How much will you actually need?
April 2010
This is the crunch question and one, ultimately, that you need to decide for yourself.
Since few of us would be happy to be worse off in retirement than we are today, as good a place to start as any is with your current net salary.
We have created three retirement benchmarks – 3 star, 2 star and 1 star – to help you work out what you might need.
A 3 star retirement - 80% gross salary
Let's say you are committed to maintaining your current standard of living, come what may. How much will you need?
To fund your retirement income out of your own savings could cost you hundreds of thousands of pounds. After all, you could well be living for a good 20 years or more after retirement. But don’t panic. You may not need to save nearly that much to enjoy what most people would consider a very comfortable retirement.
Say you are a 30 year old man living on a salary of £27,700 a year, about average across the UK*, how much would you need? Would you really need £27,700 a year in retirement? You wouldn’t have to fork out for travelling and other work related expenses, and your mortgage may be paid off, so perhaps you might feel equally well off with an income of just £22,000 – or about 80% of your gross salary.
Don’t forget that unless you retire before your State Pension age - currently 65 for men, 60 for women (though this is due to rise to 65 by 2020) - there’s currently the basic State Pension to boost your income. As at April 2010,,this stands at £97.65 a week for a single person giving you a little over £5,095 a year gross, leaving you to find £16,905 a year.
You may also have the advantage of higher personal allowances as you get older which may mean you paying less tax on your income too, depending on the tax allowances at the time you retire.
*Based on an average UK salary of £531 a week (Source National Statistics Online, http://www.statistics.gov.uk/cci/nugget.asp?id=285)
A 2 star retirement - 70% gross salary
You want to be able to live reasonably well, but recognise that perhaps you won’t need to spend as much money as you do now.
However, you can’t see yourself getting by on less than £19,500 a year – or about 70% of your current gross salary of £27,700. After the basic State Pension of £5,095 a year, you would still need to find £14,405 a year. £19,500 equates to just over £373 gross income a week.
A 1 star retirement - 50% gross salary
Hopefully, with the mortgage paid off and just yourself to look after, you can’t really see that you’ll need much money at all.
Targeting about 50% of your gross salary, i.e. £14,000 a year, you would still have to find around £8,905 a year. £14,000 equates to just over £268 a week gross.
These calculations assume you will receive the full State Pension at the equivalent current rate. Although it may not be wise to rely on this as you don’t know what State Pension will be available in 35 years' time. So it’s worth thinking about putting away more than you think you’ll need. After all, you may wish to take 25% of your pension fund as a tax-free lump sum which would reduce the amount of regular pension you could receive. And wouldn’t it be nice to give yourself a little treat after all those years of hard work, like that world cruise you’ve always promised yourself, and still have enough to live on when you get back?
All you folk whose incomes are well in excess of £27,700 a year, won’t need reminding that expectations rise in line with salary. Well, have you ever met anybody who didn’t feel they were worth at least a 10% more than they were being paid?
