Retirement is a dream for almost everyone. Relaxing, traveling, enjoying family — they should be the best years of our lives. But how much money do you need for retirement?
Working out how much money you need for retirement depends on a variety of factors. One of the most important considerations is your standard of living. The Pensions & Lifetime Savings Association (PLSA) suggests that a retired couple’s minimum is around 17K a year. For a single person, they recommend 11K.
For a more comfortable retirement, the costs shoot up. The PLSA proposes something in the region of 30K for a couple who want to holiday a few times a year and enjoy other luxuries. The typical convention holds that retirees need around £1million. The 4% rule suggests an annual income of £40,000. However, retirees will need to factor in tax on their pensions.
Do I Need £1m for Retirement?
But do you really need a pension that large for retirement? A lot depends on your future expenses, like healthcare or holidays. One of the other significant factors that affect how long a pension lasts is location. Choosing the correct city to retire in can make a considerable difference. Either way, many suggest that the general rule is that you’ll require about 60-70% of your pre-retirement income.
Of course, not everyone will have the luxury of a million-pound pension pot. Many retirees will need to get by on half that amount. It’s never too early to start thinking about retirement — even if you’re in your 20s.
The Importance of Saving and Investing
The UK state pension is less than £10K per year. While this sum is not insignificant, it falls short of the amount required for a comfortable retirement. Most people will struggle to live on that budget, which underlines the importance of saving and investing.
Saving is a good step, but low bank saving interest rates barely keep up with inflation. As a result, investment should form a vital part of your retirement strategy. The S&P 500 regular returns around 8-10% on investment. A 35-year plan with monthly investments of just £483.60 could make you a millionaire.
The S&P 500s performance in recent years has been incredible. £500 per month invested in the index over the last 40 years would be worth a staggering £3.3 million today. Purchasing exchange-traded funds, also known as ETFs, is a great way to track an index like the S&P 500. Additionally, you could potentially gain market-beating returns with some savvy stock picking and a bit of research.
Of course, not everyone has a spare £500 per month. However, experts suggest that investors abide by the 50-15-5 rule. In short, that means investing about 15% of your earnings each year.
Retirement is full of many surprises; not all of them are pleasant. Increased life expectancy, taxes, and inflation are all factors that can chip away at a pension. Retiring with a comfortable amount takes discipline and some good choices. No matter your age, investing with an eye on retirement is a smart move. Retiring with a million is more than possible.
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Alpesh Patel OBE