July 15th, 2020

How much will I need to fund my retirement?

So, you’ve been earning a reasonable salary for a while now, your income is around the national average of £29,000 and you’re starting to think about retirement. It could be 10 years off, or it could be 30 years off.

But how much are you going to need to in retirement? How much is enough? and how much is realistic?

Before we get into specifics, let’s make a few reasonable assumptions. These may not all apply to you, but most of them certainly should.

Before you retire:

  • you will have repaid your mortgage
  • your children will have left home
  • you will no longer pay national insurance contributions
  • you will no longer pay pension contributions

When you retire, you will: 

  • be more active (and therefore spend more) in the earlier years of retirement
  • receive a full state pension entitlement from state pension age

Naturally for most people, paying down a mortgage and supporting your children can be big expenses, when these are gone, we can feel a whole lot richer at the end of the month.

Likewise, no longer having to contribute to a pension or national insurance can also have an impact.

Let’s quantify that impact:

  • It is estimated that a mortgage payment can amount to up to 33% of an individual’s take-home pay.
  • Minimum Pension and National Insurance contributions can be as much as 12-18%.

If you’re no longer paying or contributing to all those things, you could have as much as 50% more of your income in your back pocket to spend on whatever you like!

This will likely have a substantial impact on the amount of money you need to enjoy retirement – maybe even as much as 50% less income to continue life as normal.

So, let’s suppose that you carry on enjoying a similar quality of life but without paying for a mortgage and without supporting your (now grown-up) children.

However, you do want to enjoy life a little bit more in retirement.

You want a few extra holidays; you want a few extra meals out and you want to be able to spoil the grandkids from time to time.

Because you’ve not got those big expenses looming over you every month, you can support that lifestyle on around 60-70% of your pre-retirement income.

The average UK pre-retirement salary is £29,000, of which we have determined you may only need 60% of that figure. That amounts to £17,400 per year.

If you have a full state pension, that currently provides an income of £8,767.20 per year. You will need to fund the remaining £8,632.80 per year, by yourself.

So, how much will you need to do that?

If we assume a modest annual pension return of 4%, you’d need a pot of around £220,000.

Quite a sum of money to save for!

How much saving would it take to reach that figure?

  • £180 per month for 30 years, increased with inflation, with growth at 5.5% = £219,000
  • £275 per month for 25 years, increased with inflation, with growth at 5.5% = £226,000
  • £420 per month for 20 years, increased with inflation, with growth at 5.5% = £224,000
  • £700 per month for 15 years, increased with inflation, with growth at 5.5% = £228,000
  • £1200 per month for 10 years, increased with inflation, with growth at 5.5% = £213,000

Which option do you think you could manage?

I’d be surprised if it’s the last one!

Time heals all (pension) wounds!

Time is your best friend.

Don’t give yourself a £1200 per month headache at 55.

I guarantee you will not thank yourself for it!

For further information, please click here to request a call back from one of our advisers.

Written by Daniel Morris – Financial Planning Consultant st Prosser Knowles Associates Limited

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