How much do you need to save for a comfortable retirement?

Setting yourself up for retirement is one of life's biggest goals, and one of the hardest to plan for.

It's impossible to put an exact number on how much you’ll need in retirement. Every person will have different standards for what a ‘comfortable’ retirement means, and you can’t anticipate every life event or how inflation might change prices by the time you get there, adding extra costs. However, having a number in mind can be a helpful goal to aim for, even if we can’t be sure of the exact amount.

Pensions UK has provided estimates of what they find Brits often need, split by different lifestyles. By their standards, a comfortable lifestyle includes two weeks of holiday in the Mediterranean each year and three long weekend breaks, as well as money for dinners out, takeaways, and gifts for birthdays and Christmas.

According to the retirement living standards (produced by Pensions UK), a single retiree is expected to need an income of £45,400 each year for a comfortable lifestyle. Remember, these projections are based on this year. So, if your retirement date is still some way off, you’ll likely face higher costs due to inflation.

Some people may be able to live a comfortable lifestyle with more than this, and some people might need less. Pensions UK also lays out what they call moderate and minimum lifestyles. Moderate lifestyles include a two-week holiday in the Mediterranean and a long weekend in the UK, as well as a meal out and £11 for takeaways. A minimum lifestyle would cover a week-long UK holiday and a meal out each month.

A single retiree living a moderate lifestyle would have a spend of around £32,700 each year, with a minimum lifestyle are anticipated to spend about £13,900 per year.

Some of this retirement income may be provided through the state pension, which pays up to £12,548 per year per person. If you are living a minimum lifestyle as a couple, Pensions UK believes the full state pension will currently cover your retirement needs. For any other situation, such as wanting a more comfortable lifestyle or if you are single retiree, you will need your personal pension pot to cover some of the expenses.

For those wanting a comfortable lifestyle, Pensions UK estimates a single person would need a pension pot of between £560,000 and £845,000 to purchase an adequate annuity, while a couple would need £300,000 to £490,000 in their pension pots each. A moderate lifestyle would require £335,000 to £505,000 for a single person, and £170,000 to £255,000 for each member of a couple.

Are you saving enough?

Being told you need to build a pension pot worth £500,000 plus to enjoy a comfortable standard of living in retirement might feel intimidating. The key is to focus on saving as much as you can afford from as early as possible, taking advantage of incentives like employer contributions, tax relief and tax-free investment growth.

To get an idea of if you are on track with your contributions, you can use AJ Bell’s pension calculator. This allows you to input your salary, contribution levels, when you plan to retire, and other factors to create an estimate of what your pot will look like by retirement age. It also factors in an inflation rate of 2% and, for any regular contributions, an increase in line with earnings inflation of 3% a year.

How to use the calculator

Let’s say an investor, Anne, is 30 now and plans to retire at 65. So far, she’s saved £15,000 into her pension pot. She makes £80,000 a year and contributes 8% to her pension while her employer contributes 3%. Using the pension calculator, Anne can see that her pension will grow to over £796,000 by the time she’d like to retire, assuming a 5% annual investment return.

Once Anne has this information, she can assess more clearly if she believes this amount will be enough. If not, she can adjust the figures on the calculator until she gets to the amount she's aiming for. If the new contribution levels are doable, then she can adjust the contributions and risk levels of her actual pension accordingly.

If you are in the early stages of your career, remember that you will likely need a much higher amount than the numbers currently listed by Pensions UK. But this method can help create an estimate of what you are on track for. AJ Bell’s pension calculator does factor in 2% inflation growth each year, so the number you see with the pension calculator can give you an estimate of what you’d have in today’s money.

Is automatic enrolment enough?

Automatic enrolment has been successful in boosting pensions participation in the UK, but the harsh reality is that anyone on minimum contributions – currently set at 8% of earnings between £6,240 and £50,270 (5% from the employee and 3% from the employer) – is at risk of falling well short of their retirement expectations. The big danger here is that, without scaling up their minimum contributions, millions of people will sleepwalk into a retirement shock and be forced to choose between working longer or living on less money in their later years.

Another risk to your retirement goals can be the investments you choose. Pick something too aggressive in your later years, and it may not recover from a market downturn by the time you reach retirement. Pick something too cautious, and you might not have a high enough growth rate for the retirement you dream of. Those with a workplace pension can look at the options their provider has and determine if they’d like to choose other investments than the default funds.

You may also consider a product like a Ready-made pension. This option lets you choose the pension investment plan that best suits your lifestyle, and experts take care of the rest, monitoring the markets and ensuring the investment stays diversified.

How to estimate based on your own lifestyle

The Pensions UK standards won’t be a good fit for everyone. For example, they assume that you own your home outright and live somewhere that you might need a car.

If you don’t feel that the Pensions UK data is a good fit for your lifestyle, you can also create an estimate yourself. Have a look at what you are spending on a month-to-month basis now and consider which of those costs you will no longer have in retirement. For example, you may save on commuting expenses, or you might have paid off your mortgage by then. Add in any new costs you think you might have, like an extra holiday each year, or perhaps additional medical and care expenses.