How much money should I save for retirement?

Planning for your retirement is important, so you can enjoy it without feeling stressed about your finances. However, it isn’t easy to know exactly how much to save before you stop earning. In this guide, we’ll look at the factors you may need to consider when working out how much money you need for your retirement. 

What kind of lifestyle do you want when you retire?

When thinking about how much you need to save for retirement, you must think carefully about the lifestyle you want to have. Your retirement should be a time for you to relax and enjoy the money you’ve earned. But the ideal retirement looks different for different people. When it comes to working out the cost of your ideal lifestyle in retirement, you might want to think about:

• Do you want to indulge in luxuries? Consider how important more expensive brands and experiences are to you and how many luxuries you want to have in your retirement years. To help, you could think about the non-essentials you spend money on now and whether you’d want to have more or less of these in retirement. 

• Do you plan on travelling? For many, retirement is a chance to explore the world without worrying about work responsibilities or looking after children. Whether you’re planning to explore different countries or go on holiday twice a year, you must consider the cost when planning for your future. 

• Do you plan on taking part in any hobbies or activities? Consider what you might like to do daily in your retirement - will you continue any current hobbies or will you want to try new activities? If so, you’ll need to add the cost of these to your retirement plan. 

• Do you plan on socialising regularly? If you plan to meet up with friends and family regularly, go out for coffee, drinks or meals and to throw the occasional party, you’ll need to account for these costs in your future budget. 

When do you plan to retire?

Another important thing to consider is how long you’ll spend in retirement. While you can't predict exactly how long you’ll live, the age you plan to retire will influence the amount you need to save. If you're considering working into your 70s or 80s, you may not require as big a retirement pot as someone who plans to retire at 50.

If you want to retire early, you need to consider how much you’ll be able to save by then. Without being a high-earner, or saving a large amount of your income, early retirement may not be possible. People who successfully retire in their 50s or earlier have usually carefully planned for this and put a lot of money away to make it work. 

On the other hand, if you plan on working past retirement age, you may be able to get away with a smaller pension pot. If you are eligible for the state pension, and choose to work past your state pension age, you can increase the amount you’ll receive by choosing to receive it later. See more information here: Delay (defer) your State Pension: What you'll get - GOV.UK (www.gov.uk).

What are your current annual expenses, and how will they have changed by the time you retire?

When planning how much you need to save for retirement, a good place to start is working out your current expenses. You can then think about how they’re likely to have changed by the time you retire.

If you own your home, you’ll need to budget for any potential home improvements or maintenance required whilst you’re retired. If you haven’t finished repaying your mortgage, you’ll need to budget your monthly mortgage costs into your budget too.

If you rent, you’ll need to plan for any monthly rent you pay your landlord, along with other monthly expenses like bills and building maintenance fees.

Your spending will likely change in many ways during your retirement. For example, if you currently commute to work, you may spend less on travel costs after you retire. On the other hand, some costs may go up - if you spend more time in your home, you may find that your heating and electricity bills become more expensive. 

What financial responsibilities will you have in retirement?

If you had children later in life, or plan to retire early, you may still have financial dependents when you retire. You will need to factor these into your retirement planning.

Additionally, if you currently have debts from personal loans, secured loans or credit cards, you’ll need to consider whether you’ll have paid these off by the time you retire. If not, you must plan for these repayments to come out of your monthly retirement budget.

What sources of income do you expect to have in retirement?

When planning how much you need to save for your retirement, you need to consider your income as well as your spending. 

• State Pension - You can see whether you are on track to receive some or the full state pension here: Check your State Pension forecast - GOV.UK (www.gov.uk). If you defer your state pension and continue working past retirement age, you could receive a larger state pension when you retire. If you decide to retire before you qualify for the state pension, you’ll need to ensure you’ve saved enough to cover the time you’re not earning and don’t have a state pension. Retiring early could also mean you don’t make enough National Insurance contributions to receive the full state pension, although you can make voluntary contributions.

• Workplace and Private Pensions - When you retire, you can also access workplace or private pensions you’ve built during your working life. Sometimes, you’ll need to reach a certain age before these pensions payout, so you’ll need to take this into account when planning your retirement income.

• Savings Accounts - If you currently have money in savings accounts, you can put this towards your retirement spending. You need to consider how much you expect to have in savings when you retire and how accessible it is. If you are planning to use the money early-on in retirement, you may want to reconsider locking it away in a long fixed-term account.

• Do you plan to downsize? - If you’re a homeowner, you may choose to downsize your home when you retire and no longer have children living at home. If this is the case, you may have money left over that you can put towards funding your retirement.

• Other income sources - You’ll want to think about any other sources of income you may have when you retire. For example, if you are a landlord, you may still expect to have a rental income during retirement. Also you may choose to continue with a small amount of paid work.

Don’t forget to put money aside for emergencies

When preparing for retirement, as well as planning for your regular income and expenses, you also need to consider how you will manage emergency expenses. These could include things like a broken-down boiler, car repairs, unexpected bills, or home maintenance.

You may want to consider putting some money aside in an easy-access savings account so you can cover emergencies without relying on borrowing.

Remember to factor in inflation

Inflation is another important factor to consider when considering financial planning for the future. 

Inflation is the increase in the prices of goods and services over time, which weakens the purchasing power of money. This means the same amount of money can buy less in the future as prices rise.

When saving for retirement, you need to think about how you will grow your retirement pot. When you are thinking about budgeting in the future, you should also account for price increases in your future budgets.

What’s the best way to save for the future?

There are lots of ways to save for retirement, such as workplace pensions, personal pensions and fixed-rate savings accounts. 

Many people choose to use a mix of these, but the best choice for you will depend on your circumstances, appetite for risk and when you plan to retire.

You can find out more about the different ways to save for retirement in our guide, What’s the best way to save for retirement. 

If you’re worried about preparing for retirement or unsure about how much you should be putting away each month, it might be a good idea to speak to an independent financial advisor who will help you come up with a plan based on your individual circumstances.