How much income do you need in retirement?

The question appears to be a simple one, but the answer is not. Over the years there have been many attempts to find the right number, some more robust than others. The classic – and now largely abandoned – solution was that retirement income should be two thirds of earnings immediately before retirement. That basis, often a target for last century’s final salary pension schemes, has now largely been replaced by calculations focused on expenditure in retirement.

The change to a forward-looking approach has logic on its side. The costs of working life are different from those of retirement and there is no arbitrary factor linking the two.

The Retirement Living Standards calculations

In 2019, the Pensions and Lifetime Savings Association (PLSA), in conjunction with Loughborough University, developed a set of Retirement Living Standards, designed to provide long term benchmarks. There are three standards: minimum, moderate and comfortable. Each standard considers six main areas: house, food, transport, holidays & leisure, clothing & personal, and helping others. A flavour of the differences between the three standards can be seen in the transport category:

The requirements for each standard are regularly reviewed as retirement lifestyles change. For example, in 2023 there was:

• An increase in the food element for the moderate standard to cover taking friends or family out for a meal, an indirect form of financial support for others.
• A decrease from two cars to one smaller car at the comfortable level, partly a response to rising insurance costs.

The bottom line

The latest costings for the Retirement Living Standards were published earlier this year, based on prices at April 2023. As usual, there are figures for each standard covering couples and singles, living in London and living elsewhere in the UK. The net yearly income required for each category (excluding rent) is show below:

All these figures were a significant increase on the previous year, the largest rise being over a third for the single person/moderate standard category. CPI Inflation across the period was 8.7% but that is a universal yardstick, and different groups have different experiences.

What does this mean for me?

No one situation is the same and as such there will never be a one size fits all calculation. It is vital to think about what sort of income you will need in retirement and how you will meet this income need.

For context, the current full State Pension is £11,502 a year before tax (Not everybody will get the full amount). Then there is the question of what if any State Pension there will be when you hit State Pension age.

If we do assume that you have a full state pension and that you are a single woman living outside of London, wanting a ‘moderate lifestyle’ and as such would require £31,300 after tax at State Pension age (67) then using today’s numbers you would require a lump sum of just over £510,000 to purchase a pension annuity rising with inflation to meet these income needs for life, even after assuming you would have the full State Pension.

This is even with annuity rates at a relative high so this figure could be even higher should we see a fall in these rates (which is likely to happen as interest rates fall).

Furthermore, these figures don’t even assume an early retirement which many people crave.

The main take away from this blog post should be that preparation is vital. You must have a plan in place to ensure that you have sufficient provisions in place as otherwise you could be forced to lower your standard of living or even work into yours 70s. 

At Adanac we can help you work out how your pension provisions are adding up, what this might look like in retirement and importantly what you need to do now to ensure you have the comfortable retirement you have worked your whole life for.

If you would like help with your retirement planning, please contact us on 01935 848764.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of fund when accessed, interest rates and legislation.