage.

As a result, as you approach retirement, it’s sensible to work towards making yourself as debt-free as possible. Taking steps to reduce outstanding debts now could help ensure you are clear of outstanding borrowing commitments when you retire.

5. Identify all your income sources

While the bulk of your retirement income is likely to come from your accrued pension fund, remember to also factor in other potential sources of income.

These could include:

• Your State Pension
• Other savings and investments you may have
• The money you could make from buying a smaller property to the one you current own
• Any inheritance you may be anticipating
• The sale of a business or a buy-to-let property portfolio.

Don’t forget to include your partner’s income and assets in this analysis.

A financial planner can help you to understand how you could best use all your assets to provide a tax-efficient income when you retire.

Get in touch

If you’d like to talk to us about your making plans for your retirement, please get in touch. Email info@aspirafp.co.uk or call us on 01454 632 495.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation to any investment or retirement strategy.

You should seek independent financial advice before embarking on any course of action.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

Approval no. 189

[1]   https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

[2] https://www.which.co.uk/money/pensions-and-retirement/planning-your-retirement/how-much-will-you-need-to-retire-aNmlv7V7sVe9

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