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Helen Kyle

HOW MUCH DO I NEED TO RETIRE ON?

By far the most common question I get as a Financial Coach is “How much do I need to fund my retirement?”. And it’s true, we might have many more pension freedoms these days, but knowing how to navigate it all is quite tricky.

Most people these days have defined contributions pensions – this is where you (and your employer, if you’re employed) will contribute towards a pension fund each month in order for you to put money aside into a pot for your retirement. It’s just like a savings account really, only with excellent tax benefits. Currently the Government will add tax relief onto your contributions too, so for a basic rate tax payer for every £80 you put in, the Government tops it up to £100. It’s even more for higher and additional rate tax payers, although this could be one of the target areas for the upcoming budget at the end of October.


Here's a very quick way to work out a rough approximation of what you’d need for retirement. You’ll need to know your approximate living expenses, your pensions and your other income.

1.      Calculate your annual net expenses (rent/mortgage, utilities, food, fun, holidays, going out).  Make any adjustments to your lifestyle at retirement.

2.      Deduct your expected State pension at retirement.

3.      Deduct any other income (eg rent, side hustles, final salary pensions etc)

4.      Adjust the annual amount for inflation using this calculator for the number of years to retirement.

5.      Multiply by 25 to get "your number”. This is how much you will need in defined contribution pension funds (“pots”) by retirement. If you want to keep your wealth and live off the growth without touching the capital, in general conditions a rule of thumb is to withdraw 4% of your pot per year (the 4% rule).

 

Below is our example, Cleo. She’s 52 and wants to retire at 67. She has a full state pension at 67, some rental income and wants to spend just under £34k a year, which is the amount for a single person requiring a comfortable standard of living .

                                     

Of course, if Cleo wanted to spend more or retire earlier, she would need a larger pot, or if she was prepared to draw more down on her “pot” and reduce her capital she would need less. You can get a more detailed calculation from online calculators – here’s a useful one.

Below are some useful resources if you’d like a more detailed idea of what you’d need to save, or you can book in for a chat here.

Standard Life pension calculator

Moneyhelper Government calculator. This is also useful, although its based on buying an annuity rather than using drawdown

Article on what funds are needed for different lifestyles in retirement.

 

Next time I’ll be looking at what you should do if your retirement pot isn’t on track.

 

 

Important note  

This blog is for education and information purposes only and does not constitute financial advice. If you need specific advice, please reach out to one of the many excellent financial advisors in the UK.



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