The short version
- Industry living standards are a starting point, not an answer.
- Housing costs are the single biggest variable between households.
- Work in today’s money, then let the forecast handle inflation.
- The State Pension does more of the heavy lifting than most people expect.
Ask ten people what they need to retire on and you will get ten numbers, most of them guesses. The honest answer is that the question is badly posed. “How much do I need?” depends entirely on what you intend to do, where you will live, and whether you still have a mortgage when you stop working.
What follows is a way of getting to a number you can actually defend, rather than one you half-remember from a newspaper headline.
Start with the published living standards — then leave them behind
The pensions industry publishes retirement living standards that describe three tiers of lifestyle: a minimum that covers needs with little left over, a moderate standard with more financial security and some flexibility, and a comfortable standard allowing for more luxuries. They are updated each year, and separate figures are published for single people and for couples, and for London versus the rest of the UK.
They are genuinely useful for one purpose: they stop you anchoring on a number plucked from the air. They are much less useful as a target, for a reason that is easy to miss.
Housing is the variable that decides everything
Two people with identical pension pots can have completely different retirements, and housing is usually why. Someone who clears their mortgage at 60 needs materially less annual income than someone still paying one at 70, or renting. Before you do anything else, work out what your housing will cost you in the year you intend to stop working.
- Will the mortgage be cleared? If not, how many years remain and at what monthly cost?
- If you rent, what is a realistic figure for your area, allowing for increases?
- Are you planning to downsize, and have you been honest about what that releases after costs?
- What will maintenance cost on an older property as you get older?
Build your number from the bottom up
The most reliable method is unglamorous. Take your current annual spending and adjust it for how retirement actually changes it — rather than applying a rule of thumb such as “two thirds of final salary”, which assumes your spending tracks your earnings. It usually does not.
Some costs fall away when you stop working. Commuting goes. Pension contributions stop. Work clothing, lunches and the general overhead of employment disappear. If you have children, they may have become financially independent by then.
Other costs rise, and these are the ones people routinely forget:
- Heating, because you are at home during the day.
- Travel and leisure, particularly in the first decade, when people are most active.
- Help around the house and garden as physical tasks get harder.
- Care costs later in retirement, which can be substantial and are not covered by the State.
Retirement is not one long, flat phase
Spending in retirement is rarely a straight line. A common pattern is higher spending in the early, active years — travel, projects, helping family — followed by a quieter middle period where spending falls, and then a later period where health and care costs can push it up again.
Planning for a single flat income across thirty years will usually either leave you short in the years you most wanted to enjoy, or leave you with more than you needed and less life than you might have had. A plan that flexes is almost always better than one that does not.
Do not forget the State Pension
The new State Pension provides a meaningful base for most people and is paid for life, rises each year under the current uprating policy, and does not run out. For a couple who both qualify in full, it can cover a substantial share of a minimum lifestyle on its own.
Two things are worth checking, and both are free:
- Your State Pension forecast, which tells you what you are on track to receive and from what age.
- Your National Insurance record, which shows any gap years. Gaps can sometimes be filled by voluntary contributions, which for some people is among the best-value things they can do with a modest sum — though it is not right for everyone, and the rules on how far back you can go change.
Work in today’s money
It is far easier to think about a figure in today’s terms — what would this lifestyle cost if I retired tomorrow? — and let a forecast apply inflation, than to try to imagine what a pound will buy in twenty years. Any decent cashflow forecast will do this for you.
That same forecast should also show you the thing that matters more than the target itself: whether your current contributions, existing pots and expected State Pension get you there, and what happens if they do not.
The gap is the useful output
A target number on its own changes nothing. The output worth having is the gap — the difference between where you are heading and where you want to be — because a gap can be acted on. More contributions, a different retirement date, a change to how the money is invested, or a more modest plan are all levers, and knowing the size of the gap tells you which of them you actually need to pull.
If your pensions are scattered across old employers, the first obstacle is usually simply not knowing what you have. That is a solvable problem, and it is worth solving before you try to model anything.