Planning your retirement income

When planning for your retirement, there are a variety of income options available, including drawing an income from a private pension, using your pension funds to buy an annuity, rental income from property, income from savings and investments, and adding in your state pension.

But before you start looking at potential income sources, you need to plan for how much income you think you will need, and consider how this may change during your retirement.

There are several factors that will affect how much income you are going to need in retirement.

When do you want to retire?

This can vary hugely for different individuals. You will receive your state pension at the age of 66 or 67, depending on when you were born, with the government planning to raise this to 68, but you can retire earlier or later than this. With a company or private pension, you can typically start to draw your pension from age 55 although this is due to rise to 57 from 2028. Of course, the earlier you retire, the longer you will need an income for. Many of us may want to retire as early as possible, but can we afford to?

When can you afford to retire?

This is not an easy question to answer with certainty, but there are things to consider that can help you work out what your required income might need to be.

What fixed outgoings are you likely to have? Will you have paid off your mortgage and any other loans? Could you still be helping children through university or supporting them living at home with you? Or you might need to contribute towards the care costs of elderly parents.

What lifestyle do you want in retirement? This is likely to change over time. For example, early on in your retirement you may want to travel more in your 60s and 70s, but later you may start to slow down the pace of your retirement and spend more time at home as your health needs start to change. As you get older, you may need to consider your own care costs.

Lots of questions but not many answers!

Everyone’s circumstances are different, but some helpful analysis has been carried out by the Pensions and Lifetime Savings Association (PLSA), a not-for-profit organisation that represents UK pension schemes. The PLSA’s aim is to improve the retirement income of UK savers. Although it is a paid-for membership organisation, it does provide some free to access information via its Retirement Living Standards website.

This website provides indications of typical monetary amounts needed to achieve ‘minimum’, ‘moderate’, or ‘comfortable’ retirement lifestyles, based on independent research by Loughborough University.

For example, it estimates that a couple could need just under £20,000 per year to achieve a minimum retirement lifestyle – describing this as “covering all your needs, with some left over for fun”. But a comfortable retirement annual income for a couple would be around £54,500 per year.

These amounts are broken down into categories, such as house, food, holidays and helping others, so you can see the estimated costs and adjust for your own situation.

This provides a useful framework for you to start thinking about your own circumstances and what you want to achieve in your retirement. It is likely to prompt you to consider factors that relate specifically to you, and this is where a financial adviser can help to tailor your plans to fully align with your goals and needs. A financial adviser can also help you consider what pensions and savings you currently have in place and how these might be best invested to maximise the amount of income needed for your planned retirement. They can also help you think about how you want to retire.

How do you want to retire?

Not everyone wants to go from full-time employment to full-time retirement overnight. You may want to reduce down to part time work as you start to take time out to enjoy your retirement. This additional income needs to be factored into your retirement planning. It may mean you don’t need to draw down on your pensions and other assets such as your savings and investments at the start of your retirement, leaving them invested with the potential to grow to fund your later phase of retirement.

However you want to retire – start planning early!

It may feel a long way off but the earlier you start to plan and save for your retirement, the more likely you are to achieve the type of retirement lifestyle you want. You probably don’t know exactly what that looks like if you are in your 30s or 40s, but planning can simply mean starting to save efficiently as early as possible. You can change your plans as you get closer to your retirement age, but whatever your retirement goals look like, you will need sufficient savings to achieve them, and this is best obtained by starting to save early.

There will be factors that affect your savings in many years’ time that you cannot predict now. These could include inflation (how much things such as food and holidays are going to cost you when you reach retirement) or any changes to tax frameworks for both your savings and your retirement income.

Regular check-ins with a financial adviser can help assess if you are still on track and also adjust your plans for any changes in your circumstances or the market environment.