Want a comfortable retirement? Here’s how much it will really cost you

How do you see your retirement? Holidays abroad, lazy days in the garden, eating out with friends or time on the golf course? It’s likely to be a mixture of some, or all, of these.

But have you considered how much your chosen lifestyle will really cost?

Research by Which? suggests a two-person household will need £26,000 a year for a “comfortable” retirement. But what does comfortable mean, and how much income will you need if you want a more luxurious lifestyle when you finish working?

Read on to discover the answer to these questions, how big your pension pot will need to be to provide these levels of income, and how a financial planner can help.

There are 3 levels of lifestyle in retirement

According to Which?, there are typically three categories of lifestyle people want when they retire. These are:

  • Essential: the ability to afford food and drink excluding meals out, the cost of mortgage, rent or Council Tax, transport and utility bills, insurances, clothing and health products.
  • Comfortable: all the above, as well as regular short-haul holidays, the ability to afford recreation and leisure pursuits, tobacco, alcohol and giving to charity.
  • Luxury: beside the above, long-haul holidays, health club memberships, expensive meals out and a new car every five years.

The level of lifestyle you would like is going to be personal to you, and understanding the level you aspire to is essential to achieving it. This is because you can create a strategy to build enough funds in your pension pot to provide the life you want.

Speaking with a financial planner could help ensure the strategy is right for you and as tax-efficient as possible.

A luxury lifestyle could cost you £41,000 a year

As the graph below by Which? reveals, you and your spouse will need more than £40,000 a year if you want a “luxury” lifestyle when you retire. If you are single, it’s around £30,000.

The following graph shows the level of income needed for each standard of living for a single-person and two-person household.

Source: Which?

You will need a pension pot of around £155,000 to live a comfortable retirement

While a full State Pension is £179.60 a week in 2021/22, the average amount UK pensioners receive from the government is £155 a week, or around £8,000 a year.

Using this average, if you are a two-person household you’ll receive £16,000 a year in State Pensions, so will need to boost your household income by £10,000 a year to live comfortably.

According to Which?, you’ll need £155,000 in your pension pot at 65, assuming you use flexible drawdown for 20 years. The consumer group bases its calculations on investment growth of 3%, inflation at 1% and charges of 0.75%.

It suggests a single person will need £192,290 in their pension pot for a comfortable lifestyle, and a two-person household looking for a luxurious standard of living will need a pension pot of £442,000.

While these provide useful ideas of how much you’ll need, don’t take them literally, as your circumstances and goals are personal to you. Speaking with a financial planner can ensure you aim for a pension pot size that’s right for you.

Check how much State Pension you will receive

Remember, a financial planner can help confirm whether you’re entitled to a full State Pension. They could also provide options if it looks like you’re going to receive less, such as boosting your National Insurance contributions (NICs).

Using sophisticated income modelling software, a financial planner can help confirm the income you will need from your pension and help ensure it does not run out during retirement. They could also help track down missing pensions, which might mean you’re already able to retire now.

Get in touch

If you would like to discuss your retirement plans and whether your pension pots will provide the life you want, email hello@ardentuk.com or call us on 01904 655 330.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

 

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