Calculating a target retirement income that suits your aspirations


Understanding the level of income you want to achieve in retirement is vitally important for staying on track. Yet, research suggests thousands are struggling with working this figure out.

Without a target in mind, it can be all too easy not to save enough for retirement, believing your current provisions will be enough. It can lead to a retirement that’s disappointing and, in some cases, may even cause financial struggles as a result. Alternatively, you could be in a position to comfortably retire sooner than expected, but, without a goal, be unaware of this fact. Understanding the income you need and want in retirement should be a crucial part of your planning process.

In the past, more retirees were members of Defined Benefit (DB) pensions, which pay out a guaranteed income for life. The way this income was calculated is defined when you sign up to a DB pension, often a combination of your service length and final salary. This gives retirees a clearer indication of the income they could expect once they gave up work, as well as shortfalls they may face. However, these types of pensions have been in decline, placing more responsibility on the shoulders of employees.

The complexity of calculating how much income you need and how this relates to your savings has been further compounded by Pension Freedoms introduced in 2015. The introduction has allowed pensioners more freedom when accessing their pensions but, again, gives more responsibility to the individual.

Research indicates just 36% of those planning to retire in the UK expected to achieve a flourishing or comfortable retirement. However, judging your expected retirement lifestyle without understanding income and the cost of living can lead to miscalculations.

The research noted: “Many people are preparing [for retirement] by gathering information and saving at least a little; these are relatively easy steps, especially for people who are saving by contributing to workplace benefit plans where the employer takes an active role. Fewer people are undertaking the complicated tasks of figuring out how much they will need when they retire or planning for an unexpected early retirement.”

How much do you need to retire?

There’s no one-size-fits-all answer to that question. It will depend entirely on your circumstances and aspirations. Answering these questions can help you begin to build an answer the reflects you.

What level of income do you need to cover the basics?

When you’re working out retirement income, splitting it down into two sections, need and want, can help.

First, take a look at what your essential expenditure will be in retirement. This may include utility bills, travel costs and grocery shopping. Many people find the spending on basics decreases as they enter retirement, particularly if you plan to pay off your mortgage around the same time. This figure will give you a baseline to work towards.

How much is needed to achieve your dream retirement?

Next, think about the things that will make your retirement comfortable and enjoyable. Do you hope to travel more now you don’t have working commitments? Will you spend more on increased social time?

Again, this will be linked to your aspirations. Spending that helps you achieve the retirement you want can often be segregated into two categories; one-off purchases, for example, home renovations or an extended holiday, and ongoing costs, such as club membership fees.

How long do your retirement savings need to support you for?

Life expectancy isn’t something you want to think about. However, it’s an important part of planning for retirement. The above two questions have hopefully given you a rough idea of how much income you’d like your pension and other assets to generate each year. But without knowing how many years this will need to cover, it doesn’t help you calculate how much needs to be saved.

Keep in mind, many people underestimate how long they’ll live for. According to research, men in their 50s and 60s today have an 83% chance of reaching the age of 75. For women, it’s 89%.

How would you cover unexpected costs?

Throughout your working life, you’re often told to build up an emergency fund to fall back on should you experience unexpected costs. During your retirement will you maintain or add to this? If not, what alternative sources do you have that you could use to fund these extra outgoings?

While retirement life is often more settled, emergencies and surprises can still happen. Making a contingency plan can help put your mind at ease and ensure your retirement savings continue to support you. Under unexpected costs, you should also consider the potential need for care in the future.

Even with these answers, it can be difficult to understand what your pension goal should be. We’re here to help you get to grips with your retirement finances, allowing you to take a step closer to achieving your dream, please contact us for more information.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.