How Much Money Do I Need to Retire?

Published / Last Updated on 06/09/2021

How much money do I need to retire is a question that we are asked regularly.

How Much Do I Spend?

The starting point is to work out how much money you will need in retirement. 

  • Work out on today’s monetary terms, what your minimum likely living expenses will be in retirement e.g.  mortgage paid off, children ‘flown the nest’ etc.
  • Work out in today’s monetary terms, how much money you would like to have for leisure time, hobbies, holiday expenses etc.
  • This is your income requirement.
  • Then increase this by an inflationary amount for each year you have to go before retirement.

You now have your target income needs.

Options at Retirement?

There are usually options to completely cash in your pension fund but you may be taxed heavily.

  • Many people buy a secure, low risk, pension annuity i.e.  a guaranteed income paid to you for life and can also have bolt-ons eg.  inflationary increases each year and a guaranteed on death option.
  • Many will choose the alternative of flexible drawdown where your pension remains invested to rise and fall as markets move.  You are able to then draw out as much or as little as you require as lump sums or regular income.  If you draw out too much or over and above any growth that your receive or markets fall in value, you are at risk of running out of money but equally with growth or you controlling your drawdowns or indeed when state pensions start, you may reduce how much you need to drawdown, your funds may grow in value.

Work on an annuity rate for an inflation linked annuity/increase each year with a 50% spouses benefit of around 2% guaranteed.

Work on a flexible drawdown dividend/growth rate of net 4% pa after charges.

How Much Money Do I Need to Retire?

If you have £100,000 and invest in an index linked annuity, you will receive approximately £2,000 pa index linked.

If you have £100,000 and move to flexible drawdown on a balanced, medium risk profile, you will likely receive £4,000 pa drawdown income.

Therefore, if you need £20,000 pa:

Using a guaranteed for life index linked annuity, you need a pension pot of c£1m.

Using non-guaranteed flexible drawdown, you will need a pension pot of c£500,000.

Pension Modelling Calculators

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