How much money do you need to retire

Published on: April 17, 2024 Last updated: October 22, 2024 Reading time: 9 minutes

The amount of money you need to retire can be tricky to pin down. It can depend on several factors. Research found that 77% of savers did not know how much money they’d need in retirement. Only 16% could give a figure.

Written by:

Rachel Wait

Writer

Edited by:

Chris Wheal

Editor

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What lifestyle do you want?

Choosing the lifestyle you want sets how much you need in retirement. Someone planning to retire and travel the world will need a larger pot of cash than if you want to stay at home with your grandchildren.

The Pension and Lifetime Savings Association (PLSA) suggests three retirement living standards:

Minimum

The minimum lifestyle covers all your needs, with money left over for social activities. You could go on holiday in the UK and go out for a meal once a month.

Moderate

A moderate lifestyle provides more flexibility. You could go on holiday abroad once a year and eat out a few times a month.

Comfortable

A comfortable lifestyle gives you a bit more choice. You could spend money on streaming services, a holiday abroad and several UK minibreaks each year.

How much do I need to retirement?

Once you have decided the living standards you hope for, you can work out how much you need to retire:

	Minimum	Moderate	Comfortable
Single person	£14,400 a year	£31,300 a year	£43,100 a year
Couple	£22,400 a year	£43,100 a year	£59,000 a year
House	DIY £100 a year to maintain your home.	Some help with maintenance and decorating each year.	Replace kitchen or bathroom every 10-15 years.
Food	Around £50 a week on groceries, £25 a month on food out of the home, £15 per fortnight on takeaways.	Around £55 a week on groceries, £30 a week on food out of the home, £10 a week on takeaways.	Around £70 a week on groceries, £40 a week on food out of the home, £20 a week on takeaways.
Transport	No car, £10 a week on taxis, £100 per year on rail fares.	3-year-old small car, replaced every 7 years, £20 a month on taxis, £100 per year on train fares.	3-year-old small car, replaced every 5 years, £20 a month on taxis, £200 per year on rail fares.
Holidays and leisure	A week-long UK holiday. Basic TV and broadband, plus streaming service.	2 weeks in the Med and a long weekend break in the UK. Basic TV and broadband and two streaming services.	2 weeks in the Med with spending money and three long weekends in the UK. Bundled broadband and TV subscription.
Clothing and personal	Up to £630 for clothing and footwear each year.	Up to £1,500 for clothing and footwear per year.	Up to £1,500 for clothing and footwear each year.
Helping others	£20 for each birthday and Christmas present. £50 a year to charity.	£30 for each birthday and Christmas present, £200 a year to charity, £1,000 for family support.	£50 for each birthday and Christmas present, £25 per month to charity, £1,000 for family support.

Source: Retirement Living Standards.

Where will your retirement income come from?

Your retirement income could come from several different sources:

State pension

The full state pension is currently £221.20 per week.

You’ll qualify for the state pension when you are 66 years old, although this will increase to 67 between 2026 and 2028 and then to 68.

You can use the pension calculator on the gov.uk website to work out when you’ll qualify.

State pension eligibility will depend on your National Insurance (NI) record. To get any state pension at all, you’ll need at least 10 years of NI contributions.

To get the full amount, you’ll usually need at least 35 years of NI contributions.

Private pensions

There are two main types of private pension:

Defined contribution schemes: These can be private pensions that you arrange or a workplace pension from your employer. The National Employment Savings Trust (Nest) is the government workplace pension scheme. It is used by many employers. The amount you receive when you retire depends on how much you paid in and how well the investments performed. A self-invested personal pension (SIPP) is a defined contribution scheme but you choose how your pension is invested.
Defined benefit schemes: These are typically workplace pensions arranged by your employer. The amount you receive depends on your salary and how long you’ve worked for your employer.

There are several regulators:

The Pensions Regulator ensures that employers put their staff into a workplace pension.
The Pension Protection Fund ensures that those with a defined benefit pension are protected if their employer goes bust.
All pension providers should be FCA-regulated.

If you have worked for more than one employer, you may have more than one pension. You could consider combining your different pension pots to make it simple for you. But always seek pension transfer advice first as exit fees may apply and you could lose valuable benefits.

Personal savings

Any money you’ve stashed away in a personal savings account could also help to fund your retirement. If you’ve put most of that money into an ISA, you won’t pay tax on the interest earned.

Investments

Investing for the long term can result in higher returns compared to cash savings. Investments include stocks and shares or bonds. However, investments are higher risk than cash as your funds can rise and fall in value. That means you could get back less money than you’ve put in.

Property

You could also fund your retirement from rental income if you have any buy-to-let properties. Alternatively, you could release some of the equity (value) built up in your home. You could do this by remortgaging or selling your home and moving to a smaller place.

Identify your retirement expenses

Working out how much cash you’ll spend on key expenses in retirement can help you work out how much you’ll need to cover them.

Essential expenses

Essential expenses will include your mortgage or rent, utility bills, clothes, food and transport. When you retire, you’ll need enough income to cover these as a minimum.

Discretionary expenses

Discretionary expenses mean money to spend on holidays, eating out or spoiling the grandchildren. These costs need to be added to your retirement budget.

Healthcare costs

Managing healthcare costs in retirement is also important. Although most of your medical needs should be covered by the NHS, you might face other expenses, such as dental care or specialised treatments.

If you want more than the NHS offers, you could think about private medical insurance.

How much should you save?

There’s no magic number when it comes to how much you should save for retirement. But the following method could give you an idea of how much you’d need to retire.

If you’ve just started to save for your retirement, halve your age and use that number as the percentage of your salary you could save each year. This means:

If you’re 20, save 10% of your salary in your pension
If you’re 30, save 15%
If you’re 40, save 20%.

Saving this amount won’t always be possible, particularly when the cost of living is high. But it gives you something to work towards.

When should you start saving?

The earlier you start saving for retirement the better. Under auto enrolment rules, your employer must enrol you into a pension scheme and make contributions if you’re at least 22 years old and earn at least £10,000 a year.

The minimum amount that must be paid into a workplace pension scheme is 8% of qualifying earnings – this is £6,240 to £50,270 a year for the 2023/24 tax year. At least 3% of this must come from your employer.

How to boost your retirement savings

The steps outlined below could help to boost your retirement savings:

Maximising contributions

Paying as much as possible into your pension pot is one way to boost your retirement income. The minimum you’ll need to pay into a workplace pension plan is 5% of your qualifying earnings. But if you increase your contributions, your employer might also match this up to a limit.

Even if you already have a work pension, you could think about setting up and paying into a self-invested personal pension (SIPP) on top. This gives you more control over how your pension is invested. It’s a good idea to seek professional advice before setting up a SIPP.

Optimise tax efficiency

Tax relief is one of the biggest benefits of saving for your retirement through a pension..

When you pay into your pension:

The government will give you 20% in basic rate tax relief.
If you’re a higher-rate taxpayer, you can get up to 40% tax relief.
Additional-rate taxpayers can get up to 45% tax relief.

If you’re self-employed, you’ll need to claim higher-rate tax relief through your self-assessment or by contacting HMRC.

However, if your employer offers a salary sacrifice pension scheme, you might enjoy further tax breaks. Through the scheme, your salary is reduced by the amount of pension contribution you want to make. This is paid into your pension, alongside your employer’s contribution.

Because your salary is lower, you’ll pay less income tax and NI on your earnings. Your employer will also save on NI.

Exploring investment options

Another way to increase your retirement fund is to explore your investment options. Consider:

Stocks and shares. These have the potential to deliver higher returns.
Buy-to-let property. These can offer a regular income stream.

Considering part-time work

Taking on part-time work could also boost retirement income. Depending on where your skills lie, you could think about consultancy or freelancing, tutoring or making deliveries.

Regular pension plan reviews

By regularly reviewing your pension plan, you’ll be able to see whether you’re still on track to meet your retirement goals.

Review retirement savings progress

As part of this review, you should think about whether you’re contributing enough to your pension. But also monitor how well your pension investments are performing.

You should also keep an eye on any other savings and investments you have. You might need to adjust them if they’re not performing well. Consider moving your savings to a more competitive account.

Adjust financial goals

Your retirement income can be affected by factors such as inflation and the cost of living. It could be necessary to adjust your goals to account for this.

Inflation

Keeping an eye on the inflation rate is important as it can affect the amount of cash you have in retirement. As well as reducing your spending power when you retire, high inflation could also mean you have less money to put into your pension pot now.

Cost of living

When the cost of living is high, reducing your pension contributions is one way to help make ends meet. But by doing so, you risk damaging the standard of living you’d hoped to have when you retire. As a result, you might need to increase your pension contributions in the future, or work longer to make up the shortfall.

Summary

Saving for your retirement as early as possible will boost the chances of you being able to live the life you want when you stop working. By weighing up the pros and cons of the different income streams, you can come up with a retirement strategy that works for you. Post-retirement budgeting will also ensure the cash you’ve saved goes further.