Anyone who’s started retirement planning will have asked themselves “How much do I need to retire?” Knowing this is a bit like knowing the length of a piece of string – it’s likely to vary for everyone. But there are some simple steps you could take to help identify how much you may need.
Know your outgoings
The first step in knowing how much you will need in retirement is to understand your likely outgoings. You could start by looking at your current bills and making some assumptions about how they will change in retirement.
Keeping a roof over your head is often the biggest single monthly outgoing. Think about whether your mortgage will be paid off by the time you retire and how much this could save every month. If your mortgage won’t be finished by then, look at its impact on your pension. It might make sense to consider using some or all of your lump sum to pay off your mortgage.
After accommodation, look at how much you will need for the essentials, such as food, utility bills, motoring or travel costs and any other debts and insurance costs you might have. Remember, some costs might be lower in retirement, while others may be higher. No longer commuting to work might save money on petrol, but being at home all day will likely increase your utility bills.
Pensioner inflation – the rate that the cost of living rises for people in retirement – is generally higher than the normal inflation rate. This is because retirees’ outgoings are concentrated in a few areas – for example, food, fuel and utilities, and petrol – that are more susceptible to price rises and are not cushioned by other items in the general inflation basket. These are all things you should consider the cost of when you ask yourself “How much do I need to retire?”
Beyond the basics
Retirement should be seen as your reward for a lifetime of hard work – beyond day to day expenses, think about what you want to do and achieve, and how you can finance them.
You might want to travel, take regular holidays or cruises, or take up a new hobby that involves costs – for example, golf membership and equipment. You might also want to help out with other family costs, such as a grandchild’s college or University tuition, a house deposit or wedding expenses.
You might ask any retired friends about what financial shocks or surprises they had when they retired. By adding these things up, you will see how much you may need to enjoy the retirement you want.
Find out your pension
The average retiree believes they need around £23,000 a year to lead a ‘comfortable’ retirement, according to an October 2014 survey by pension firm True Potential. Unfortunately, according to figures by insurer LV from April 2014, the average retiree’s annual pension is far lower than this, at £8,774, including state pension.
Knowing what pension you are entitled to is therefore key to being able to retire. If you have paid into your employer’s pension scheme over your working life, contact the trustees of the scheme to find out what entitlement you have built up.
If you have changed jobs over your career and built up a pension with several employers, it might be an idea to contact the government’s Pensions Tracing Service to track them down.
For many pensioners, the Basic State Pension is a vital part of their retirement income. Currently worth £113.10 per week, it will rise to £148.40 per week in 2016. However, the State Pension Age is also set to rise to 65 for both men and women by November 2018, and then to 67 by October 2028 - make sure you factor this into your retirement planning.
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.