The question of ‘how much do I need in my pension to retire?’ is something I’m asked frequently but it’s not a question you can answer unless you know what retirement looks like for you. When I work with clients, I ask them to spend time thinking about what retirement looks like for them personally and what they want to achieve. Here are some things to think about before you can start to answer this difficult question.

Setting a retirement date

Are you planning to retire on your 65th birthday or is your goal to retire as early as you can? Some people now prefer to transition into retirement over a number of years by reducing their hours or the number of days they work each week. You may be thinking I’d like to retire tomorrow but can you afford it?

If you begin to plan early enough, you can decide when you will retire or reduce your hours, rather than waiting until you reach your pension retirement date or state pension age.

Building a budget

Once you have a date to plan for, you then need to consider carefully how much you want to spend each year? Is £20,000 enough or will £60,000 a year provide you with the lifestyle you’d like, enable you to travel and eat out more often. Are there sports and hobbies you’d like to take up or continue into retirement? Without work, you have more time to enjoy yourself, but will this come at an additional cost. Building a budget for your retirement is a good starting point but also think about how your spending habits might change as you grow older. When will you finish paying the mortgage or will you still be helping fund your children’s education?

State Pension

With so many changes to the state pension in recent years, have you obtained a state pension forecast from the department of work and pensions (DWP). This can be obtained simply online or completing an application form which then gives you the important information about when you will start to receive it, how much you’re likely to receive and whether you are on track to get the maximum level of income. From April 2022 the new state pension can provide up to £185 per week which is £9,628 per year.

Pensions, Savings, and Investments

When planning for retirement, don’t just look at the size of your pension fund, it is the combination of all your personal savings, investments, pensions and other assets like a business or properties that can help provide you with income and capital during your retirement.

You may have accumulated several different pensions during your career, invested into ISAs, purchased shares and have a number of different savings accounts. All of these need to be considered as part of your retirement pot and it’s a good idea to have a record of these in one place. A personal net worth statement can be put together on a simple spreadsheet and should be reviewed regularly. What are they worth now and what value are they likely to be in the future? If you’re investing into a pension on a regular basis, the pension provider should be able to provide a statement of what level of benefits you may receive at a future date.

As a starting point, the very basic rule is that if you’re retiring at 65, you’re likely to need a pension fund of 20 - 25 times the amount of income you’ll need each year. Based on a withdrawal rate of 4% you may need pensions and investments of £500,000 to provide an income of £20,000 per annum.

Planning for retirement

Planning is the key to answering the difficult question of how much do I need in my pension to retire, but those that have a plan are likely to when and how much they’ll need. It then gives them the confidence to enjoy their retirement when it comes.

March 2022