It’s hard to know exactly how much you’ll need in later life because everyone has different circumstances and expectations
But by planning how much you’ll need and working out how best to build up your pension pot, you’ll be in a great position to live your best life in later life.
What lifestyle do you want in retirement?
People have different ideas of how they might live when they’ve finished working.
Research has shown that there are basically three (3) retirement living standards, based on questions like how many holidays do you see yourself taking a year? Would you have a car? If so, how often would you want to replace it? And how much home maintenance do you think you’ll need to do?
- Minimum – geared towards paying for essentials, with all your needs covered.
- Moderate – gives financial security and some flexibility.
- Comfortable – provides more financial freedom and some luxuries.
How much will you need to retire?
When it comes to working out the retirement income you’ll need, it’s easy to make the mistake of basing the figure on your salary while working. So, you’re likely to think you need more to live on than you actually do.
Bear in mind your living costs will probably change in later life – often significantly.
People tend to spend less on housing costs, such as mortgages, but more on things like heating bills, healthcare and insurance. Commuting costs may also go down if you decide to retire from work.
However, you’re likely to have more time for things like travel or hobbies, which can increase your outgoings. So, it’s important to know how much you’ll need to live the lifestyle you’ve envisaged for yourself.
How much should you save into your pension?
Here’s a quick way of calculating how much to save: at the time you start saving for your pension, halve your age, then use that number as the percentage of your salary you should aim to save each year.
Many experts recommend this rule of thumb. It would mean that if you start at 20, you should aim to save 10% of your annual income towards your pension. If you start when you turn 30, this will rise to 15%, and so on.
For most people, your pension income will come from 3 sources:
- Your State Pension
- A private and/or workplace pension scheme
- Any other income, from property or investments, for example