How much money do you need coming in each year to fund life after work? Unfortunately, that's a question that few people ever ask themselves and even fewer answer.

Which? has recently published the results of its latest study [1] of thousands of its retired readers. It found that there are three levels of retirement lifestyle annual spending: Essential, Comfortable and Luxury.

Essential is £13,000 for singles and £18,000 for couples

Comfortable is £19,000 for singles and £26,000 for couples

Luxury is £31,000 for singles and £41,000 for couples

Which? calculates that a couple would need a fund of:

between £29,000 to £47,000 to provide the essential lifestyle
between £154,700 to £265,400 provide the comfortable lifestyle
between £442,000 to £757,000 to provide the luxury lifestyle

The lower cost assumes taking a regular income from the fund. The higher cost assumes buying a guaranteed annuity from an insurance company.

The Pensions Commission suggests the average retiree should aim for a retirement income of around 67% of their pre-retirement income, so someone earning, say, £40,000 should aim for a retirement income of £27,000. [2]

“The Pensions Commission suggests the average retiree should aim for a retirement income of around 67% of their pre-retirement income, so someone earning, say, £40,000 should aim for a retirement income of £27,000.” Tweet This

Vanguard, the investment group, recently published some retirement calculations that suggest aiming for a post-work income of between 72-80% of pre-retirement income was reasonable at a 10% savings rate. [3]

Source: Four Steps to a Successful Retirement: How will I get there?, Vanguard

Vanguard then shows one possible route for how a 25-year-old currently earning £25,000 per annum could achieve a post-work retirement income of 75% of their inflation-adjusted income at age 68.

What’s Your Target?

How do those numbers look to you given your current lifestyle cost and what it might be when you are mortgage-free, and any children have left home? And how does the required fund value look compared to what you've already saved?

Whatever your desired post-work lifestyle spend, you need to decide whether or not to include your state pension entitlement. Then, I suggest multiplying the remaining required income by 30 to get an idea of how much money you need to have accumulated.

For example, if you are a couple and want to fund a lifestyle costing £31,000 from age 67 and include both state pension entitlements, your shortfall would be £12,300 (£31,000 - £18,700). The capital you need to accumulate would be around £369,000 (30 x £12,300).

Mañana To Retirement Savings When You’re Young?

If you are under 45, you've probably got a lot of demands on your income. Housing and childcare are expensive and likely to leave little left for saving and investing.

A recent Institute of Fiscal Studies analysis suggests that most people shouldn't worry too much about saving for retirement in the first half of their working life. [4]

The researchers contend that in the second half of their working life, most people will be able to save enough to meet their retirement needs. The only exception is employees who need to make a pension contribution to qualify for a pension contribution from their employer.

"...rather than saving nothing until the last half of working life, the individual now chooses to save in all years of working life. However, they choose to save the minimum required to get the employer contribution until their late 40s, and then they increase their saving rate substantially."

The study modeled different levels of education and earnings and included the cost of children and student loan repayments. They found that the median mid earner could make 76% of their retirement savings contributions between the age of 45 - 66, making up 62% of their retirement wealth, as shown in the following table.

Mañana is Spanish for waiting for tomorrow or an unspecified future date. If you are under 45 and you are happy to retire in your late 60s, as long as you contribute the minimum necessary to qualify for any employer pension contributions, you can catch up on your retirement savings later on.

But if you aspire to retire early, then you’ll need to make some sacrifices now and do some extreme saving and investing. Check out my video on FIRE (Financial Independence, Retire Young).

Be Aware But Don’t Worry

Your numbers will be unique to you, but knowing them means that you can make more conscious decisions about how you earn, spend, and invest your money now.

When you are young, it's more important to develop good money habits rather than obsess about saving too much for the long term. The reality is you will probably be able to save a lot more when you are older.

Just focus on avoiding consumer debt, growing your income faster than your living costs, and balancing meeting your immediate needs with saving for the future.

Sources:

[1] How Much Will You Need to Retire?, Which?

[2] As Good as it Gets: The adequacy of retirement income for current and future generations of pensioners, Resolution Foundation

[3] Four Steps to a Successful Retirement: How will I get there?, Vanguard

[4] When Should Individuals Save for Retirement?, The Institute for Fiscal Studies