The big retirement question is how much money does someone need to save to pay for a comfortable life in their later years.
No one knows the answer because predicting how long anyone will live is impossible.
Everyone has a different amount of money in mind, but the fear everyone has is running out of cash before they die.
Finding the right numbers
It is possible to make some reasonable assumptions about how much to save – and that means nailing down some figures about your spending and retirement expectations.
- Work out how much you spend and that’s on everything – take your total income from work, savings and investments and deduct any taxes. The rest is your disposable income.
- Set a number on how much you believe the cost of living will rise each year. The rule-of-thumb is 3%
- Set a retirement date – the idea is to have a number of working years in which you have a salary to make savings from
- Calculate what you think you will spend in retirement – Include hobbies and holidays including any debt carried over
- Take a stab at how many years you will spend in retirement
- Add up the retirement income that’s guaranteed – Consider the state pension, any benefits you might receive and any final salary pension
- Benchmark your current savings and investments – put a value on your assets
- Make an assumption about the rate of return on savings and investments over the years until retirement
Your target is the amount needed to fund spending across retirement – which is spending times number of years retired.
How much do you need to save?
Take away the guaranteed income to leave the savings gap.
Then deduct the income you already have from savings and investments.
If there is still a gap, consider upping your monthly savings or look into other options like downsizing your home or equity release.
The results of the exercise can be frightening if you have a massive retirement income shortfall and only a few years left to save.
Don’t forget to adjust the figures for inflation as this can have a major impact on the money someone needs after leaving work for good.
