This article will cover exactly how much money you should have saved in your pension and by which age.
We will be 100% UK focussed and use UK statistics and retirement data for our analysis.
We shall also include helpful pieces of information, benchmarks by age and some general principles to consider when looking at retirement.
From State Pensions to annuity’s and compound interest, it can be difficult to know if you’re on track and how much you can expect to have in retirement.
And with that in mind, let’s start with the average pension pot in the UK for retirees.
According to the FCA, the average pension pot in the UK is £61,897. If you were to purchase a basic annuity with that pension pot you may expect around £2,500 per year – even less if you’d like to it to increase with inflation or be transferable to your spouse etc…
In 2021, the maximum State Pension you can expect is £9,338.16 – and how much State Pension you can take has increased from April 6th.
Therefore, the average person aged 67 can expect an annual income of just under £12,000 – or £1,000 a month.
£1,000 per month may seem very low, especially since the average UK income per month is £1,950 (£29,600 per year). However, despite the fact that it seems low, how much pension do you need?
The first thing to note is that in retirement you will need less income. This is because you no longer have the need to save or invest to build your pension since you’ve already created it.
The simple equation is that the income from your pension nets out your expenses & leaves enough margin to combat inflation.
Everybody’s ‘retirement number’ will be different and it is based off the kind of lifestyle you’d like to live, your expenses and your assets. For instance, one person may have a somewhat frugal lifestyle and own their home and the next is in debt and spends all they make.
Step 1: Decide on the lifestyle you’d like to have
From salt of the earth to international jet-setting, there are thousands of potential lifestyles in retirement. The Financial Independence Retire Early (F.I.R.E) movement categorise retirement into a few categories from ‘Barrista FIRE’ to ‘Abundance FIRE’, all with varying levels of income. We’ve created a simplified version below for the retirement hierarchy which you will progress through. You can learn more about this FIRE community on their Reddit page. When deciding the kind of lifestyle you’d like, consider things like how many holidays you’d like to go on, how much you’d like to give, will you own your own home? etc…
Step 2: Create an expenses list
Now you’ll need to list all of the expenses required for that lifestyle. From mortgage (if applicable) to food, fuel, gifts, clothes and everything in between. For annual costs such as insurance or tax, you can use accruals (the cost divided by 12) to generate a monthly figure). For example, Person A may have the following expenses:
In Person A’s example this would account for a total monthly expense of £1,895. Therefore, Person A would want an income of that amount every single month in perpetuity. This number may be lower or higher than what you’d like, but you can follow the above process to find out what that number is for you. And if this kind of budget is new to you, you may find our guide on budgeting helpful. Now we’ve got a monthly figure, it’s time to find out how much pension you need.
Step 3: Calculate your required pension pot
Before we calculate how much pension you need to retire it’s important to know that this can be three different numbers, based on the above. If you just want the amount you need to retire with food on the table and a roof over your head (financial minimalism), repeat the above with that in mind. You can then do the same for base case (financial lifestyle) and an abundant retirement (financial abundance), giving you three target numbers 😎
Let’s take Person A’s financial lifestyle which requires a monthly income of £1,895 as an example. We’ll start with the 4% rule, which essentially says that your pension pot will almost certainly last your lifetime if you invest it well and only take 4% each year. Approach financials‘ graph below provides a really great visual on the 4% principal.
Then, we need to factor inflation into the mix. According to Statista, the average rate of inflation in the UK is 1.79%
This means your money is worth 1.79% less each and every year due to the rising cost of goods and services.
So, with all of this in mind, how much do you need to retire?
Person A would like an income of £1,895 per month – or £22,740 per year. At. 4% withdrawal rate, that means he needs 25x his required amount. If he or she wanted to be very conservative they may take a 3% withdrawal rate and would need 33x the desired amount.
Therefore, based on how conservative you’d like to be, you need to multiply your desired annual income by either 25 or 33.
4% Withdrawal: 25 x £22,740 = Pension Pot of £568,500
3% Withdrawal: 33 x £22,740 = Pension Pot of £750,420
As above, the amount of pension you need depends on the type of lifestyle you’d like to retire on. If you’d like to live in financial minimalism you would need circa £12,000 per annum.
Assuming full State Pension (£9,338) you would need to top that up by circa £3,000 per year. According to the 4% withdrawal rule, you would need a balanced investment portfolio of £75,000 to consistently draw down £3,000 per year and not affect the principle.
We’ve covered how to calculate the amount of money you’ll need in your pension pot to retire and enjoy the life that you want. Now we understand how much money you need to retire, the question becomes ‘when can you get there’?
If we start with a desired number in mind (call it £500,000) based on your current progress we can calculate if and when you’ll reach or surpass that number.
Everybody will have different aspirations for retirement, so to keep this simple we assume that the average person will want to retire at age 65 and would like to have the UK’s average income.
When you’re retired you are no longer saving for retirement any longer, and hopefully not paying for a house either. General guidelines suggest that you only need around 70% of the income you had when working.
According to the Office for National Statistics (ONS), the average UK income 2021 is £29,600 per year. We will aim for a retirement income of £20,720 per annum. Most but not all readers will expect a State Pension.
We shall complete these forecasts based on your private pension pot alone, excluding any State Pension contributions.
It’s better to have the confidence that you can retire independently from the State and the State Pension amount may also change by the time you retire. What’s more, if you can retire based on your own pension, anything additional will be a welcomed bonus.
To enjoy an annual income of £20,720 per year you must develop a balanced pension pot of £518,000 to be conservative (assuming 4% withdrawal). If you’d like to be extremely conservative (3% withdrawal rate) you will need a pension pot of £683,760
Let’s jump in to see how much pension you should have by age 😎
At age 20 there is no expectation to have money in your pension pot. Most graduates don’t start earning until age 21 so if you have anything in your pension you’re winning.
That said, the earlier you start the more compound interest can work in your favour. See the below graphic as an example.
If you can have £1,000 in your pension at age 20 you’re doing well. The most important focus in your 20’s should be removing any consumer debt, building an emergency fund and start the pension snowball so that you have more years to enjoy the wonders of compound interest.
At age 20, if you only £300 per month until you retire at age 65 you will have a pension pot you will be able to retire on an income of over £21,000 per annum, assuming a 5% growth rate in investments.
To reach the UK average pension pot of £61,000 you would need to invest only £60 per month. If you’re 20 you have a fabulous opportunity to benefit from the compounding effects of your pension. If your investments grow at 7% per year your money will double every 10 years money💷
This means £1,000 invested at 20 is the same as £2,000 invested at 30 and £4,000 invested at 40.
As with any age, how much you should have is completely personal and will vary broadly across the UK’s population. however, at age 25 we can calculate how much you should have in your pension by age 65 based on two numbers:
Firstly, without the help from the UK State Pension, where do you need to be at 25 to be able to retire with an annual income of £20,720 (UK average income, minus 30%).
Secondly, how you are doing compare to the average pension pot in the UK at retirement: £61,000
At age 25 the financial focus should be on paying down any consumer debt and start paying into you pension. If you are anywhere close the UK’s average salary of £29,000 you’re doing extremely well statistically.
Pension contributions don’t remain the same, most people increase the amount they pay over time in line with their salary.
If you started work at age 20 and have £10,000 at age 25 in your pension you’re on track for a very comfortable retirement. However, it is important to note that pension size at age 25 isn’t always reflective. Lots of individuals don’t enter the workforce until mid 20’s, so not having a starting amount shouldn’t discourage you.
The most important thing at age 25 is that you’re saving 10% of your income towards retirement.
The general advice is that by age 30 you should have saved one times your annual salary. If you have a pension of £25,000 or greater at age 30 you’re on track for a comfortable retirement.
Once again, at age 30 it is difficult to gain an indication as to how much it should be as you’ve not entered your highest earning years yet statistically.
Thos who started in their 20’s will gain a head-start but by no means is it difficult to catch-up if you’re committed. At age 30 you should have one year’s annual salary and be committed to growing your pension for retirement.
You may wonder, how much do i need to invest in my pension?There is the ‘half your age rule’ which says ‘halve the age you start and contribute that to your pension from your gross income’.
if you’re starting at age 30, then you need to be contributing 15% of your gross income to your pension as a minimum.
At age 35 your pension pot should be growing nicely and you should already be able to see the benefits of compounding interest. At age 30 you saved 1X your salary.
At age 35 you should have roughly 10% of the final pension amount you plan to take at age 65. If you’re aiming for a pension pot of £500,000 then £50,000 is a great aim.
However, between the ages of 25 – 35 you will not have seen your most aggressive pension growth or contributions. The majority of the UK have children, career changes and many other events which may not reflect the long-term value of their pension.
With that in mind, 35 puts you 30 years away from retirement which is a healthy stretch for compounding interest. Doubling down in your 30’s can save a lot of additional effort later in life.
At age 40 you should be taking your pension very seriously. If you’ve not started yet you’ll need to get an aggressive start and likely put at least 20% – if not 25% or higher – of your gross income towards your pension.
If you’re planning to work until you’re 65, your pension pot at age 40 should reflect 15-20% of your final pension pot size.
So, if you’d like to retire on £20,000 per annum from your private pension you should expect a pension pot of circa £90,000 at age 40.
A pension size of £90,000 at age 40 puts you well on track for a comfortable retirement at age 65, without having to rely on the state pension.
A good pension amount is determined exclusively by what each person considers ‘good’. If you’d like to lead an average life as the average UK earner you’d need a pension pot of around £500,000-£600,000.
If you wanted to have a financially minimalistic retirement (your four walls and food), and relied on state pension to supplement your income, you would aim for a pension pot of £60,000-£80,000.
In this article we have covered how much you should have in your pension and by what age. We’ve explored how to find out how much money you need to retire.
To understand how much you need to retire you have to consider what kind of life you’d like in retriement, what your expenses will be (paid for house, holidays, health costs) and when you’d like to retire.
Generally, a pension pot of £500,000 would give you an independant and comfortable retirement from which you can conservatively withdraw and enjoy many good years.
As with most things, pension pots are not an exact science and the right amount is largely down to the individual. If you have questions you may find it beneficial to sit down with a professional and exploring your options.