2 How much money will you need in retirement?
Your spending will change when you retire. If you have been working outside of the home some costs might go up, such as your utility bills, but others may go down with a change in lifestyle.
It is estimated that a couple would need to be able to spend £43,100 a year for a ‘moderate’ lifestyle in retirement, while a single person requires £31,300. By contrast, couples require £22,400 and a single person £14,400 for a ‘minimum’ standard of living (RetirementLivingStandards.org, 2024). But it is important to remember that these figures do not include housing costs – so if you are in rented accommodation or have a mortgage you will need to factor this in. Follow the link to this research provided in the ‘References’ section at the end of the course to learn more about what spending is included in the definition of ‘moderate’ and ‘minimum’ retirement lifestyles.
Looking at how much you need to spend in retirement can be done by listing everything you currently spend: using 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 utility bills are likely to 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).
- Bearing in mind recent price rises make sure you allow a buffer for inflation in your expenditure and possible larger price increases for items such as energy bills.
- 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 to allow for inflation and other pensions are also, usually at least partially, ‘inflation-proofed’ by annual increases.
- 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.
- And given the recent rapid increase in inflation it is advisable to review your budget regularly – at least every six-months – to make sure it still accurately reflects your spending.
In the next section, following the guidance above, you can work out how much you expect to be spending in retirement.