It’s hard to think about how much you need in your pension in your 20s and 30s when retirement feels so far away. Then life starts to creep up on you fast. Time seems to move faster and faster. You start to wonder if you’re on the right track with your pension or not.
Realistically the state pension is not going to be enough to live on comfortably in your later years. If you want a comfortable lifestyle you will need some sort of private pension. In this article, we’re going to look at how much you should have in your pension, depending on your age and salary. Let’s jump in.
How Much Do You Need To Retire
Before we can look at how much you need in your pension at each age, we need to know how much you will be spending in each year of retirement. The table below breaks down how much you will need for 3 different levels of lifestyle:
| Minimum | Moderate | Comfortable | |
|---|---|---|---|
| Single | £12,800/Year | £23,300/Year | £37,300/Year |
| WHAT STANDARD OF LIVING COULD YOU HAVE? | Covers all your needs, with some leftover for fun | More financial security and flexibility | More financial freedom and some luxuries |
As a single person, you will need a minimum of £12,800 per year to live a very basic lifestyle.
The state pension currently provides £10,600 per year. So, even to live a very basic lifestyle you will need a private pension to make up the difference.
If you want to live a moderate lifestyle, you will need at least £23,300 per year. If you’re getting £10,600 from the state pension, you’ll need another £12,700 from your private pension each year.
To safely draw £12,700 from your pension each year, you would need approximately £317,500 in your private pensions at retirement using the 4% rule.
That’s really a minimum to live a reasonably comfortable life, if you have a paid-off house and don’t need any luxuries. If you want to enjoy yourself in retirement you’re going to need a lot more. Want to visit those countries you haven’t had a chance to see yet? Want to have a new car every few years? You’re going to need much more in your pension.
For a comfortable lifestyle, you need approximately £37,300 per year. The state pension will provide £10,600 of that, so you need to be taking £26,700 from your private pension each year. To do this you will need a portfolio value of £667,500.
It’s also important to remember that by the time you retire, inflation will effect these numbers. If you’re not retiring for another 20 years, inflation will significantly impact how much you need.
You can use the formula below as a rule of thumb to work out how much you will need in retirement.
(Expected Annual Expenses in Retirement – State Pension) x 25 = Required Portfolio Value
Now you know how to work out how much you will need in retirement, let’s take a look at how you can work out how much you should have at certain ages.
You can also use our Financially Independent Retire Early calculator to see how different amounts of monthly contributions can affect the age you can retire. Investing an extra £100 per month could shave years off your retirement.
How Much Should You Have In Your Pension At 30, 40 & 50
How much you should have in your pension will depend on your current age and how much you want to spend each year in retirement.
The table below gives you a rough estimate of how much you will need in your retirement pot to retire with a specific income. The numbers below do not take into account your state pension.
These numbers show how much you will need in your private pension at each age to draw the desired yearly amounts in retirement.
The chart assumes you start investing in your pension at 25 and get a 7% return on your investment. If you start investing later than 25, you will have to invest more on a monthly basis to catch up.
| Starting To Invest At 25 | £12,500/Year (£120/Month Investment) | £25,000/Year (£240/Month Investment) | £35,000/Year (£335/Month Investment) | £45,000/Year (£430/Month Investment) | £55,000/Year (£525/Month Investment) |
|---|---|---|---|---|---|
| 30 | £8,591 | £17,182 | £23,983 | £30,784 | £37,586 |
| 40 | £38,035 | £76,070 | £106,182 | £136,293 | £166,405 |
| 50 | £97,208 | £194,417 | £271,374 | £348,330 | £425,287 |
| 60 | £216,126 | £432,253 | £603,353 | £774,453 | £945,553 |
| 65 | £312,500 | £625,000 | £875,000 | £1,125,000 | £1,375,000 |
You can use these numbers as a rough guide on where you need to be based on the income you want. You may also have ISAs, other investment accounts or property to account for in your retirement as well.
Hargreaves Lansdown Estimate Retirement Pot By Age
If you want to live on £23,300 per year as per the moderate living standard number, you can use the following numbers to see if you are on track for retirement.
Hargreaves Lansdown, the investment platform stated that you would need roughly £200,000 in your pension pot if you want to spend £23,300 per year in retirement.
This would give you an annual income of approximately £12,700 from your workplace and personal pensions and the remaining from the state pension.
Here are the numbers you need to have invested at each age to see if you’re on the right track.
These numbers assume you are contributing £282.89 each month starting at 22 with investments growing at 5% per year.
| Age | Amount In Pension Pot |
|---|---|
| 32 | £35,322 |
| 42 | £74,626 |
| 52 | £120,216 |
| 62 | £174,866 |
5% per year is a very conservative growth rate however many workplace pensions invest in conservative funds. Many investors will invest in 100% equities in their first few decades of investing as they have plenty of time to recover from a crash. For example, the S&P 500 has produced returns of approximately 10% per year on average over the past 50 years.
When I am projecting my retirement figures I generally use a stock market return of 7% per year.
How Much Do You Need To Invest Monthly To Retire
How much you need to invest to retire will depend on how much you need in retirement. The easiest way to find out how much you need to invest is to work out your target retirement number and work backward from there.
For example, if you want £25,000 per year in retirement, you will need approximately £625,000 invested. You can then use a compound interest calculator to work out how much you need to invest.
You can use the compound interest calculator below to help you. Add in your current investments/pension pot (Principal Amount) and your number of years to retirement (Investment Period). You can then start adjusting the monthly contribution figure to find the sweet spot where you reach your retirement goal.
For example:
- You are 36 years old with 29 years to retirement
- You have £63,000 in investments and retirement pots
- You expect a 7% return on investment
- You want to retire with £625,000 in your retirement account providing you with £25,000 of income
In this scenario, you would only need to invest approximately £150 per month to reach your goal of £625,000.
Use the calculator below to work out your own specific numbers.
Average Pension Amounts By Age In The UK
Here are the average pension pot numbers based on age in the UK. These numbers use the median average and are based on data collected between April 2018 to March 2020.
If you lined up everyone 25-34 who has a private pension in the UK from smallest to largest, the person in the middle has a pot size of £9,500. This is the median average. If your pension is above average for your age range, you are in the top 50% of people in that age range, who have a pension.
| Age | Average Pension Pot |
|---|---|
| 16-24 | £2,700 |
| 25-34 | £9,500 |
| 35-44 | £30,600 |
| 45-54 | £81,200 |
| 55-64 | £189,700 |
| 65-74 | £190,000 |
| 75+ | £90,300 |
Looking at these numbers I was pretty shocked. I have been investing for my retirement since I turned 18 and always operated on the basis of a 4% safe withdrawal rate.
If I wanted to withdraw £40,000 per year at retirement, I would need £1 Million invested to do it.
Looking at the average pension pot of £189,700, drawing 4% per year only gives you £7,588 per year. That’s not a lot to live on, especially in these high inflationary times.
While these numbers are low, we have to realise that they don’t take into account ISAs, standard investment accounts, or property that people may own. However, these numbers also don’t take into consideration people who don’t pay into a pension at all.
In fact, 1 in 6 people aged 55+ admit to having no private pension at all.
Personally, I have very little in my private pension as I’m self-employed but I max out my ISA every year. This gives me some more flexibility with the money if an opportunity arises.
Want to retire early? Check out our guide to FIRE (Financially Independent, Retire Early)
How To Invest More In Your Pension
If you feel like you are behind on your pension investments then these tips might help you contribute more to your retirement.
- Increase Monthly Contributions: If you’re contributing a set amount monthly, consider increasing it, even if it’s just by a small amount. Over time, thanks to the power of compound interest, even small increases can make a significant difference.
- One-off Lump Sum Contributions: If you receive a bonus, inheritance, or any other unexpected sum of money, you can consider putting a portion or all of it into your pension.
- Salary Sacrifice: Some employers offer a ‘salary sacrifice’ scheme where you can give up a part of your salary in exchange for increased pension contributions from your employer. This not only boosts your pension savings but can also offer tax and National Insurance benefits.
- Regularly Review Pension Performance: Keep an eye on how your pension investments are performing. If they’re not doing as well as you hoped, consider switching to a different fund or provider. Always seek financial advice before making any major changes.
- Maximise Employer Contributions: Many employers will match your pension contributions up to a certain percentage of your salary. Make sure you’re contributing enough to take full advantage of this ‘free money’.
- Additional Voluntary Contributions (AVCs): These are extra contributions you can make on top of your regular pension savings. They are a way to boost your pension pot and are often flexible, allowing you to pay more when you can and less when you can’t.
- Consider Opening a Personal or SIPP Pension: If you’re self-employed or want more control over your investments, you might consider opening a Personal Pension or a Self-Invested Personal Pension (SIPP). These allow you to make regular or one-off contributions and offer a wide range of investment choices.
- Claim Tax Relief: In the UK, you receive tax relief on pension contributions. This means for every £80 you put into your pension; the government will top it up to £100 (for basic rate taxpayers). Make sure you’re claiming any tax relief you’re entitled to.
- Catch-up Contributions: If you’re nearing retirement and realize you’ve not saved enough, you can make larger ‘catch-up’ contributions. The annual allowance for pension contributions might limit this, but carry forward rules can allow you to use any unused allowances from the previous three tax years.
- Stay Informed: Pension rules and allowances can change. Stay informed about any changes to ensure you’re maximizing your contributions and not overstepping any limits.
Final Thoughts
This guide has hopefully given you a rough idea of how much you should have in your retirement pot right now to retire comfortably at retirement age. If you are a little behind where you expected to be, hopefully, some of our savings tips can help you invest more each month to catch up to your goal.
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