How Much Money Do I Need To Retire

How Much Do I Need to Retire?

Do you know how much you need to retire? This is one of the most common questions I get asked by my clients, regardless of how large or small a portfolio they have. My first answer is usually ‘it depends’ – because there’s no one-size-fits-all figure we can pull from the air for you. How much you need to retire genuinely depends on what sort of life you want, what you have now, when you start putting money aside – and plenty of other things too.

But although we’ll start with ‘it depends’, we will actually be able to determine exactly what you’ll need to retire – and what you’ll need to do to achieve your goal. There’s nothing worse than not being sure and worrying about what you’ll have in retirement. Your financial wellbeing impacts your mental health, and knowing how much you need to retire can have a positive impact on it.

The 3 steps to working out how much you need to retire

I work on a three-step process that helps you really get into what you expect from your retirement. Then we work back and out from there. It helps you understand what your options are and how you’ll need to plan to achieve different scenarios.

Step 1: what do you need and what do you want?

What you need and what you want are two separate questions you’ll need to ask yourself.

• What you need – these are the non-negotiables and include all the boring-but-necessary expenses. Think things like utilities, council tax, food, transport, and insurance. These will need to be projected forward over time to take account of inflation, not factored in at today's figures.
• What you want – this is the sort of life you anticipate retiring into. Does it include holidays, hobbies, days out, bucket-list items? Some hobbies are cheap and won’t make a huge difference to your budget. If you want to take up flying or have your own pottery studio in the garden, however, you’ll be looking at a different set of costs. The same goes for travelling, days out, and so on.

It’s important to separate the two because otherwise you run the risk of retiring and only being able to afford the things you have to – with nothing left over to enjoy yourself. Retirement should be fun, not drudgery.

Step 2: what do I actually have?

This is where we look at how much wealth you have and what you already have in place. This includes things like:

• Workplace and personal pensions
• Your state pension forecast (we can help you find out what yours is)
• Other retirement provisions including any property income, whether you have a business you might sell, part-time work, inheritance, savings and investments

This is often where we find people are surprised. People can find they have more sources than they had realised. Others discover they expected to receive more from their state pension, sooner.  

Step 3: how do I bridge the gap between what I have and what I need to retire?

It’s normal to look at all the numbers and realise that, to get from where you are to where you want to be, there’s a gap to be bridged. The earlier you start planning for this, the better – you have more options and a greater chance of achieving or exceeding your goals. Starting late is always better than not starting at all, though!

Once we have a clear picture of what we’re aiming for we can determine if there’s going to be a shortfall. In this case there are various options we can explore, including:

• Saving more
• Deferring retirement by a year or two
• Adjusting your expectations
• Looking at risk and how your money is invested
• Some combination of the above

What you’ll need to do and how you’ll need to do it will be different for everyone.

How cashflow-forecasting models help you get clarity on what you need for retirement

Retirement planning is easier and more ‘doable’ if it’s not just an abstract concept you’re somehow aiming towards with no real plan. Telling yourself you need £X by the time you’re 65 is hard to act on. Where’s it coming from, and how? However, if you know that for one good holiday a year in retirement, you’ll need to put an extra £X a month into your pension, it’s easier to envisage and to do.

At that point you just need to work backwards to see how you’ll make that happen.

A cashflow forecasting model that lets you explore your options

Our cashflow forecasting tool joins the three steps together and lets you see how different scenarios can play out.

Firstly, we take today's spending and project it forward through retirement. We layer in your pensions and other income too. Then, by adding it all together on a single timeline, we’ll see when and where there might be any gaps or surpluses.