What sort of income do you need in retirement?
Okay, okay. So it’s not the most exciting question. But it is important. And if you get it right, you can spend the money on genuinely exciting things, such as a holiday in the Maldives or vintage champagne.
So let’s be blunt. Do you want to enjoy your current lifestyle when you retire? The answer, of course, is yes. So you're probably going to have to save more than you think. Or work longer than you planned. Cancel the Maldives.
The hard numbers
Here are some things to consider:
- the average retirement income in the UK is £19,700 a year
- but would-be retirees expect to receive an income of £26,000
- that’s a gap of £6,300 or 32 per cent
- unsurprisingly, 26 per cent of us plan to work part-time in retirement1
To calculate your required retirement income, start with a figure of around 70 per cent of your current spending2.
So let’s say your current salary before tax is £50,000. That suggests you need a pre-tax income of £35,000. To generate this level of income from pension savings would require a pot of around £656,250 at the time of retirement3.
If you want to be really accurate, try this:
- Look at all your outgoings for the last financial year. Let’s say they add up to £30,000.
- Subtract anything that you won't expect to pay when you stop work, such as commuting at £1,800, subsistence (lunch, coffee) at £900 and clothes for work at £300.
- You’re left with a figure of £27,000 to aim for.
- To fund that level of income from pension savings you would need a pension pot of around £583,125– paying around £31,100 annually before tax.
- If you're nowhere near that, you may need to save more or work longer, or start to think of a different retirement experience. Other savings you have will of course help you towards your target.
- In reality you may need even more to protect your future income need against the effects of inflation
Note you’ll only pay tax on around 75% of the withdrawals you make from untouched pension savings and this will be at your marginal rate. So the tax you will pay on your pension income depends on what other sources of income you have when you retire. If you have ISAs, you will not have tax to pay on the withdrawals you make from those savings.
Consider seeking guidance from a financial adviser. Otherwise you might find the champagne’s cancelled.
Get it right and you could be going places
Finally, for a little retirement inspiration, here are the top destinations people with annual income over £60,000 would like to move to, or spend lengthy periods:
- France 19 per cent
- Spain 18 per cent
- US 16 per cent
- Australia 6 per cent1
Now that’s something to save for!
We’ve illustrated, in an infographic, how you can give yourself the best chance to have enough income in retirement to enjoy the life you want.
1 Old Mutual Wealth 2015 survey
2 Centre for Retirement Research at Boston College. http://crr.bc.edu/wp-content/uploads/2014/07/IB_14-111.pdf
3 Assumes the industry drawdown standard of a 4 per cent annual withdrawal rateand annual return of at least 4 per cent growth on the existing fund. You will need to factor in your tax rate at the time you take the income, because taking larger sums could push you into a higher-rate tax bracket.