£20,800 a year is a ‘moderate’ pension income – so how much do you need to generate it? | Personal Finance | Finance
The state pension will not even cover half of this amount. To avoid spending your retirement in poverty, you must supplement it with income from your own workplace and personal pensions, as well as tax-free Isas. So how much do you need to save?
Most people have no idea how much income they need in retirement.
The UK Retirement Living Standards survey aims to help, by showing what lifestyle level different income levels will buy you.
As we reported last month, to take advantage of the strict minimum standard of living in retirement in 2021, a single person needs £ 10,900 per year, while a couple needs £ 16,700.
This is the absolute base, however, and ideally people should aim for more than that.
To enjoy a “moderate” standard of living, a single person needs £ 20,800 per year, compared to £ 36,000 for a couple, according to the survey.
That would give retirees around £ 100 a month for restaurant meals and take out, £ 750 a year for clothes and shoes, a Netflix subscription, a Samsung Galaxy mobile and an annual 10-day Spanish holiday.
To go further and enjoy a ‘comfortable life’, a single retiree will need an income of £ 33,600 per year, while a couple will need £ 49,700.
The research was conducted by Loughborough University for the Pensions and Lifetime Savings Association before the recent spike in the cost of living, so ideally you should plan for more.
The big question that Loughborough doesn’t answer is: How big do you need to make that moderate £ 20,900 a year?
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If you retired after April 5, 2016, the new state basic pension currently earns you £ 9,339 per year, assuming you are entitled to the maximum amount.
Subtracting that from £ 20,900 means that you would only need to generate an additional £ 11,561 per year from your personal and work savings.
This makes it easier to achieve this objective of a moderate standard of living.
A long-standing rule of thumb used by financial advisers can be used to calculate how much pension you need to meet that goal of £ 11,561.
It’s called the “four percent rule” and states that if you let your money invested in retirement and get four percent as income each year, it should never run out.
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Using this rule, a single retiree would need a pot of £ 289,025 to generate an income of £ 20,000 per year.
It’s pretty heavy, even after factoring in corporate pensions.
Couples who both qualify for the new state full basic pension are expected to generate an additional £ 17,322 per year from their own savings.
They would need pensions and other savings worth £ 466,950 to have a moderate standard of living.
You could generate moderate income with a smaller pot, but only if you eat up your equity and withdraw more than four percent per year.
Becky O’Connor, head of pensions and investments at Interactive Investor, said everyone should check the progress of their retirement, as well as any tax-free Isas. “Then invest as much as you can each month to make up any shortfall. “
Saving enough for retirement is never easy, but at least now you have a goal to achieve.
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