This article was last updated on 12/02/2024
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 £14,400 a year at a minimum, £31,300 a year for a moderate lifestyle and £43,100 a year to be comfortable.
Some caveats: the living standards have been updated for 2024. 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 £14,400 a year for one person (£22,400 for a couple), the minimum living standard is set just a tad above the current full new State Pension, which for 2023/24 is £203.85 a week, or £10,600 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 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.
Moderate for more flexibility
Life is looking up for those on the moderate living standard, which promises more financial security and flexibility. The £31,300 a year for one person, or £43,100 for a couple, brings the chance to eat out once a month. A three-year old car, can be replaced every 7 years. It allows a fortnight long 3* all inclusive holiday in the Med and a long weekend break in the UK. The budget for clothing and shoes shoots up, and suddenly you can afford £30 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 £43,100 a year for one, or £59,000 for two, and now we’re talking. The luxuries listed at a comfortable living standard include a fortnight long 4* holiday in the Med with spending money and 3 long weekend breaks in the UK. The food budget is £230 a month, the spending on clothes and footwear up to £1,500, and you’re up to a generous £50 each for birthday presents. You can even replace your car every 5 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.
*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.