The Year Ahead

How much money do I need for retirement?

28 Sep 2018

Justin Urquhart-Stewart, Co-founder and Head of Corporate Development

One of the questions that you need to answer in planning for retirement is how much money do you need. Justin looks at why this is such a difficult topic and how an old rule of thumb may help.

The American comedian, Henry Youngman, once stated: “I've got all the money I'll ever need, if I die by four o'clock”. It’s quite the timeline! But while I’m confident that everybody reading this will have much more money than is enough to last them till the following mid-afternoon on any given day, it does make us all think through how much is enough?


The issue is that it’s not an easy question to answer. This is because you need to have made some more decisions ahead of that particular discussion and because the number is unique to you and it is entirely up to you how you will live during your retirement.


The questions need to cover a lot of aspects of your life. If you’re planning to lead a rather dull existence you would, of course, need less money than if you’re planning to jump on a plane for a few weeks in the sun every year.


You will also not be going to work anymore. So you could be saving on travel costs and lunches sat hunched at your desk, but if you’ve had a social life that you enjoy that’s been connected to work, you may have to supplement your out-of-work life, and that may have to be out of your own pocket.


Meanwhile, with no work to get in the way, you can spend more time with friends and family and you’ll almost certainly have the chance to take up a new hobby or two (and buy the accompanying kit). This could leave you spending an amount that’s more akin to that which has typically been spent during a weekend, but every day of the week.


All these varying sums could of course tally to quite a lot. You can seek some reassurance that there is a high probability that you will no longer have a mortgage to pay off. And you should have definitely stopped paying regular amounts on your children.


If you still don’t have a figure in mind (that includes some of my suggested variables), a reasonable number to start with is about two thirds of your present annual household income. That figure then enables you to calculate the total amount you need to save using the useful rule of thumb of the ‘25x pension rule’. I quite accept that this is not going to give you a precise sum for your future, but it’s a better number than you probably had before you started reading this article! After all, since encouraging us all to fruit and vegetables at least five-a-day has helped improve our diets, this rule of thumb may have a similar effect on the prospects for our financial health.


An example of how this could work in practice can be based on average UK salary – currently around £27,500 a year. If you’re going to be able to enjoy a full state pension (which not everyone is), the government will give about £8,500 a year towards that, leaving you with £19,000 a year still to find. It’s this last sum that I need to multiply by the 25 to give me the sum that I would need to have set aside to keep me in retirement (i.e. £475,000).


That is quite a significant number, and the real reason why, I believe, that a lot of us haven’t dared to even begin to calculate our own total. After all, we know it’s going to be a sizeable sum given it has to last a decent number of years. And we all want to be able to have an enjoyable retirement. It’s also really tough setting aside money for an undetermined future that will be enjoyed at some point in time that has yet to be defined.


All I can caution is that calculating it sooner rather than later makes sense. The earlier you know your number, the more years you will have to set money aside to reach your target. You would also have more time to take advantage of employer contributions and the government tax relief. These will both help. Starting sooner means you have more of a chance to benefit from the power of compounding. After all, Einstein called compounding the eighth wonder of the world for a reason!


So, please, set a bit of time aside to think through your retirement, what you want to do in those years and therefore what money you might need. Yes, it could initially give you a bit of a headache, but the number isn’t going to get any smaller! And failing to plan can very often result in you planning to fail.


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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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