How Much Do You Need to Retire in the UK?

While informative, the table itself doesn’t explain much, as different people have different definitions of minimum, moderate, and comfortable.

Here is a brief breakdown that will help you understand how the PLSA defines these living standards.

Minimum

• Lifestyle expenses – Covers the essentials and leaves little for trivial expenses.

• House expenses – Predicts maintaining the house by yourself and allows a single room decoration per year.

• Food expenses – Allocates £54 per week for eating at home and outside.

• Transport expenses – The minimum standard doesn’t cover car expenses.

• Holiday expenses – Allows for one week and one long weekend in the UK annually.

• Clothing expenses – Allocates an annual budget of £580 for clothes and footwear.

• Celebration expenses – Covers a £20 birthday present for each birthday.

Moderate

• Lifestyle expenses – Provides greater financial stability and more spending flexibility.

• House expenses – Allows for hiring some professional help with maintenance and room decorations.

• Food expenses – Allocates £74 per week for eating at home and outside.

• Transport expenses – Allows driving a three-year-old car and replacing it every ten years.

• Holiday expenses – Covers two-week holidays in Europe and one long weekend in the UK annually.

• Clothing expenses – Allocates an annual budget of £791 for clothing and footwear.

• Celebration expenses – Covers a £34 birthday present for each birthday.

Comfortable

• Lifestyle expenses – Provides excellent financial freedom and allows for some luxuries.

• House expenses – Allows for replacing the kitchen and bathroom every ten years.

• Food expenses – Allocates £144 per week for eating at home and outside.

• Transport expenses – Allows driving and replacing a two-year-old car every five years.

• Holiday expenses – Covers a three-week holiday in Europe every year.

• Clothing expenses – Allocates an annual budget of £1,500 for clothing and footwear.

• Celebration expenses – Covers a £56 birthday present for each birthday.

Note that the Retirement Living Standards assume the retiree has qualified for full national insurance and paid off their mortgage.

As you can see, there is a significant quality of life difference between the three standards.

While the minimum standard can cover your basic needs, it still isn’t enough to cover car expenses or trips to Europe. Moreover, leisure spending like eating outside, buying a nice wardrobe, or renovating your home is limited.

The moderate standard is already a significant improvement. It allows for yearly trips to Europe, driving a car, and larger budgets for leisure expenses.

With the comfortable standard, retirees enjoy some luxuries, like three-week-long trips, shopping sprees, and replacing their vehicle every five years.

But how big should your retirement fund be at the time of your retirement to have enough money for each of these three categories? Let’s have a look at the numbers.

As you can see from the table above, retired couples with absolutely no savings can have a minimum living standard and survive solely on their full £10,600 state pensions.

On the other hand, since a single retiree would need a yearly income of £12,800 for the minimum standard, the entire state pension would not be enough, so they would need a retirement fund of at least £36,500 to secure a minimum lifestyle standard.

As you might’ve guessed, retiring as a single person requires much larger pension pots, and to live comfortably in retirement, the British saver needs over £500,000 in their retirement fund.

The latest data indicates that a male median wage employee in the UK, who starts saving at 18, will save up to £114,000 in their workplace pension by the time they are 68 if they rely on the automatic enrolment minimum contributions. For female workers, this figure is £93,000.

In other words, it won’t be enough for them to reach the goal of retiring with a moderate, let alone comfortable, lifestyle. This is why early planning and saving from a young age is so vital.

The most basic estimation of how much your retirement fund should be by the time you retire is ten times your lifetime average yearly wage.

For example, if your annual income over the course of your professional career has been £30,000, a retirement fund of £300,000 is a safe bet that you will not stress out about money in retirement.

You may think this is a huge figure and an unreasonable goal, but with proper retirement planning and healthy spending habits, it’s more than attainable.

What most young people seem to overlook is that you will not have the same spending habits in your 20s and 50s. Additionally, your income in your 50s will likely be higher than in your 20s, but starting early is still essential.

Financial planners advise young savers to save only one year’s salary in their 20s. Just by saving £5 per day, in five years, you will reach a figure of about £10,000.

As your yearly income starts to grow in the following decades, and you eliminate some high expenses like mortgages, you will be able to increase your contributions and reach your goal.

If you’re looking for a more fixed plan that doesn’t involve flexible planning and allows you to make the same contributions every year, the ‘save half your age rule’ will do the trick.

To find out how much you should be paying towards your pension pot per year, just take the age you started saving at and divide it by two. The number you are left with should be the percentage of your annual income you should save for retirement.

For example, if you started saving at 20, you should put 10% of your income in your retirement fund every year. If you started at 30, your annual contribution should be 15%, etc.

The save half your age rule is easy to understand and follow and can help savers who had to start saving late ensure they are on the right track towards a comfortable retirement.

Another way to estimate how big your pension pot should be at your retirement age is the 4% rule. It can be particularly useful for savers who want to plan long-term, as it ensures you will get your desired annual retirement income for exactly 30 years.

The rule says to divide the annual income you would like to receive in your retirement by 4%, and the number you get should be the total size of your pension pot.

For example, you want to reach PLSA’s moderate retirement living standard income of £23,300, knowing that £10,600 will be covered by the state pension. This means you should ensure you get £12,700 from your other pensions every year.

£12,700 divided by 4% is £317,500, which means you will need a pension pot of £317,500, besides your state pension, to maintain PLSA’s moderate retirement living standard for 30 years.