How much do I need to require in 2023?

With UK residents now living longer than ever before, retirement has become a stage in life that requires careful preparation and planning. But how much do you need to retire comfortably?

The better planned your retirement is, the more stress-free and enjoyable it’s likely to be, but how do you go about making a retirement plan?

Couple planning their retirement and dicussing how much do i need to retire

In this guide

What is retirement planning?
I’m planning my retirement – what do I need to think about?
How much do I need to retire?
How can I work out my retirement income and budget?
What are pension freedom rules?
Should I sell my assets in order to retire?
How big should my pension pot be?
Cons of selling your house in retirement
How to turn your home’s equity into retirement income

What is retirement planning?

Retirement planning means thinking through the different aspects of your life and considering how they will be affected by stopping paid employment.

I’m planning my retirement – what do I need to think about?

When you’re thinking about how to plan your retirement, it can be easy to focus purely on your financial situation, but there are many other areas you should consider as part of your retirement plan.

We’ve put together this checklist of different areas to consider, to help with retirement planning:

Financial planning – what will your budget look like?
Social – what sort of lifestyle are you expecting in retirement?
Emotional – how will you manage the transition from work to retirement?
Housing – where will you live in retirement?

How much do I need to retire?

According to the Pensions and Lifetime Savings Association (PLSA), those living outside London need an annual retirement income of between £12,800 and £37,300, depending on the lifestyle they want.

The lowest amount would enable very limited living standards. It doesn’t cover the cost of any rent or mortgage payments, but does cover the cost of DIY maintenance. The budget would allow £54 per week for food and up to £580 per year for clothes and shoes. It also budgets for a week and a long weekend away in the UK each year. On this budget, it’s unlikely that you’d be able to afford a car.

A moderate retirement income of £23,300 per year allows for a little more financial security. Your food budget would rise to £74 per week and your clothing budget increases to £791 per year. Within this budget, the PLSA suggests you should be able to afford a 3-year-old car that you replace every 10 years. You could also afford a 2-week holiday in Europe each year.

The more comfortable retirement income of £37,300 allows for a few more luxuries. Your weekly food budget would increase to £144 (this includes any meals out) and your clothing budget would increase to £1,500 per year. According to the PLSA, on this higher budget, you should also be able to afford a 2-year-old car that you replace every 5 years. You may also be able to afford up to 3 weeks abroad each year.

If you think you’re going to need to pay rent or will still have a mortgage to pay in retirement, you’ll need to budget for that on top of the proposed retirement income.

How can I work out my retirement income and budget?

To work out your retirement income, you’ll need to combine your likely state pension, any private pension, and any other expected retirement income.

How much state pension will I get?

The current state pension is £221.20 per week.

You will be eligible for full state pension if you have paid national insurance for a minimum of 35 years. If you’ve paid at least 10 years of national insurance, you’ll be eligible for a proportion of a full state pension.

You can check how much state pension you’re likely to be eligible for, using the Gov.uk online state pension forecast.

How do I know how much my private pension will pay out?

You should receive an annual pension statement for any private pension you pay into. This statement will include an estimate of your future pension pot value and your projected pension income. This projection will be based on using your pension to buy an annuity, which will provide a regular and guaranteed income.

What additional income might I have in retirement?

In addition to your state pension and any private pension, you may have other sources of finance in retirement. Many people over retirement age continue to carry out a part-time job or have additional income from other investments. These should be taken into account when calculating your retirement income and budget.

Calculating your retirement budget

Once you have a clear idea of your retirement income, it’s time to calculate how much you will need to retire. It’s important to do this early so you have the opportunity to make up any shortfall.

When thinking about how much you need to retire after you finish working, you should consider the following areas:

Housing – will you still have housing costs in the form of rental payments or an outstanding mortgage on your property?
Council tax – how much council tax will you need to pay? Depending on your income, you may be eligible for Council Tax Support.
Utility bills – rising utility bills have been in the news a lot over the last year. It’s difficult to predict how much utility bills might be at the time of retirement, but it’s a cost you’ll need to consider.
Food bills – cost inflation on a weekly food shop is currently at an exceptionally high level. Grocery bills make up a significant proportion of a household’s monthly budget. Would your current grocery bills be sustainable through retirement?
Clothing – how much do you currently spend on clothing each year? Would you envisage spending a similar amount in retirement?
Property maintenance and upkeep – property maintenance can add a substantial cost to your annual budget. How much you’ll need to budget for this will depend on how much of the work you’d be happy/able to carry out yourself and how much you’d need help with.
Trips, treats, and holidays – how much do you think you’d like available for life’s luxuries? Birthday and Christmas gifts, trips to visit family and friends, holidays abroad, or just an occasional meal out. It’s easy to forget to budget for ‘non-essentials’ but the cost of them can quickly add up.

If you’re concerned that you won’t have enough income in retirement, you should speak to a financial adviser about the possibility of increasing your pension fund before you retire. The longer you pay into a private or workplace pension, and the more you’re able to pay in, the more financially comfortable your retirement is likely to be.

What are pension freedom rules?

In 2015, changes were made to the way those with defined contribution pensions are able to access and use the funds. You now have much more flexibility to access your pension and decide what to do with the money.

What is a defined contribution pension?

You’re likely to have a defined contribution pension unless you work in the public sector.

A defined contribution pension can be set up by you or an employer. The amount you receive from a defined contribution pension will depend on how much is paid in and how that pot of money grows over the course of the product.

A defined benefit pension, by contrast, is always set up by an employer, usually in the public sector. A defined benefit pension will guarantee a certain income (benefit) in every year of retirement.

Pension freedoms only apply to defined contribution pensions.

What do the pension freedom changes mean?

Previously you would have purchased an annuity (an investment product that provides a regular income) with your pension fund. Now, when you reach the age of 55, you have the choice to withdraw some, or all, of you pension. You can do this in one go or take a little at a time. Alternatively, you can leave it where it is.

The pension freedom changes give people more control over their pension and where it is invested.

25% of your pension pot can be withdrawn tax-free. The tax-free amount cannot be withdrawn in one lump sum though, instead 25% of each withdrawal will be tax-free.

I have a few different pensions, should I combine them?

If you have multiple workplace pensions with previous employers, you may wish to consider consolidating them. This can help to make your retirement planning simpler to manage.

Should I sell my assets in order to retire?

This will depend on your individual circumstances and what assets you have.

If you have a large home that you’re considering downsizing, for example, it can be a great way to boost your pension pot.

Other assets to consider cashing-in may include shares, investments, ISAs and smaller workplace pensions.

How big should my pension pot be?

According to Moneysupermarket.com, your target pension pot for a comfortable retirement can be calculated as a multiple of your current income. You can use the helpful table below. Remember, however, this is how much should be in the pot, not how much you should have put in. Your contributions will be invested and therefore the pot should be larger than the contributions you have made.

Age	Target pension pot
30	One year’s salary
35	2 x salary
40	3-4 x salary
45	5-6 x salary
50	5-6 x salary
55	7-8 x salary
60	8-9 x salary
65	9-10 x salary
67 (or State Pension age)	10 x salary

How much do I need to retire? A guide to retirement planning