Will I have enough to retire on?

If you’re unsure about how much money you need to retire, you’re certainly not alone. Nearly two-thirds of respondents to the 2023 Schroders Personal Wealth Retirement Report said they didn’t know or weren’t sure how much funding they’d need for a comfortable retirement.

Few of us today retire with a gold watch and a lifelong pension income that matches our final salary level and rises in line with the cost of living (as measured by inflation). We are now increasingly responsible for our own financial futures, and you may have to roll your sleeves up and be more proactive about your retirement income.

Key things to think about include:

• How many years you will spend in retirement

• How much you’re likely to spend in any one year

• Your healthcare needs in later life.

Your spending patterns will be decisive when working out how much to set aside for retirement.

How long could you live?

Assessing our potential lifespan is a key factor in retirement planning, but it’s something that’s easy to underestimate. According to the ONS life expectancy calculator (1), men living in the UK who are currently aged 65 will, on average, live to 85. And 65-year-old UK women will live to an average age of 87. So 65-year-olds can currently expect to live for an average of around 20 more years.

You’ll want to consider the best-case scenario too. According to the same calculator 65-year-old men currently have a one-in-ten chance of living to 96, and 65-year-old women a one-in-ten chance of living to 98. That’s around 30 more years.

How do you imagine your retirement lifestyle?

Take some time to think about how you live now, how much you spend on your current lifestyle, and how you’d like to live in retirement. Some people dream of sitting in the garden reading, while others want to tour the world. The rate at which you spend will likely have a large impact on the rate at which you go through your savings.

Do you want to stay in your home or downsize? How about going for semi-retirement and working part time? Maybe the extra money and the social interaction appeal? The number of over 70s working rose by more than half (61 percent) in the ten years between 2012 and 2022 (2).

What about retiring abroad? More than three-quarters (79 percent) of pension savers dream of retiring outside the UK, tempted by better weather and potentially lower living costs (3). But be conscious of the fact that your retirement income is likely to be paid to you in sterling, and currency fluctuations could lead to significant variations in your monthly income.

Think about how your day-to-day spending will change. If you don’t have to commute to work, wear smart, dry-cleaned clothes and eat lunch in city centres, you may find your everyday spending reduces.

How healthy will you be?

The state of your health will affect not only your lifespan but also your spending in terms of healthcare, personal care and lifestyle. You might dream of climbing Machu Picchu but will you have the physical strength and agility to do so? If you retire abroad, will you have to cover your own medical expenses?

You can never be sure what’s going to happen. But taking into account your current health issues, family history and lifestyle (such as whether you smoke, drink and exercise regularly) may offer some clues.

DNA testing could highlight genetic predispositions for some conditions such as heart disease, brain disorders and cancer. The NHS provides this free of charge if your doctor thinks you might have a health condition caused by a genetic disposition or by a change to one or more of your genes (4). But they are also available privately.

How much would you like to leave to others?

Some people are very keen to leave money to family or a good cause. For others it’s a case of ‘whatever’s left over.’ If you do have ambitions for a financial legacy, include this in your plans.

How much regular income will you have?

How far could your pension pot go? Roughly speaking, £400,000 of pension savings could allow you to spend around £20,000 a year for 20 years; for £600,000 it’s 30 years. And that’s before considering the effect of inflation on prices.

But before you feel the need to sit down to take this all in, remember you probably won’t be relying solely on your savings and investments.

Take into account how much you’ll get from your state pension. You can check how much state pension you are likely to receive on the government’s website (5). You can also find out if topping up on incomplete years of National Insurance could improve the figure.

You could also consider buying an annuity with your savings. An annuity is an insurance product in which you swap a lump sum (typically your pension savings or part of your pension savings) for a guaranteed regular income. An annuity could give you the security of regular payments.

Conclusion

Forward planning can be complex for even the simplest of retirements. There are many moving parts, and some areas are hard to accurately calculate.

What you really need is a thorough analysis of how much your personal retirement dream could cost to fund. You could then look at what resources will be available or what you currently have. You may then be in a position to decide on a plan of action that could help you get closer to your dreams.

How much can I afford to set aside?

You may have grand visions for a luxury retirement, but if there’s not enough money in the pot you may never turn them into reality. There’s a balancing act between the life you live now and the life you want to live in retirement. Taking into account the potential for future investment growth, a bit more money put aside now could make a big difference in the future. Even so, all investments come with risks and cannot be guaranteed.

Do you cut your suit to fit the cloth or find a way to increase the amount of fabric you have? This is where talking to a financial adviser could help.

Sources:

(1) Office for National Statistics (www.ons.gov.uk), ‘Life expectancy calculator’, 30 January 2024.

(2) Rest Less (restless.co.uk), ‘Number of men aged 70+ in work has increased by 58% in 10 years’, 2 May 2023.

(3) MoneyWeek (moneyweek.com), ‘Retiring abroad: three-quarters of Brits dream of moving out of the UK’, 27 June 2023.

(4) NHS (www.nhs.uk), ‘Genetic and genomic testing’, 1 March 2023.

(5) Gov.uk (www.gov.uk), ‘Check your state pension age’, 15 May 2024.