How much do you really need in your pension pot?​

Most people want to retire around the age of 65, or even sooner. The sad truth, though, is that it can be tough to stack up enough savings in your pension pot to hit that target. The earlier you retire, naturally enough, the less money you’ll have to live on – and the longer it’ll have to last. On the other hand, working for a few more years means you’ll be able to save more with less chance of the cash running dry before you do.

We know – it feels weird trying to guess how long you’re going to live, and it’s a more complicated question than it sounds. It’s one of the most important expectations to set when you’re planning your retirement, though. If we start looking at the basic averages for the UK, for instance, a typical 40-year-old Brit who retires at 65 is probably looking at a 17-year retirement period before they shuffle off. Good exercise habits and a healthy lifestyle could bump that up by as much as a decade, though. Those extra years are going to need to be paid for – which means they’re going to need to be saved for.

The next question to ask yourself is what your lifestyle expectations are once you hit retirement. Again, this is a pretty vague and complicated thing to wrestle with, so let’s break it down a bit. Fixing up your home, for instance, can chomp a big bite out of your savings pot. We’re not just talking about renovations, either. You might need to make a few changes as you get older to help you get around. You’ve also got your leisure needs to pay for, like holidays. If you’ve been waiting until retirement to see the world, for example, you’ll need a fair bit of cash set aside for travel. Even just expecting to run a car will drain regular money out of your pot, so it’s important to find a balance between the retirement you want to have and the cash you can realistically stash toward it.

As of 2021/22, the basic State Pension pays out £141.85 per week after you hit the age to collect it. That’s assuming you retired today, because the amounts do change over time. The other thing that changes is how old you need to be to get it. Currently, that age is 65, but it’s already on the rise. People born after the 5th of April 1960, for instance, will have to wait until they’re 66 to claim their State Pensions. People born after the 5th of March 1961, on the other hand, won’t qualify until they turn 67.

That amount’s guaranteed for as long as you live, but in itself really won’t buy you much of a standard of living. In fact, it’s hard to imagine living on it at all. So why have you been paying into it through your National Insurance contributions for all these decades, then? Well, your State Pension can be a major head-start toward hitting your retirement saving goals. By adding guaranteed cash to your income from private pensions for life, it’s a pretty big boost to your overall income.

In his Autumn Statement of November 2022, Chancellor of the Exchequer Jeremy Hunt announced that the State Pension, along with means-tested and disability benefits, would be rising in line with the inflation rate of 10.1%.

With your basic expectations in mind, it’s time to start making plans. It’s actually pretty easy to make the mistake of overestimating what you’ll need to live on once you’ve retired. Paradoxically, that can often leave people feeling like it’s not worth saving at all. The truth is, you really won’t need the equivalent of your working wage after you’ve stopped working. A lot of the day-to-day costs you’ve got used to over the years really won’t be a factor in retirement.

So, as a basic rule of thumb, you’ll probably find you’ll need anywhere between half and two thirds of your working income, based on the final salary you had before retiring. That’s after tax, of course. With that much coming in each year, you ought to be able to keep up the kind of lifestyle you’ve been used to.

Why? Well, for one thing you’re likely to have paid off your mortgage. That alone accounts for a major chunk of most people’s monthly income. If you’ve spent decades of your life paying to bring up kids, the chances are they’ll have left home by the time you retire as well. Then there are the costs involved in actually doing your job – the kinds of expenses you’ve hopefully been claiming tax refunds for all these years. Daily commuting expenses, for example, can be a pretty big drain on your wages, but in retirement those costs just evaporate.

One ballpark figure that a lot of advisers tend to toss around is the rule of 10. Basically, you should aim to have 10 times your average salary saved by the time you stop working. We’re talking about your salary averaged out over your working life here. So, for instance, if that average came to £30,000 you’d be looking at a savings target of £300,000 by your retirement age.

As for actually hitting that impressive target, it actually might not be as tough as it sounds. Again, taking an average yearly salary of £30,000, regularly saving just 12.5% of that could get you there over your working life. It works out as saving £312.50 per month into your pension scheme, assuming 4% growth. Over 40 years, you’ve hit that £300,000 target nicely.

If you’ve got a workplace pension then reaching your £300,000 goal gets even easier, since your employer will be making contributions too. Assuming they match your own contributions, you’d only need to pay in £125 per month to hit the magic £300,000 mark over 40 years. How does that work? Well, your employer’s contributions would double yours up to £250, then the 20% tax relief you get on the total amount effectively bumps it up to £312.50.