How much income do you need in retirement?

Faith Archer

by , Personal Finance Journalist and Blogger

at Much More With Less

15 Sept 2022 /  

retired couple sit using a calculator

This article was last updated on 12/01/2023

Perhaps, like me, you’re pretty clueless about how much income you’ll actually need, at the point when you finally quit work and skip off into the sunset. According to the Pensions and Lifetime Savings Association (PLSA), 77% of savers don’t know how much they will need in retirement and only 16% of savers can give a figure.

Weighing up income in retirement

The rule of thumb for income in retirement always used to be two thirds of your income while working. This assumes you’ll have cleared your mortgage and can ditch work-related expenses, from commuting costs to a uniform. But I’m freelance, so my income has its ups and downs, making it harder to calculate how much I might need based on my current earnings.

Plus, I find it tricky to grasp how much less I’ll need in future, after (fingers crossed) the kids have left home and university, versus how much more I might want to spend, with time to enjoy hobbies and holidays.

To add to the uncertainty, rising costs on everything from energy to fuel and food mean I probably need to save more – just at a time when it’s harder to spare the money!

Thanks to Auto-Enrolment, more of us are stashing cash in pensions than ever before. I think pensions are a good thing, as I’m particularly keen to grab the free money on top, in tax relief and any employer contributions, should you qualify. But I’m finding that without knowing how much income I’m aiming for in retirement, it’s tricky to plan how much I need to pay into my pension beforehand.

Check out the Retirement Living Standards

Thankfully, if you want an idea of what life in retirement might cost, you can check out the Retirement Living Standards from the PLSA. These put a price tag on retirement at three different levels - minimum, moderate and comfortable – depending on whether you’re single, or in a couple. You can also see how much more you might need when living in London, rather than elsewhere.

The living standards are described as:

  • Minimum, which covers all your needs, with some left over for fun

  • Moderate, which offers more financial security and flexibility

  • Comfortable, which includes more financial freedom and some luxuries

Sadly, none are described as ‘Go crazy partying on a yacht’, so maybe I’ll have to pencil in a Lottery win for that. So – drum roll please – according to the Retirement Living Standards, if you’re single and living outside London, you’ll need £12,800 a year at a minimum, £23,300 a year for a moderate lifestyle and £37,300 a year to be comfortable.

Some caveats: the living standards have been updated for 2021, to include the impact of COVID-19, but don’t reflect more recent price surges. They assume people are living mortgage and rent free, so you’ll need to add on housing costs if you’re still likely to have them. Plus, they ignore care costs, which can be stratospheric in later life.

What’s interesting is looking at the picture painted at each of these income levels, the kind of life you’d lead. Sure, you won’t exactly duplicate the living patterns, and you’re unlikely to have exactly the same income. But it provides a starting point: would I be happy with that? Would I want more than this?

Minimum for basics

At £12,800 a year for one person (£19,900 for a couple), the minimum living standard is set just a tad above the current full new State Pension, which for 2022/23 is £185.15 a week, or £9,628 a year. I tried living on just the State Pension for a week last year. It wasn’t fun.

As the minimum living standard describes, you’d cover your essential bills but with little left over. You can wave goodbye to a car and eating out more than once a month. Forget foreign holidays – the budget only stretches to one week away and one long weekend in the UK each year. Keen to redecorate now you’re spending more time at home? You’d be reliant on your DIY skills, as there’s no budget to pay someone else to help. This worries me as my own DIY skills are non-existent. Thank goodness for ‘affordable leisure activities’ twice a week!

Moderate for more flexibility

Life is looking up for those on the moderate living standard, which promises more financial security and flexibility. The £23,300 a year for one person, or £34,000 for a couple, brings the chance to eat out a few times a month. A three-year old car, replaced every 10 years. A fortnight in Europe plus a long weekend in the UK every year. The budget for clothing and shoes shoots up, and suddenly you can afford £34 a pop on birthday presents, rather than £20 each at the minimum living standard. You can even afford some help with maintenance and decorating each year. (What a relief)!

Comfortable for some luxuries

Stretch to £37,300 a year for one, or £54,500 for two, and now we’re talking. The luxuries listed at a comfortable living standard include regular beauty treatments, theatre trips and a three week holiday in Europe each year. The food budget is over £140 more than the minimum living standard allows, the spending on clothes and footwear almost triples, and you’re up to a generous £56 each for birthday presents. You can even afford two cars, and you’ll be able to replace them every five years, and your kitchen and bathroom every 10 to 15 years. More importantly, you have enough cash to be more spontaneous, rather than being forced to plan for every penny.

Working out how much to save

Fair to say I’d prefer my retirement to be on the comfortable side, rather than struggling to make ends meet on minimum income. At least now I have a better sense of the chunky sums needed in future, I can work out how much I need to put in my pension right now to get there.

PensionBee has a handy pension calculator on its website and app. I can put in my current age, when I’d like to retire, how much I’ve saved so far and how much income I’d like to have, and then play around with how much I need to contribute every month for my pension to last until I hit 100 years of age. You can even choose whether or not to include the State Pension, if you’re suspicious it might not be around by the time you retire.

Luckily I’ve been paying into a pension for a long time (because: old) so have a decent amount stashed away. If I keep up my contributions, I may yet be able to sail off into the sunset on something a bit better than a pedalo.

Faith Archer is a Personal Finance Journalist and Money Blogger at Much More With Less.

Risk warning

*As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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