How Much Do You Really Need for a Comfortable Retirement? £800,000

Savers seeking a comfortable retirement may now need to accumulate a pension pot exceeding £800,000, according to recent estimates from the Pensions and Lifetime Savings Association (PLSA).

New data indicates that individuals need to increase their annual savings to keep pace with rising living costs.

The annual Retirement Living Standards report from the PLSA, considered a definitive guideline, categorizes retirement lifestyles into three levels: minimum, moderate, and comfortable.

To maintain a comfortable lifestyle—characterized by weekly dining out, a £75 weekly grocery budget, and an annual two-week vacation at a four-star hotel—a single individual requires £43,900 yearly, a slight rise from £43,100 last year. This amount is calculated after taxes, assuming no mortgage or rental payments.

When including the full state pension of £11,973 per year, a single person needs around £805,000 in a pension pot to secure an annuity that provides the necessary income, up from £788,000.

For couples, the required annual income for a comfortable retirement is approximately £60,600, a jump from £59,000, necessitating a pension pot of roughly £455,000 each alongside their full state pensions.

Those aiming for a more modest retirement can expect the “moderate” lifestyle—entailing a weekly restaurant outing, a £56 weekly grocery budget, and a two-week holiday in a three-star hotel—to now cost around £31,700 a year, an increase from £31,300. This translates to needing about £490,200 in retirement savings, up from £489,600. Couples would require £43,900 jointly, an increase from £43,100, requiring around £246,000 each.

In a positive shift, the required savings for a “minimum” lifestyle have declined due to lower energy costs. This entry-level tier, which allows for one meal out monthly, a £55 weekly grocery budget, and a one-week UK holiday, now demands £13,400 annually, down from £14,400. Couples need £21,600, decreased from £22,400.

A single individual would require a pension pot of £28,000 to sustain this lifestyle, while for couples, the full state pension would cover their expenses.

These updated statistics may be startling for many savers. Research by Interactive Investor, involving a survey of 5,000 pension savers, found individuals aged 55 and younger mistakenly believe they only need £350,000 in pension savings for a comfortable retirement—less than half of what is actually necessary.

Myron Jobson from Interactive Investor advised that the PLSA’s figures should be regarded as a reference rather than strict guidelines, as individual retirement situations can differ markedly.

The introduction of auto-enrolment in pensions in 2012 has significantly increased participation, requiring employers to enroll employees aged 22 and above who earn at least £10,000 into pension plans.

Government statistics reveal that the share of workers contributing to workplace pensions increased from 48% in 2011 to 80% in 2023. However, experts warn that the minimum contribution rates are insufficient for most individuals to secure anything beyond a basic standard of living in retirement.

Under the auto-enrolment scheme, the minimum total contribution is 8% of eligible earnings, split between the employee contributing 5% and the employer contributing 3%.

Mike Ambery from Standard Life stated, “While auto-enrolment has successfully engaged millions in pension saving, the minimum contribution level may create a false sense of security, failing to provide a comfortable living standard in retirement for most people.”

This system, however, does not accommodate the self-employed or many low-income or part-time workers whose earnings fall below the £10,000 threshold.

Starting to save early is critical in determining how much needs to be saved each year for a desired retirement lifestyle. The earlier you begin contributions, the more time your investments have to grow.

For instance, a individual in their twenties aiming for a comfortable retirement should plan to save about £4,100 annually in their pension, based on analysis from AJ Bell.

Conversely, someone who starts saving in their forties would need to contribute approximately £13,160 each year. These calculations assume an average annual investment growth of 4%, adjusted for charges, alongside a 2% annual increase in income.

It’s never too late to enhance your situation, and boosting contributions can significantly enhance retirement outcomes.

An individual in their mid-thirties investing the minimum 8% in their pension would have to increase this to 13% to transition from a minimum to a moderate retirement. To achieve a comfortable lifestyle, they would need to contribute around 23%.

This is based on a starting salary of £25,000 at 22, anticipated to grow by 3.5% yearly, alongside a 5% annual investment return and 0.75% yearly charges.

Individuals in their mid-forties could potentially secure a moderate retirement by increasing contributions to 15%, while 30% would be necessary for a comfortable lifestyle. For those in their mid-fifties, contributions would need to rise to 20% for a moderate retirement and an extraordinary 48% for a comfortable one.

Are you concerned about your retirement income? Share your thoughts in the comments below.