There isn’t a one-size-fits-all rule for how much you need to save to retire in comfort. Retirement planning is based on a number of factors, and making a plan based on your personal circumstances is the most accurate way to go about it. How early you start saving, how you invest and what retirement strategy you pick are just some of the many variables that play a part.
But there are a few ways to get at least a preliminary idea of what income you should aim for, how big a pot you might need to generate that income and how much you should save every year to amass that pot.
Jason Hollands, managing director at Evelyn Partners, says people typically aim for somewhere between half and two-thirds of their final salary as their retirement income. By the time they retire, many people have paid off their mortgage, and their children are financially independent, so their expenses are lower. The state pension should also cover at least a portion of them, while the same level of gross income goes further because you are no longer making National Insurance and pension contributions.
How big a pension pot should you aim for?
Once you have worked out how much you need after the state pension, you can do some maths on how big a pot to aim for. Michael Law, paraplanner at JM Finn, says an easy way to do this is to multiply your planned expenditure in retirement by 25, which should give you the size of pot you need to be able to safely withdraw 4 per cent a year. For example, if you estimate you will spend £25,000 a year on top of the state pension, you will require a retirement fund of £625,000. Unless your investments perform poorly or you live to a very old age, following this rule should enable you to leave some of your pension pot to your children.
A good way to amass a sizeable pension pot is to contribute half your age as a percentage of your earnings every year when you start making contributions – 10 per cent of your gross salary when you are 20, increasing to 15 per cent when you are 30 and so on, including employer contributions. People who leave retirement saving until later in life may need to work for longer or to release equity from their homes.
An old rule of thumb about investment strategy that is no longer quite as relevant is to ‘own your age in bonds’ or allocate a percentage of your portfolio equivalent to your age to fixed income and the rest to stocks. This strategy is designed to derisk your pot as the time to buy an annuity for retirement approaches. But if you use drawdown instead, you have a much longer investment time horizon so a more growth-focused strategy is a more sensible option.
Finally, three key things to keep in mind if you want to do some ad hoc calculations yourself, for example using a compound interest calculator. One is inflation – your withdrawals will need to increase in line with it to maintain the same living standards through retirement. Secondly, income tax applies to your retirement income, so work out both the gross and net annual income you want to aim for. Lastly, don’t forget to account for investment, platform and drawdown fees, which will eat into your returns.
