How much do you need for your retirement?

Pensions & retirement 29 March 2021

Budgeting for your golden years may feel like a daunting task but only living for today puts you at risk of not making ends meet in retirement. The majority of retirement advice is also geared toward couples. It can be difficult to get yourself in the planning mindset without feeling alienated if you’re not married.

If you’re a single person that’s thinking ahead to retirement, we’ve got you covered. Whether retirement is around the corner or years away, we’ll take you through the key questions you need to answer, savings benchmarks and considerations.

Deciding when you want to retire

Before you can determine how much money you need to retire, you need to consider what ‘retiring’ means to you.

Retirement isn’t universal. Like buying a first home or starting a family, this milestone happens at different stages for different people. And while money is an important factor, it’s not the only reason that people decide to retire. It comes down to what retirement means to you.

According to a People’s Pension report, here are the most common reasons people decide to retire:

  • Wanting to stop working
  • Reaching a certain age such as State Pension age
  • Their partner has retired
  • They or their partner are in poor health
  • Working environment changes
  • No mortgage repayments or other huge reduction in expenses
  • Redundancy or lack of self-employed work
  • Receiving an inheritance or other windfall

Do any of these resonate with you? You may find that many could apply to your circumstances – and that’s normal. In fact, most respondents in the study cited many reasons that signalled it was the right time to retire.

Full vs partial retirement

Reaching State Pension age doesn’t necessarily mean leaving the workforce. Many people are happy to stop working, especially if their role caused them physical and/or mental stress. In this case, the liberation of retirement can far outweigh the pay cut if it means more time to devote to family, travel or hobbies.

For others, retirement can feel more like boredom. These people may be more career-focussed and thrive on the responsibility of managing day-to-day tasks. If you’re leaning towards this camp, you can still stay active by postponing retirement. Or, you can give it a trial run by taking advantage of a sabbatical, doing volunteer work or reducing your working hours.

Imagining your ideal retirement

An ideal retirement means different things to different people – especially if you’re single. Again, this could mean full retirement, semi-retirement or volunteer work.

It may be tempting to look to friends and family members that have already retired for inspiration. Don’t get caught up in the trap of keeping up with the Joneses. Judging yourself by anyone else’s standard won’t help you achieve a fulfilling retirement.

Remember when you used to daydream as a child about what your life would be like as an adult? Make some time to daydream now. Get a pen and a notepad. Imagine you’re retired and write down your thoughts on the following questions:

  1. What will you look forward to most about having more free time?
  2. What hobbies or activities would you like to explore?
  3. Are there causes or charities that you’d like to donate your time to?
  4. What parts of your current lifestyle will change?
  5. Will you miss anything about your work or current lifestyle?
  6. Do you see yourself downsizing or moving house?
  7. What does a good life look like to you?

Retirement is an exciting, important chapter of your life – and it needs to be right for you. Whatever you’ve jotted down, ensure that your retirement adventure matches your personal values.

How much a single person needs to retire in the UK

Now that you’ve considered what your retirement could look like, it’s time to explore how much that ideal lifestyle may cost. A 2020 Which? survey asked single retirees how much they spent each month to help them determine what real retirement budgets look like. Their research revealed three levels of spending:

The no-frills lifestyle

Retirees looking for a simpler lifestyle reported spending an average of £12,532 annually on the basics. This included only essentials such as groceries, transport and insurance. Here are their expenditures, broken down by average cost:

  • Housing: £2,603
  • Groceries: £2,172
  • Insurance: £1,924
  • Transportation: £1,696
  • Utilities: £1,545
  • Health: £963
  • Household goods: £895
  • New clothing: £734

How does this budget compare to your current spending? If you feel you’d like to indulge, the comfortable lifestyle might be a better fit.

The comfortable lifestyle

Singles looking for more indulgence spent and an average of £19,000 each year. Their budgets included the basics, plus extras such as travel and leisure. Here are their average monthly expenses.

  • European travel/holidays: £3,134
  • Housing: £2,603
  • Groceries: £2,172
  • Insurance: £1,924
  • Transportation: £1,696
  • Utilities: £1,545
  • Charity gifts and donations: £1,231
  • Recreation and leisure: £1,111
  • Health: £963
  • Household goods: £895
  • New clothing: £734
  • Alcohol and/or tobacco: £726

Does the sound of exploring new cities, leisure and cocktails feel more your style? If you want even more extravagance, consider going all out with the luxury lifestyle.

The luxury lifestyle

People that wanted to go all out reported spending an average of £30,000 annually. Like the no-frills and comfortable lifestyles, their budgets included the basics plus all the extras you’d expect. Here are their average expenses, from highest to lowest cost.

  • Extended holidays: £5,160
  • New car: £4,277
  • European travel/holidays: £3,134
  • Housing: £2,603
  • Groceries: £2,172
  • Insurance: £1,924
  • Transportation: £1,696
  • Utilities: £1,545
  • Charity gifts and donations: £1,231
  • Recreation and leisure: £1,111
  • Leisure membership: £1,046
  • Health: £963
  • High-end meals: £803
  • New clothing: £734
  • Alcohol and/or tobacco: £726

This lifestyle isn’t for everyone. So, if you feel that you deserve the best retirement that money can buy, be sure to budget accordingly.

Determining whether you can afford to retire

You should now have a good idea of what to aim for to achieve your ideal retirement lifestyle. The figures above can offer you a helpful benchmark, but they’re not set in stone. There are many factors that will affect how much you will spend in retirement such as your local cost of living.

It’s common sense, but your lifestyle will change after you leave the workforce. While retiring doesn’t mean slowing down, your priorities and expenses will shift.

Paying off or reducing your mortgage or other debts can make a huge impact on what you’ll spend in your future retirement. This means the amount of money you’ll need will most likely be much less than you need right now.

Looking at your current spending can help you determine whether your chosen lifestyle is achievable. Let’s start by creating your retirement estimate.

Step 1: Estimate your annual spending

Listing your current outgoings can help you get a rough idea of your future spending. Depending on how you manage your personal finances, you may want to gather the past year’s receipts, invoices or bank statements.

  1. Make a note of all your monthly expenses
  2. Add in less frequent, but essential expenses such as dental check-ups and MOT
  3. Subtract expenses you expect won’t be necessary for retirement
  4. Total the annual cost of these expenses

Step 2: Estimate your retirement income

This might be trickier to figure out, but it’s a worthwhile exercise to help you consider what the future could look like. You’ll also need to have a rough idea of what age you’d like to retire. If you’re not sure, write down your projected pension savings and State Pension earnings at retirement age.

  1. Make a note of the total amounts in your pension pot(s)
  2. List your expected State Pension payments
  3. Note any final salary pensions and their totals

These amounts may not cover your chosen lifestyle, but they can help your pension savings go further.

Step 3: Compare estimates and determine your savings gap

The next step involves comparing your guaranteed retirement income against your projected expenses. This helps you calculate the gap you’ll need to fill to reach your goal. For instance, if you’ve estimated you’ll have £40,000 in annual expenses and a guaranteed income of £20,000, your gap is £20,000.

  1. Subtract your projected expenses from your guaranteed income
  2. Multiply this figure by your estimated number of retirement years

Step 4: Map out your best and worst-case scenarios

Forecasting for the best and worst outcomes will give you an estimated guess of what your future could hold. This step helps you determine whether you should save more for retirement, reduce your spending or delay retirement for a few years.

  1. Map out the worst-case scenario: lower than average returns, high inflation and longer life expectancy
  2. Map out the best-case scenario: average to higher returns on investment, low inflation and average life expectancy

Other factors to consider

Once you’ve worked through these steps, you should have a better idea of how much you need to retire on. But that’s not all to think about as you picture your golden years. Here are other factors to consider as you plan your retirement budget.

Longer life expectancy

The Office for National Statistics estimates that today’s 50-year-old man has an average life expectancy of 84 years old. This rises to 87 for women. More impressive is that both genders have a one-in-four chance of living into their nineties. With this in mind, it’s vital that your budget can cover at least 20 years of retirement if you choose to retire at 67.

The pension freedoms

In 2015, new rules allowed people more power over their retirement. You now have the opportunity to access your defined contribution pension at age 55 and take up to 25% as a tax-free cash lump sum. If this option appeals to you, you must ensure you can budget for an extra 10 years.

State Pension

If you’re thinking about retiring at 55, you won’t yet qualify for your state pension. Still, waiting for a few years for your state pension can be beneficial.

To date, the full basic State Pension is £134.25 a week, which works out to £581.75 per month and £6,981 per year. But, if you reach state pension age on or after 6 April 2016, you may be eligible for the ‘full level’ new state pension of £175.20. This works out to be £9,110.40 a year or £759.20 per month. Depending on your circumstances, you may get more or less than these figures.

Fewer or no travel costs

Whether you choose to enter full or partial retirement one thing is certain – you’ll be commuting less. The money you’ll save should make a positive difference to your outgoings and the environment. You can also reduce your carbon footprint further. People in England, Scotland, Wales and Northern Ireland are eligible for a free bus pass when they reach 60.

When you should get professional financial advice

We hope that the above guidance and exercises have helped you gain a better idea of how much you need to retire in the UK.

If thinking about your finances has left you feeling overwhelmed or you’re worried about affording retirement, you should seek professional advice.

Financial advisers have the expertise to guide you through your options, helping you plan for a secure retirement. They’ll work with you to help you understand your future goals and create a realistic forecast for your years ahead.

An adviser can also help you:

  • Discover long-forgotten pension pots
  • Understand your options at retirement
  • Identify tax-efficient ways to save
  • Make your money go further through investments
  • Check whether your pension funds are sustainably invested
  • Determine whether you can afford to retire
  • Understand how your financial projections will affect your quality of life

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