You can retire on less than you think

Neil Faulkner
by Lovemoney Staff Neil Faulkner on 11 June 2007  |  Comments 13 comments

Good news about pensions! You might not need as much as you think. Here's why, plus a helpful exercise to help you plan for retirement.

You can retire on less than you think

This is the first part in a three-part series that will help you to work out what size pension pot you need to retire comfortably, and how much you need to save to get there.

The four-step guide to a comfortable retirement: part one

What annual income do we need to live comfortably when we retire? The finance industry often says 'We need £20,000', but what a stupid answer! Do they really think we all need exactly the same amount?

Still, I'll admit that we sometimes use this figure at lovemoney.com, albeit for rough calculations only. Thing is though, the reality is very different for many people. We're not identical; there is a vast range of lifestyles and financial requirements. As a result, some of us will need much more than £20,000 and others a lot less.

With this in mind, it makes sense for us to come up with a personal estimate. After all, estimating what we'll need ourselves is likely to be much more accurate than any figures bandied about by the industry.

Related how-to guide

Get ready to retire

There are a lot of things to think about as you get closer to your retirement. But the early you start to prepare, the better.

One way to estimate our retirement-income needs is to consider our future outgoings. The best person to do that is you.

Using my best guess as to my needs when I retire, I estimate that my outgoings when I stop work are likely to be about £13,300 in today's money (i.e after inflation). As we pay tax on pension income, this means I'll need an annual income of roughly £15,000.

I arrived at this figure simply by considering the lifestyle I expect to lead when I retire, which we can all do fairly easily. Some big factors to remember are:

  • Whether you expect to own your home outright
  • Where you will live
  • How big your house will be
  • Whether you will be married, single or divorced
  • Whether you still have dependants
  • How active and healthy you will be.

Clearly we can't know the answers to these questions in advance, which is why it's sensible to consider each of the scenarios you think are quite likely, so you can estimate worst-case figures.

So, write down now all the outgoings you might have when you retire, and add them up. To ensure you don't miss any expenses, use this Statement of Affairs calculator, which lists all the typical bills you might have. Also, consult your old bill statements and receipts, and don't forget to add a realistic amount for entertainment and luxury goods.

Here are some more tips from helpful reader, John Johnson:

  • You'll probably use the heating a lot more
  • You'll use your own toilets more (which affects those with metered water)
  • You'll make more drinks at home now that you don't go to work
  • Consider every little detail, such as newspapers, books and pets.

There's no point spending hours on this unless you're planning to retire soon, because the future is uncertain. In addition to the variables listed, there are others we can't influence, such as the income tax rate on pensions, which might change.

Recent question on this topic

However, I think carrying out this exercise is vastly better than simply saying we all need £20,000. I think it's also worth re-visiting this every now and again to make sure you're still on track as your expectations for retirement change.

I was glad that my figure came as low as £15,000. I think that for most of us as little as £10,000 to £15,000 will be sufficient. Remember that the figures you'll often see in the news, such as the £20,000 one, are put forward by an industry that makes more money the more you invest! (I'm turning into a cynical old crank already.*)

We haven't finished yet though. The next logical step is to factor in inflation (the rising price of goods we buy), because £15,000 will be worth less as time goes by. After we've done that, we'll then be able to estimate how large a retirement pot we should be aiming for.

You've been reading part one!
Go back to the introduction
Go forward to part two

*But don't worry, that was factored into my calculations.

More: How David Cameron plans to mess with your pension | Stop using a pension to save for retirement

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Comments (13)

  • Neil Faulkner
    Love rating 32
    Neil Faulkner said

    Thanks for your comment, Mick James. The more concerned you are about possible risks the more margin of safety you put in your estimates under emergency expenses or any other category. You can also take into account the tax-free lump sum, which gives you extra safety for one-off emergencies. Many, many people will still find they need to save way less than the industry says even when they use pessimistic figures.

    Neil

    Report on 26 May 2010  |  Love thisLove  0 loves
  • Betty Dale
    Love rating 0
    Betty Dale said

    I am a retired 70-year old woman. I own my house outright and manage on my pension income. However, I am taking £3000-£4000 each year for travel and holidays. My question is: how much should I ensure remains in savings for such things as car replacement, house repairs and the (hopefully) occasional private health bill. I look forward to reading any comments.

    Report on 20 November 2012  |  Love thisLove  0 loves

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