How much money do I need to save for my retirement?

Advice on how much to save for retirement depends on the lifestyle you wish to have in retirement. A basic retirement may include a few luxuries like a few holidays, hobbies and eating out occasionally. A luxury retirement would also include a long-haul holiday and a new car every few years. 

What’s my target income in retirement? 

Some financial advisors recommend that you save up to 10 times your average working life salary by the time you retire e.g., if your average salary is £50,000 a year aim for a pension pot of £500,000. 

Another tip is that you should save 12.5% of your monthly salary. So if your annual salary is £50,000 you would save £520 a month. 

If your employer matched your pension contribution, you would only need to pay £208 a month (5% of your salary) which your employer would top up to £416, with tax relief of 20% then take the total to the required £520. 

This can be illustrated with a compound calculator. At 5% growth, just 32 years is required to reach a pension pot of £500,000. 

Using the above scenario, Table 1, illustrates likely age benchmark targets at each age to see if you are on target starting at age 25 with no pension saved.

Table 1. Investor's age and savings benchmarks

Investor's age	Savings benchmarks
25	No pension saved
30	.5x of salary saved today
35	1x of salary saved today
40	2x of salary saved today
45	4.5x of salary saved today
50	6.5x of salary saved today
55	10x salary saved today
60	12x salary saved today
65	16x salary saved today

 

Income replacement rate rule of thumb

When you come to retire, the replacement percentage income required is unlikely to be 100% of preretirement income.

The children would have left home, the mortgage may have been paid off and with no work travel expenses the levels of spending and expenditure are considerably lower in retirement. 

You also have a state pension, although perceived as small compared to other Western countries, most people only need to replace between 55% and 85% of their, pre-retirement household income before tax, after they stop working, to maintain their lifestyle in retirement.

Research carried out by Fidelity found that people with between £30,000 and £90,000 annual household income at retirement, should plan for their retirement savings to replace about 35% of this income before tax. 

The rest would come from the state pension as can be seen from Table 2.

Pre-retirement income	Retirement savings	% from state pension	% of pre-retirement income
£30,000	35%	57%	91%
£50,000	36%	35%	71%
£90,000	36%	18%	51%

 

If your retirement savings fall way short and your state pension isn’t enough to meet your needs, you may need other sources of income in retirement including working part-time in retirement. 

How much can I save for retirement?

Currently, as of 2023, the maximum you can pay per year you can put into your pension and claim tax relief is £60,000 per year.

These days, there is no total limit to how much you can pay into your pension but there is a limit on how much you can draw as a tax free lump sum which is around £268,275.

When you retire matters

The age at which you choose to retire can have a significant impact on your retirement income and the role of your savings. 

Delaying your state pension can result in an increased monthly benefit of 5.8% every year you can delay your state pension age. 

Continuing to work and delaying retirement can extend the period during which your retirement savings can grow.

This can be especially beneficial for individuals with defined contribution pensions or investment accounts or those who started paying into a pension late, as it allows for more time to accumulate savings.

How can Regulated Advice help?

Knowing how much money you need is long and complicated process, for most people it is easier and faster to know from a profesional. 

Let Regulated Advice match you with a financial advisor for expert advice.