How much do I need to retire? | Step by Step Calculations

How much do I need to retire?

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    Are you dreaming of a comfortable retirement but unsure of how big your pension pot needs to be before you can press pause? Perhaps you are desperate to achieve financial freedom and retire early, but the thought of running out of money in later years is stopping you.

    To calculate how much you need to retire, first determine your ideal annual retirement income and deduct any other forms of income, such as your state pension. Then, using a sustainable withdrawal rate as a percentage of your pension fund, you can calculate roughly how much you need to save to meet the shortfall.

    At Heritage Financial Planning, our financial advisors are specialists in pension and retirement planning. In this article, we will explore how you need to save into your pension before you can retire and present a framework you can use to see if you are on track to achieve your retirement plans, even if it is many years away.  

    Step 1 – Calculate how much income you will need

    Before we can answer the burning question of how much you need to save, you need to make an estimate of the income you need (and want) in retirement.

    It’s likely you will make reductions; most people’s annual income is lower than when they were working due to a more relaxed lifestyle. You may also have to account for your mortgage being paid off by then.

    Also, remember to factor in any increases, for example, the well-earned holidays you’d like to take.

    Use a rule of thumb to calculate how much income you need

    If it’s hard to come up with a figure, or retirement seems so far away it is hard to gauge, then you can use a rule of thumb to estimate how much income you will need to retire.

    One method is to take 50-70% of your current income and use this as your likely retirement spending.

    Retirement Living Standards also provide guidelines on what retirement income is needed for a Basic, Moderate and Comfortable retirement here in the UK, which you can see below. They provide figures for a single person, as well as couples.

    pension retirement income guidelines

    If you are married or live with your partner, when it comes to retirement planning, we always suggest doing this exercise together and combining your retirement savings and incomes to get an enhanced view of your projected income. After all, you probably split the bills now and will likely continue to do so in retirement.

    Step 2 – Deduct your state pension and other savings from the amount you need

    Once you have calculated what retirement income you think will need, the next step is to deduct any other forms of income you may have in retirement. This includes state pension, rental income and a final salary pension if you are lucky enough to have one.

    If you’re unsure, it’s easy to find out your state pension age and entitlement on the website.

    Once you have deducted your other income sources from the amount of retirement income you need, you can calculate the value of the pension pot needed to address the shortfall.

    Step 3 – Calculate what pension pot is needed to retire

    One way we can do this is to use the concept of the 4% rule, which originated from a 1994 US study.

    It found that if you were invested in a balanced portfolio made up of 60% stocks and 40% bonds and withdrew 4% of your pension each year over 30 years or less between 1930 -1970, then historically, at least, you wouldn’t exhaust your retirement savings. This is often described as a sustainable withdrawal rate.

    The 4% rule is best seen in practice. Just to warn you, it can produce quite large numbers, so don’t be put off if you think you have no chance of reaching these figures. As we’ll demonstrate later, they are very much achievable.  

    An example of how to use the 4% rule or any other sustainable withdrawal rate

    Bob and Sarah require a combined retirement income of £40,000 in retirement and should each receive the full state pension of £10,600, which combined comes to £21,200.

    After deducting their state pensions, they have a shortfall of £18,800 per year that will need to be funded from private pension pots and workplace pensions.  

    If we take £18,800 and divide this by 4%, it means that Bob and Jane should be aiming for a pension pot of £470,000.  

    You can flip this on its head and simply take the shortfall amount and multiply this by 25. You will get the same result.       

    This, of course, assumes you take the flexible option from your pension, known as income drawdown. You could opt for an annuity which is a guaranteed income source, where you essentially buy a guaranteed income in exchange for your retirement fund.

    See our blog on the best pension to take for further reading.     

    What if you use a different sustainable withdrawal rate?

    It has been argued that the 4% rule as SWR is too high and that a more sustainable withdrawal rate is closer to 3%. Others would say 4% is too low and that a withdrawal rate closer to 5% is fine.

    The withdrawal rate is important for your retirement planning, as it determines how much money you need to save. The lower the withdrawal rate, the more money you will have to save to achieve your target retirement income.

    Using Bob and Jane’s example from earlier, they need £18,800 per year from their private pensions. We can see how the different withdrawal rates affect how much they need to save for retirement.

    Withdrawal RateFund Value Needed

    Use sustainable withdrawal rates with caution

    Using the 4% rule or any other withdrawal rate doesn’t guarantee that you won’t run out of money.

    It should be used as a rule of thumb to ensure you are saving enough, and if you are retired, if your income drawdown is a reasonable amount of income in relation to your pension fund or savings.

    SWRs don’t factor in things that could decimate your retirement savings, such as potential care fees. It’s also unlikely you will require the same amount of income each year of your retirement. Some years you may want to spend more, particularly during the active years of your retirement when your health allows.

    If you are unsure of exactly when you can retire or how much you should have in your pension pot, it is always a good idea to speak to a professional financial adviser who can carry out cash flow planning’ to see if you are on track to meet your pension goals.

    How you can check if you are saving enough for retirement?

    Hopefully, these numbers haven’t depressed you! We’ll now show you how you can check if you are on track with your own goals and put a retirement plan into place.

    The earlier you start your retirement planning and investing, the better, as compound interest on investments can be very powerful and give your pension time to benefit from investment growth.

    Once you have identified the value of the pension pot you need to aim for to fund your ideal retirement lifestyle, you can play around with a compound interest calculator online. We like to use one called Moneychimp, but there are lots of others online.

    To use the calculator:

    1. Add up the total value of your current pension.
    2. Calculate both your pension contributions and your employer contributions. You should be able to get this from your pension company or statements. 
    3. Determine your retirement age.
    4. Use an assumption for annual investment growth. We use 5% growth per year in our own planning.

    Putting this into practice

    Let’s revisit Bob and Sarah’s example. We know they should be aiming for £470k, and we will assume the following:

    1. They are aged 50 and plan on retiring at the age of 66 in 16 years’ time. Their retirement savings are currently valued at £100,000.
    2. They are making £6,000 pension contributions.
    3. We will assume their investments grow by 5% a year up to their retirement age.

    Plugging this into the compound interest calculator, we see that this gives them around £367k, which is short of the £470k they are aiming for.

    compound interest calculator on pension savings

    Using the calculator, we can then reserve engineer this to see how they can achieve their goal of £470k.

    If they are able to save more and increase their pension contributions to just over 10k, all else being equal, they should reach their target amount. 

    compounding interest on pension contributions over time

    As well as changing the contribution amount on the calculator, you can either extend or shorten the time to retirement to play around with the results.

    Not sure when you should start saving for your pension? Read our helpful guide today.


    Trying to calculate the exact fund value you will need in your pensions to retire is almost impossible, and the 4% rule or any other Sustainable Withdrawal Rate should be used with caution. Its results are no guarantee that you won’t run out of money.  

    However, it is a good framework and basis upon which to think about how much you should be saving for retirement and if you are on track with your own retirement planning.

    A word of caution, these calculations make various assumptions on stock market growth and life expectancy, which are impossible to control. After 30 years of stellar investment returns and stock markets at record-level valuations, it is possible that slower investment growth, along with greater life expectancy and changes to the state pension, means you will have to save significantly more.

    Get in touch with Heritage Financial Planning

    For professional guidance on pension planning and investing, please book a call with the experts at Heritage Financial Planning.

    Alex Norman-Jones​

    Alex Norman-Jones​

    I am one of the founders of Heritage and I am highly motivated to deliver bespoke financial planning solutions to my clients.

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