After years of hard work and paying in, a comfortable retirement is probably the light at the end of the tunnel.
40% of over-55s, however, are worried that their money will run out. (1)
Moneywise.co.uk – April 2018
It’s worth taking some time to make some retirement decisions and figure out how much you are going to need – and if you’re on track to build up the pension fund needed to provide this.
How much will I spend?
Let’s start with how much you will need every year. There are lots of figures floating about, but financial experts generally recommend the two thirds rule – for a comfortable retirement, your total pension needs to be about two thirds of your pre-retirement income to enjoy financial independence. £18,000 is considered the minimum for married couples, allowing hardly any luxuries: no eating out, no alcohol, probably no car, and no gym membership.
According to Which?, married couples enjoying a comfortable retirement spend £26,000 per year. (2) You can get a figure calculated for you through tools like the Money Advice Service’s Budget Planner.
Your retirement planning should also consider how your spending might change. At the start of retirement, people tend to spend more. You may already be planning to spend the tax-free lump sum cash on a holiday, or renovating the house. In later life, however, you may need to think of the costs of healthcare or extra carers. Most of us will be retired for twenty or more years, so it’s important to make sure your pension fund lasts.
When reaching retirement age and if you’ve paid enough National Insurance (NI) contributions, the full state pension is worth around £165 a week per person. As this only amount to just over £8500 a year, many people pay into a private pension to cover the expected shortfall.
There are different options available for how to draw this. Income drawdown allows you to take money as and when it’s needed. Although this gives you more freedom, it does mean you need to be sure the investment doesn’t run out. A traditional annuity guarantees a constant income for a set period or for life. Whatever the option, how much you get depends on the size of your pension fund.
How much should I save?
According to thebalance.com (3), by the age of 45 you should have already have saved 4x your salary, on target to save 8x by age 60. This is probably a more helpful way of looking at it than pulling a six-figure number out of nowhere – although many sources are putting this at £300,000.
Once you know how much you’ll need, it’s time to focus on how much to save now. After all, the money available to you will depend on the size of your pension fund. If you are just paying the minimum, through your workplace pension scheme, then you need to think seriously about whether this will give you enough. You might have twenty years left to work, and just a small increase in contributions now can have a major effect and help you look forward to a comfortable retirement.
If you’re unsure – perhaps if you have more than one pension policy like old workplace pensions – it’s worth considering whether pension consolidation could be an option just to ensure your money works harder for you.