For Old Time’s Sake – How much money do you need?

When you think of your retirement, do you envision a certain standard of living?

Do those day-dreamed glimpses into the future feature sunshine, a well-manicured lawn and a good bottle of wine chilling in the ice bucket next to your stripy deckchair? Or perhaps you’re seeking all those thrills you couldn’t tick off the list whilst you’ve been working? Exotic travel, high adrenaline sports and a life very much in the fast lane?

The 3 ‘standards of living’

The Pension and Lifetime Savings Association (PLSA) recently published its ‘retirement living standards’ report, and it sets out predictions of how much life as a retiree will cost whether you are flying solo or tackling it as part of a pair. The PLSA provides 3 simulated ‘standards of living’ and demonstrates how much one can expect to pay annually on life’s essentials depending on which camp you fall into.

The ‘Minimum Retirement Living Standard’ (based on the Joseph Rowntree¹ Foundation’s Minimum Income Standard) includes a week’s holiday in the UK, eating out about once a month and some affordable leisure activities about twice a week. It’s worth noting that this standard of living does not include budget to run a car. The annual living budget for the minimum standard is £10,900 for a single person and £16,700 for a couple in 2021.²

The ‘Moderate Retirement Living Standard’ provides more room for financial security and offers more flexibility. For example, you could have a two-week holiday in Europe and eat out a few times a month. The annual budget for the moderate standard has risen to £20,800 for a single person and to £30,600 for a couple.³

When it comes to the ‘Comfortable Retirement Living Standard’, retirees have room in the budget to enjoy some luxuries like regular beauty treatments, theatre trips and three weeks holiday in Europe a year. The annual budget needed for a comfortable retirement living standard has increased to £33,600 for one person and £49,700 per couple.⁴

So how much do you need in your pension for your expected standard of living?

Let’s look at the ‘Comfortable Retirement Living Standard’. If you’re going to retire at 67 years old, and hope to make it to the average life expectancy in the UK (79.4 for men, 83.1 for women⁵ then assuming you both receive a full state pension, we have estimated you are also going to need a retirement fund of approximately £560,000⁶ if you are living as a couple.

If you’re happy with a simpler retirement and see yourself in the ‘Moderate Retirement Living Standard’ category, then your pension pot should be at around £220,000⁷ for a couple.

(This assumes that your living costs will rise by inflation of 2.5%⁸ per year in retirement, and your ‘retirement fund’ achieves growth of 4% per annum after charges).

Sources:

1. https://www.jrf.org.uk/
2. https://www.plsa.co.uk/Press-Centre/Press-Releases/Article/Retirement-Living-Standards-updated-to-reflect-expectations-changed-by-lockdown-living
3. https://www.plsa.co.uk/Press-Centre/Press-Releases/Article/Retirement-Living-Standards-updated-to-reflect-expectations-changed-by-lockdown-living
4. https://www.plsa.co.uk/
5. https://www.ons.gov.uk/
6. based on female life expectancy and your savings will have fully eroded at that age
7. based on female life expectancy and your savings will have fully eroded at that age
8. The 2.5% interest rate used is the Bank of Englands & UK Government “target rate” and is what all long term predictions are based on.

It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested.