The dilemma for many people approaching retirement is how much money they need to live on.
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Research shows that most of us overthink what we need for retirement, believing they will spend at least as much as they are paid in wages.
The rule of thumb is making plans for pensions and savings to cover around two-thirds of pre-retirement earnings to maintain a lifestyle after giving up work.
The reasoning is you will probably have paid off your mortgage and any debt on retirement, won’t have the cost of commuting to work and any children will have left home.
But that’s not the case for everyone.
How Much Do Retired People Spend?
There’s no right or wrong answer to the question. All of us have different spending needs and patterns, so there is no specific golden figure to aim for.
Consumer magazine Which? has had a stab at working out the figures based on asking more than 6,000 retired households about their money matters.
The results of the 2020 survey reveal the average retired household spends £2,110 a month – about £25,000 a year. The figure is slightly less than surveys in previous years, with lower spending explained by COVID-19 lockdowns limiting shopping trips and going out.
The figure covers basic day-to-day spending of just over £17,000 a year and some luxuries, including a holiday in Europe.
If you want a more comfortable retirement, retirement income must rise to around £40,000 a year to cover holidays outside Europe and changing a car every few years.
Travel and breaks away are important to many retirees, and the average spend of £4,450 on holidays reflects this.
Spending patterns change as people get older. Travel and going out are important to the youngest retirees, but as they age this drops and is replaced by spending more on health, utilities and insurance.
Retirement spending for singles
This chart shows average spending in a year for a single, retired person with a basic, comfortable or luxury lifestyle:
| Item | Essential | Comfortable | Luxury |
|---|---|---|---|
| Groceries | £2,172 | £2,172 | £2,172 |
| Housing costs | £2,603 | £2,603 | £2,603 |
| Insurance | £1,924 | £1,924 | £1,924 |
| Transport | £1,696 | £1,696 | £1,696 |
| Utilities | £1,545 | £1,545 | £1,545 |
| Household goods | £895 | £895 | £895 |
| Health | £963 | £963 | £963 |
| Clothing | £734 | £734 | £734 |
| Travel and holidays (Europe) | £3,134 | £3,134 | |
| Recreation and leisure | £1,111 | £1,111 | |
| Charity donations | £1,231 | £1,231 | |
| Alcohol\tobacco | £726 | £726 | |
| Long-haul holidays | £5,160 | ||
| New car | £4,277 | ||
| Restaurants | £803 | ||
| Totals | £12,532 | £18,734 | £28,974 |
Retirement spending for couples
This chart shows average spending in a year for a single, retired person with a basic, comfortable or luxury lifestyle:
| Item | Essential | Comfortable | Luxury |
|---|---|---|---|
| Groceries | £3,982 | £3,982 | £3,982 |
| Housing costs | £3,109 | £3,109 | £3,109 |
| Insurance | £2,268 | £2,268 | £2,268 |
| Transport | £2,217 | £2,217 | £2,217 |
| Utilities | £2,179 | £2,179 | £2,179 |
| Household goods | £1,311 | £1,311 | £1,311 |
| Health | £1,181 | £1,181 | £1,181 |
| Clothing | £965 | £965 | £965 |
| Travel and holidays (Europe) | £4,543 | £4,543 | |
| Recreation and leisure | £1,494 | £1,494 | |
| Charity donations | £1,153 | £1,153 | |
| Alcohol\tobacco | £952 | £952 | |
| Long-haul holidays | £7,705 | ||
| New car | £4,780 | ||
| Restaurants | £1,090 | ||
| Totals | £17,212 | £25,354 | £38,929 |
Working Out What You Need In The Bank For Retirement
The calculation to find your savings shortfall on the average spending figures requires some simple math.
You will need these for you and your spouse\partner:
- State pension forecast and projected payments from any other pensions
- Likely income from savings or investments
- Any other income, like part time earnings or continuing benefits
Tot them up, and if the total comes to more than £12,500 each, factor in any income tax you might have to pay.
Add the amounts net of tax for each of you together to give an annual income figure.
Deduct this from the lifestyle costings at the foot of the tables. If you have more than the average lifestyle amounts, that’s good.
If you have less, then the shortfall is what you will have to make up to meet that lifestyle.
So, if you have enough retirement cash to fund a comfortable lifestyle for a couple, you will need an extra £15,000 a year to upgrade to a luxurious lifestyle but will have to finance the gap from your own funds.
Over 10 years, drawing that amount of cash would drain £150,000 from your savings and investments less any income from the fund.
How Big A Pension Fund Do You Need In Retirement?
If you were to fund your lifestyle from pension savings, you would need to be a disciplined saver over your lifetime.
Which? reckons to fund a comfortable retirement you would need a pot of £262,500 to get £25,000 a year from an annuity or £169,175 to get the same amount from income drawdown.
The numbers are much bigger for a luxury lifestyle – £718,000 in a pension pot to generate £40,000 a year from an annuity or £456,500 to get the same amount from income drawdown.
The figures factor in the state pension. Once you know how much you need in your pension fund, the question becomes how much you need to save each month.
That depends on how long you have to reach your savings target.
These charts show what you need to save at different age milestones.
Women Worry About Running Out Of Retirement Cash
Pension provider statistics tend to show men are better off in retirement than women.
A new study by financial firm Key Advice reports one in three people over 55 years old fear running out of money in retirement, but the number rises to 48% or one in two for women.
Their main concern is falling ill or having to pay for long-term care.
The advice firm also disclosed women are less likely to look for alternative funding options if they run low of cash in retirement.
Women also have less confidence about controlling when they retire because they feel they don’t have enough money to last.
A third of women aged over 55 expect to have a less well-off retirement than their parents, compared to one in five men.
The COVID-19 pandemic has not helped. Official data shows 90,000 over 50s were made redundant between June and September 2020.
This has prompted one in 10 women to dig in to their retirement savings early, while 4% have put off their retirement date, 5% are supporting family or friends from their retirement pots and 8% have stopped saving altogether because they cannot afford to.
How Long Will Your Retirement Last?
Working out how much you must fund retirement is fine, but the unknown factor is how many years without employment income will you have to fund?
The one unknown is how old will you be when you die and what financial provisions you may have to make for your loved ones.
Government data suggests a man aged 65 today has a 50% chance of surviving until he is 87 years old.
A woman of the same age has a 50:50 chance of living to 90 years old.
Drafting A Retirement Budget
Average figures based on research are a starting point for working out how much money you will need in retirement.
Your figures are likely to be different.
Now is a good time to sit down and rough out how much you spend on food, utilities, hobbies, holidays and the myriad other bills.
Then look at the list and see which expenses will be less or might disappear when you retire.
You also must take inflation into account as the rising cost of living will take a big bite out of your spending power, which is likely to be fixed during retirement.
If you need a hand in making your budget, check out the retirement budget planner on the Money Advice Service web site.
The online tool takes you through sorting out your income and spending and offers some tips to help you with your money.
Money Advice Service retirement budget planner
Resisting Your Pension Freedoms
Pension freedoms let retirement savers spend the cash in their pots from the age of 55 years old.
Spending the money too early is not a good idea.
Besides reducing your available money in later life, you may also pay unnecessary tax.
The minimum age for exercising your pension freedoms rises to 57 years old from 2028 and is likely to go up again to 60 or more by 2040.
How Much Money Will You Spend In Retirement FAQ
Working out how much money you will spend in retirement takes some sensible planning and a bit of luck.
The biggest variable is how long you will live, but you also should think about your lifestyle.
Everyone has plenty of questions about financing their retirement, so to help here are the answers to some of the most asked questions.
Why do you need to plan for retirement?
Now, you must take responsibility for funding your retirement based on a defined contribution pension, if you have one, that pays an income based on how much you have saved.
How much state pension will you get?
If you have less than a 10 year NI history, you get nothing, and if you have a 35 year history you get the full amount. Between 10 and 35 years you get a proportion of the maximum pension.
You can get a state pension forecast online
How much state pension you get is important as it’s money you do not have to provide when you retire.
What happens if I run out of pension cash?
You are likely to go through seriously reduced circumstances, as the state pension only guarantees £179.60 a week at the most from April 2021. That’s an annual payment of £9,339 a year or £778 a month to over your basic costs that Which? research estimates at more than £12,000 a year.
Where can I get help with retirement planning?
Many financial firms offer similar tools but bear in mind that they are trying to sell their products and services to you.
I can’t remember my pension details
The Money Advice Service has a useful guide on how to find a lost pension.
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