How Much do You Need to Retire?

How much do you need to retire? Estimating what you'll need in retirement can be difficult, but there are important considerations that most investors need to keep in mind.

Key Takeaways:

  • Calculating how much you’ll need for retirement is a complex task.
  • Your retirement costs may vary based on your individual circumstances—don’t overlook the impact of investment time horizon for your assets.
  • You may have a variety of sources to help you save for retirement, including pension plans, savings accounts and more.

How much will your retirement cost? Determining how much money you will need in retirement is not always straightforward. There are a number of considerations to take into account. You need to consider when you will retire, how much you currently have in savings and how you plan to spend your time in retirement. The amount needed to retire can vary significantly from person to person, but there are some factors you can assess now to get a better idea of how much you need to retire.

How Much Money Will You Spend in Retirement?

To understand how much money you need to retire, start with estimates of spending and saving. Spending generally falls into one of two categories: non-discretionary and discretionary.

  • Non-Discretionary Expenses include essential spending for needs. These essential expenses include spending on housing, basic living expenses, debt and taxes. This spending is necessary, and you may be able to estimate how much money you’ll pay on these.
  • Discretionary Expenses include nonessential spending for wants rather than needs. Generally, these expenses are flexible, and can be reduced if necessary. This category includes money you spend on travel, luxuries, hobbies and more.

Keep in mind that your spending in these categories could change as you age. For example, you may consider traveling more after you retire, which could increase your discretionary spending. Or you may consider moving to a cheaper housing situation, which could reduce your non-discretionary spending. You may not be able to exactly estimate retirement spending, but evaluating the retirement decisions you plan to make as you age can help you determine if you are on track.

Inflation’s Effect on Retirement Planning

When you consider your current spending and savings, you may begin to form an idea of how much you’ll need to retire. But inflation is an important consideration that can significantly impact how much money you’ll need throughout your retirement.

Inflation has the potential to decrease your purchasing power—perhaps significantly—over time. Your purchasing power relates to the amount of goods or services your money can buy. If inflation rises, your money purchases less. For example, if inflation rises at approximately 4% per year (as it has on average since 1915 in the UK), £50,000 in expenses today would cost the equivalent of almost £115,000 in 20 years.

What does that mean for your portfolio and estimates of the amount you need to retire? If inflation rises, the money you count on now for expenses may not go as far in the future to provide for the same needs. If you have a fixed pension income or annuity payout, you should be mindful of how inflation will affect how far that income goes.

How can you account for inflation in your retirement planning? Ensuring that you have the appropriate asset allocation—mix of equities, fixed interest, cash and other securities— to meet your needs and level of risk is a good place to start. You may also consider aiming for a higher financial target before retiring—or perhaps cutting some discretionary expenses to increase what your savings.

How Long Does Your Money Need to Last?

Your investment time horizon—how long you need your money to provide for you—is another factor to consider when evaluating if your current savings and investments are sufficient to support a comfortable retirement.

Your investment time horizon could be your lifespan, the lifespan of a spouse or dependants or perhaps longer depending on your goals. If your investment time horizon is tied to a lifespan, it is important to not underestimate it. Consider that it is possible you will live longer than previous generations—potentially longer than you expect! If you live to a higher age than you expect, your investments will need to provide for longer.

The age you decide to retire and take pension benefits or investment withdrawals is also important. If your pension income and investment withdrawals are unable to cover your entire retirement, you may consider delaying retirement or adjusting your discretionary spending.

Evaluating Your Retirement Savings

Retirement planning requires an understanding of how much money you currently have in retirement savings and expected pension benefits. You can begin by evaluating and estimating how much income you can expect to receive from the State Pension, workplace or personal pensions, rental income or expected work salary if you decide to continue part-time work. Consider that the age you decide taking pension benefits can have some effect—for example, deferring your State Pension benefits could potentially increase your future benefits up to a certain amount.

You should evaluate how much you have in your current retirement accounts, and also be aware of some of the other savings options available to you. Here is a brief overview of some of the ways pensions and other sources of retirement income could impact your evaluation of how much you need to retire.

Pension plans:

  • State Pension: The State Pension is available for those who qualify via National Insurance Contributions. If you qualify, you can expect to receive a guaranteed income from the State Pension, with some standard, non-investment based increases each year. You can use the government’s website to get an estimate of what you might receive.
  • Workplace pensions: You may be a part of an employer-provided pension scheme. If you have a defined benefit plan, you can expect regular and potentially inflation-adjusted income from the scheme. The income is based on a variety of factors, including what your salary and tenure. The pension provider can likely provide you with an estimate of your benefit. On the other hand, if you have a defined-contribution pension scheme, your income may depend on how the invested assets within the plan have performed.
  • Personal pension schemes: You might consider a private pension if you are interested in supplementing your other pension income or if you don’t have access to an employer-provided pension scheme. You may have some flexibility in how you invest the contributions in a personal pension and should asses what the most appropriate investment for your situation is.

Additional Retirement Income Sources:

  • Individual Savings Accounts (ISAs): These tax-efficient saving accounts can be a way to save or invest money. You may be able to use your ISA as a useful supplement to other forms of retirement income.
  • Salary: Will you work part-time during retirement? If you have plans to continue working, you may be able to estimate your expected salary.
  • Annuity: If you have an annuity, you likely have a specific benefit that you can plan on regularly receiving. These are often fixed benefits, so you should be able to anticipate how much you will receive.
  • Business and Real Estate: If you own part of a business, or plan on owning a rental property, you may expect to receive income from these sources during retirement. However, you may not be able to estimate how variable these sources of income will be in the future.
  • Taxable Investment Accounts: You may consider investing in an account that does not supply tax relief. These accounts can provide an opportunity for more flexible investment decisions. Withdrawals from these accounts could be useful additions to retirement income.

Are You on Track to Enjoy a Comfortable Retirement?

It is not always easy to evaluate exactly how much money you need to retire. There are a number of considerations to take into account, and your individual circumstances may have a significant impact on your retirement planning.

If you need help evaluating where you are, you might consider using a retirement calculator to see where you stand. These tools can help you get a general sense of where you are on your retirement saving path. And if you need help evaluating your retirement plan, or if you aren’t sure how to start planning for retirement, call Fisher Investments UK today to speak to one of our qualified professionals or download a guide to learn more.

Source: Global Financial Data, as of 13/02/2019. Based on UK Retail Price Index in GBP from 1915-2018.

https://www.gov.uk/check-state-pension

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.