2 How much money will you need in retirement?
Your spending will change when you retire. Some costs might go up, such as your household bills, but others may go down with a change in lifestyle.
Research shows that currently (in 2020) couples need £29,100 a year for a ‘moderate’ lifestyle in retirement, while a single person requires £20,200. By contrast, couples require £15,700 and a single person £10,200 for a ‘minimum’ standard of living (RetirementLivingStandards.org, 2020). To be clear, these figures relate to how much needs to be spent by households to achieve these lifestyles (rather than how much gross income needs to be earned).
Looking at how much you need to spend in retirement can be done quite easily by listing down everything you currently spend: looking at your receipts and bank statements will help. Then look at the things on your list that are related to your current lifestyle or work. Think about how your spending will change in retirement. Don’t look at just the costs that will go down. Remember some things might go up. For example, you are likely to spend more time at home so your bills might go up – and maybe you want to travel or eat out more?
So now it’s time for you to assess how much you need to spend to have the lifestyle in retirement you want.
Some key points:
- Work out your spending on an annual basis. Doing this means you capture items of spending which happen less often, like annual subscriptions, holidays, vehicle checks or insurance premiums. For other items look at your monthly – or perhaps weekly – spending, and then scale this up to an annual amount (for example by multiplying the monthly amount by 12).
- Do you just look at your spending or do you need to include someone else’s, for example your partner’s, spending too? In most cases doing a budget for the entire household makes sense.
- Focus on how much you expect to be spending in the early years of retirement while recognising that this is likely to change later in your retirement, as your spending needs change. For example, in early retirement you may spend more on travel and leisure activities as you enjoy your increased free time. Later you may spend less time travelling while needing to spend more on care needs.
- Even if your planned retirement date is several years away, for now estimate your spending based on current prices. State pensions are increased each year in line with the rate of inflation, so there is no need to consider the impact of rising prices on your spending. Some other pensions are also, at least partially, ‘inflation-proofed’ by annual increases, compensating for the effect of rising prices on your budget.
- When you have assessed your spending, add on 5 per cent to the total. At all stages of life there is a tendency to underestimate how much we spend.
In the next section you can apply these points as you find out how much you expect to be spending in retirement.