Can you afford to retire?

Working out how much you’ll need to live on in retirement can be a real challenge, especially as your outgoings are likely to change when you stop working.

For example, you might spend less on travel as you no longer have to commute, but more on holidays as you’ll have more free time available. With this in mind, consumer association Which? interviewed nearly 7,000 retirees about how they spend their money and found that for a couple, a ‘comfortable’ retirement costs £26,000 a year and for a single person it’s £19,000.

Of course, what one person views as a ‘comfortable’ retirement might be dramatically different to another person’s view, so to make things a little clearer, Which? have defined exactly what they mean by a ‘comfortable’ retirement income, compared to an ‘essential’ and ‘luxury’ income:

  • Essential – Provides you with enough to cover all your essential living costs such as food, housing, transport, bills, insurance, clothing and toiletries
  • Comfortable – includes enough to cover all the elements of the essential category as well as short-haul holidays, leisure activities, alcohol, tobacco and charitable giving
  • Luxury – covers both essential and comfortable spending, as well as long-haul holidays, gym or health club memberships, expensive meals out and a new car every five years.

How much income might you need to retire?

The average spending and estimated pot size you would need to achieve each of these lifestyles looks like this:

 CategoryAnnual income requiredAnnuity Pension PotDrawdown Pension Pot
One person householdEssential£13,000£123,365£77,350
Comfortable£19,000£305,710£192,290
Luxury£31,000£671,000£442,140
Two person householdEssential£18,000£47,325£28,810
Comfortable£26,000£265,420£154,700
Luxury£41,000£757,000£442,020

As the table shows, the sums needed to provide you with these incomes are often huge. For example, the Which? Calculations found that, on average, couples need a pot of around £155,000 alongside their State Pension to produce an annual income of £26,000 via pension drawdown, or just over £265,000 through a joint life annuity. Calculations for pension drawdown are based on the saver reducing all their income over 20 years from the age of 65, with investment growth of 3%, inflation at 1% and charges levied at 0.75%. You can find out more about how pension drawdown works in our guide What is pension drawdown and how does it work? and more on annuities in our article Annuities explained.

Rebcecca O’Connor, head of pensions and savings at Interactive Investor said: “The Which? drawdown estimates reduce the pot size to nothing after 20 years, which means if you lived to be older than 85, in these scenarios, you would become dependent on the State Pension at that point.

“While the estimates suggest that someone on an average salary paying the auto-enrolment minimum of 8% throughout their working life who will also receive the State Pension should just about be on track for a retirement somewhere between ‘essential’ and comfortable, it might still be a struggle to manage any unexpected high bills, such as property maintenance.”

Which? is using this research to urge the government to make changes to the way people are able to view their pension pots and to assist with the understanding of what sums of money people need to be aiming for.

How much State Pension will I get?

The above income targets factor in the State Pension, which for those who reached or will reach retirement age on or after 6 April 2016 is £179.60 a week (or £9,339.20 a year) in the 2021/22 tax year.

Each tax year, the new State Pension increases by the highest of the growth in wages, inflation as measured by the Consumer Prices Index (CPI), or 2.5%. This is known as the ‘triple lock guarantee’.

Not everyone is eligible for the full amount of State Pension though, and the amount you are entitled to will obviously have an impact on how much more (or less) you might need to save into your private pension. Your State Pension entitlement is determined by the number of ‘qualifying years’ you have of paying the appropriate amount of National Insurance Tax. Working out what level of State Pension you are eligible for can be confusing, but you can find out more in our article How the State Pension works.

How can you afford the retirement you want?

If looking at the above table fills you with dread, it’s worth remembering that everyone’s situation is different and what you might be looking for in retirement is unlikely to be the same as everyone else.

However, if this has got you thinking about how you are going to afford the retirement you would like, we’ve produced several retirement guides to help you find ways to boost your pot:

Where to go for more help

Planning for retirement isn’t always straightforward, so if you’re not sure whether you’re saving enough, or you’re not sure which pension to choose, you might want to speak to an independent financial adviser who can recommend the best course of action based on your individual circumstances.

You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.

If you think you might be interested in speaking with a financial advisor, VouchedFor is currently offering Rest Less members a free pension check with a local well-rated financial advisor. There’s no obligation, but once you’ve had your check, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.

Do you feel that you have enough saved for your retirement, or are you looking at building a pension pot for the first time? We’d be interested in hearing from you. You can join the money conversation on the Rest Less community or leave a comment below.

Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.

If you’re considering getting professional financial advice, VouchedFor is offering Rest Less members a free pension check with a local advisor. There’s no obligation but once you’ve had your review, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.

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