Retirement – how much income will you need?

When you stop work, or start winding down gradually, your financial plans for the future are likely to boil down to three key questions...

  1. How much income will you need to live on?
  2. How long will it need to last?
  3. Will you be able to afford this?

These questions seem fairly obvious, but when you start thinking about the answers, things aren’t necessarily as straightforward. So we’ve put together a quick summary of things to consider if you’re trying to put together a realistic budget for the future, plus some suggestions for how to turn this into definite plans.

How much will you need to live on?

A good way to estimate what you’ll need to live on is to add up your current monthly spending, then have a think about what might change. Perhaps the mortgage will be paid off and you won’t have the travel costs associated with work. But other expenditure could go up, like holidays and hobbies, or heating bills if you’re at home more. It all depends on how you expect to use your time.

We’ve listed a few ‘essential’ and ‘optional’ monthly costs here to get you thinking. You may have other regular outgoings too – and there are sure to be disagreements about what’s optional or essential – but our list should help you get started.

‘Essentials’ – mortgage/rent, council tax, gas and electricity, water, food and groceries, childcare, phone and internet, motoring costs, public transport, credit cards and loans, insurance, clothes, pet care

‘Optionals’ – eating out/takeaways, holidays, sports hobbies, TV package, alcohol, cigarettes and tobacco, personal/home goods and services

How long will your money have to last?

Put another way, how long will you be retired for? Which comes down to two questions really, one somewhat gloomier than the other: When do you plan to stop working and how long do you expect to live?

Many people underestimate their life expectancy and run the risk of running out of money in their later years or having to live on a smaller amount than they intended. Good planning can help ensure this doesn’t happen.

Will you be able to afford it?

Your retirement income is likely to come from a number of places, such as a personal pension or workplace pension. If you’re eligible you’ll also be entitled to a State Pension when you reach State Pension age. And you might have other sources of income to draw on at the time.

Knowing what these might be worth in the future isn’t an exact science, but we’ve got some tools to help you get a picture of your future income and expenditure.

In a few easy steps Shape My Future gives you an idea of a possible income in retirement and takes a light-hearted look at how much the lifestyle you want could cost. You can also plan how you might make it happen, including seeing the effect that different retirement ages can have on your income.

For a more detailed look at the different retirement options and how your money could last, try My Retirement Planner. This estimates what your pensions could be worth in the future, compares income options and lets you see the difference that changes could make.

Starting to plan

If you feel you could be doing more towards your long-term future, there are a few things you can do. As well as seeing the difference that different retirement ages can make, could you afford to pay more into your personal pension plan or work pension scheme? If you can’t at the moment, are there any areas where you could be spending less?

You could also think about whether it’s likely that you’d be able to increase contributions in the future. Also, find out about maximising the amount your employer will pay into your workplace. Some employers will increase their contributions when you do.

It’s never too early to prepare for retirement. The earlier you start thinking about what kind of retirement you want and where your money’s going to come from, the more control you can have over that period of your life.