Three simple rules to determine how much money you’ll need for your retirement, from the power of seven to the importance of the number 13.
There’s never a shortage of people telling us just how expensive retirement is and how we should always be saving more, but sometimes that’s just not possible. For younger people with time on their side, making a small change to the amount you save now could bring significant rewards later on, but for older savers, the only way to boost your retirement income is to divert a larger chunk of your earnings.
In this guide, we introduce three simple rules for determining how much you need for a retirement that will meet your expectations. That will help you better understand how much you should be saving now.
Rule 1: The Power of Seven
Research has found that UK households that manage to save seven times their annual household income by the age of 68 should be able to enjoy their retirement without any reduction in their standard of living. That figure is based on two working adults with two state pensions. Although that might sound difficult to achieve, the key is to start saving early and work towards saving milestones along the way.
According to these benchmark guidelines, you should save:
- 17% of your monthly salary at age 25
- 22% of your monthly salary at age 30
- 30% of your monthly salary at age 35
- 42% of your monthly salary at age 40
Rule 2: 13 is Your Lucky Number
Knowing how big your pension pot needs to be before you retire will help you make important decisions about your retirement age and how much money you should save now to get there. One very simple rule is that the earlier you start saving, the better. Research suggests that savers should aim to put away at least 13% of their pre-retirement income before tax, each year. Ideally, you should aim to hit the saving targets above, but if they’re unrealistic for you, sticking to 13% as a minimum should allow you to enjoy your retirement.
Increases in the minimum auto-enrolment contribution mean that many people in formal employment will benefit from workplace contributions of 8%. That will leave you with just 5% to contribute for your pay packet to achieve the minimum recommended saving level of 13%.
Rule 3: Limit Yourself to a 5% Withdrawal
Of course, numerous factors determine how much you’ll need to save for a comfortable retirement, including market returns, your retirement age and how long you live. However, as a general rule, you should try not to withdraw more than 5% of your pension pot a year. In fact, calculations from Fidelity International suggest that you should aim to withdraw between 4.1% and 4.4% per year. That will be a potentially sustainable rate for a retirement lasting 25 years.
Not sure how much you’re going to need in retirement? Perhaps you’re going to have significantly less than these rules suggest? Please share your thoughts with our readers in the comments below.