Knowing how much money you will need in retirement is one of life’s million dollar questions and will depend on a wide range of factors, not least the lifestyle you aspire to have. In this article we explore some of the ways you can gain greater clarity on your future income requirements.

Retirement used to be reassuringly predictable. On your 60th or 65th birthday you switched overnight from full-time employment, to having time on your hands. At the same time, your pension was transformed into a guaranteed income for life, to fund your retirement. Today, everything is different. Not only are we living longer, healthier and more active lives, most of us can now decide when, how, and even if, we retire.

With the introduction of pension freedoms, there is no longer the onus on us to cash in our pensions at set ages, and instead we can take our pension money flexibly. But, with this freedom also comes responsibility, and for some, uncertainty. Many of us have no clear plan for what we want from our retirement, and even more of us underestimate how much money we will actually need for it when we do.

How long will your money need to last?

Given our increasing lifespans and the fact many of us are leading more active and healthier lives, most experts suggest that we should plan to make our retirement money last at least 30 years.

A key consideration is that we typically underestimate how long we will live. According to the Office for National Statistics, a 55-year-old woman has an average life expectancy of 87 years, while the average for a 55-year-old man is 84¹. But averages don’t tell the whole story. Our 55-year-old man has a one in four chance of reaching 92, while our 55-year-old woman has a one in four chance of reaching 94 and one in ten chance of celebrating their century. In other words, if you’re in good health, you could spend at least up to four decades in retirement, so you need to know how this would impact your retirement pot.

It’s easy to underestimate your retirement needs

Even people with larger retirement pots struggle to estimate how much retirement actually costs. According to the 2023 Wealth Index published by Saltus, high-net-worth individuals (with £250k+ investable assets) said they expected a pension pot of £578k would achieve an individual income of £55k in retirement. In fact, an annual retirement income of £55k requires a pension pot of more than £1.3m², almost double the average estimate. The impact of inflation is also a major factor. To put its potential impact into context if someone today needed £100,000 to meet their current standard of living, in 15 years’ time they would need £180,000 based on the long-term average rise in the cost of living of around 4%.³