How much money you’ll need to retire and live comfortably largely depends on your plans for retirement and how you like to live your life. Generally though, as a rule of thumb, the more you can save up for retirement, the better. The more money you can put aside when you are younger, the more you’ll have in later life. You should have a target number for your retirement savings in mind.
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According to research conducted by Fidelity International, people in the UK who managed to save seven times their annual household income by the age of 68, were able to live a comfortable retirement that reflected the standard of living they had experienced when they were at work. This figure is clearly a high number, which is why it is so important to save as much as possible early on in life. You should save at least one year’s worth of income (based on your current salary), by the time you turn 30. The longer it takes you to begin saving, the more you will have to contribute to your pension as you head towards retirement. If you leave this too late, it may not be possible to generate the income before you need to retire.
Your pension pot: how long should it last?
This is a big question that many people ask when planning their retirement. If you were to retire at the age of 68, and you are in retirement for 25 years, you’d need to take no more than 5% of your pension pot every year in order to make your money go as far as possible. Taking 4% is ideal. That said, this isn’t an easy calculation, as there as many factors that could affect how long your pension pot will last. You may end up living far longer, the rate of inflation may change, the market and schemes your pension is invested in could underperform, and the national retirement age could increase again. Always consider when you plan to retire. If you can hold on and work for a few more years, this means you will have more money to dip into when you do retire, as you will have made more contributions to your pension scheme.
That said, don’t overestimate how much you’ll need
Many retirees overestimate how much they will actually need when they retire. It is commonly believed that you’ll need around two-thirds of your final salary, as many people will spend the equivalent of their last wage per year. In many cases, this isn’t true. This is because many retirees don’t consider factors like not having to pay a mortgage (if they have paid theirs off by the time they retire), no children to look after and pay for, no commuting fees, and no additional costs with going to work, such as clothing, lunch and miscellaneous items to make working life more comfortable. A survey conducted by the consumer group Which? found that most retirees spend around £2,220 per month. This equates to around £27,000 per year, covering holidays, luxury items, food, clothing, utilities, hobbies, leisure activities and so on. As you age, you may find that you spend less in some areas, but more on others.
You also shouldn’t forget that you will receive the State Pension provided by the government from the age of 65. Depending on your National Insurance contributions, the amount you can receive through the state pension is up to £175.20 per week, which makes a fair amount of your overall pension income. If you have defined benefit (DB) or defined contribution (DC) pension schemes, you’ll also have income that comes from these that you will have access to. So, while £27,000 per year may seem like a very steep figure, if you invest and save your money well while working, this figure shouldn’t be that difficult to reach in retirement.