How much will I need to retire: Approaching Retirement

Asking how much money is needed in retirement is like asking how long is a piece of string, because there is no universal answer. If you are used to an annual income of just £6,000 then you will not need a huge pension, but if you lead a lavish lifestyle that burns £100,000 each year then your retirement pot will need to be quite staggering.

If you have all the necessary qualifying years to receive the maximum state pension then you will have a good starting knowledge of how much money you will receive, although if you would like your state pension to be bigger you can defer it. For anyone reaching state pension age before April 2016, the state pension grows 10.4% each year it is deferred; for those reaching state pension age later, it will grow at 5.8%.

Currently, retirees can also enjoy things like the winter fuel allowance, a free bus pass and free TV licence, which can be helpful but they are unlikely to make a big difference to your financial situation. If you own a car, the running costs will need to be factored into your retirement income planning. A person's biggest expense is usually the mortgage or rent, so if you own your home outright when you retire then your outgoings should be reduced, lowering the amount of money you will need.

Nonetheless, a very small income will be challenging, especially if you encounter unexpected expenses. Yet according to Prudential's Class of 2014 report, 7% of the men and 20% of the women retiring in 2014 were going to be solely reliant on the state pension of £5,881 a year.

Although most people will have other retirement provision, there does appear to be a lot of confusion around how much money is needed. The "Pensions and Investments 2013: Retirement Planning and Gender" YouGov report found that, when asked how much money would be needed to provide a comfortable retirement:

  • 12% thought less than £100,000
  • 11% thought over £600,000
  • 24% were unsure but would like to know
  • 12% were uninterested

A separate question asked how big a pension fund would need to be to provide a £10,000 annual income with an annuity for a 65 year old. Only 20% knew it was between £180,000 and £200,000, while 9% did not know what an annuity was. This question also highlights how much money is needed to provide an income with today's low annuity rates, which reinforces the importance of saving into a pension and having a retirement plan; this is especially true for joint-life annuities, as the payouts are smaller to compensate for the extra years they may need to be paid.

Planning for retirement is not just about saving as much as possible, though. While it's certainly better to have a large fund than a small one, you will also be in a stronger position if you are not repaying debts with your retirement income. If you are able to clear your mortgage before you retire, your pension will be able to stretch further, freeing up more money to spend elsewhere or save for something else. If you're close to retiring, you can read our pension tips for people in their 50s and in their 60s.

Do you know how much you'll need in retirement, or have you retired already? Let us know with a comment below.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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