Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

WORKING out how much money you’ll need to give you the retirement you want is not a straightforward task. 

That’s particularly true if you intend to use investments to fund your lifestyle. Lots of factors can influence your outcome and many of those are outside of your control - although not all of them. 

In this article we explore the effect that different variables will have on your chances of achieving a ‘comfortable’ retirement, establishing the biggest risks to your plans and the areas where you can do the most to tip the chances of success in your favour.  

How much income? 

Most people understand that they will have less income to live from in retirement than during their working lives, but they still hope for enough money to be comfortable. 

So what’s ‘comfortable’? In reality, the answer to that will be entirely personal to you based on your lifestyle before retirement and your expectations after it. Nonetheless, attempts have been made to put an average figure on what would be needed and that can be a useful starting point. 

In its Retirement Living Standards study, the Pensions and Lifetime Savings Association (PLSA) concluded that an annual pre-tax income of £43,482 would afford individuals a comfortable retirement. That counts as a lot when compared to a level of retirement income most people will achieve, but it’s not extravagant. The PLSA specified that it would translate into a weekly shop at Sainsbury’s, holidaying in Europe for three weeks each year and owning a five-year-old mid-range SUV, like a Nissan Qashqai plus an older, smaller run-around. 

How much in savings to get £43,482 a year? 

There are many potential sources of retirement income - no two individuals will be the same - so laying out a definitive plan to achieve a required level of income is impossible. We can, however, lay out scenarios based on broad assumptions to gauge the size of the challenge. 

What follows is based on analysis by Fidelity Adviser Solutions, aimed at helping advisers devise retirement plans for their clients. It is not intended as a plan for any individual to follow. Rather, it helps explain the factors that can influence the likelihood of individuals hitting their retirement goals. 

The starting point is an individual aged 65 and aiming for our required £43,482 a year, escalating with inflation. 

The amount they need to achieve depends on several factors, including; life expectancy; the level of investment returns they achieve in retirement; inflation; investment fees; whether they can reduce their income; whether they work longer; and whether they wish to leave an inheritance. 

The base case assumes that the individual will receive the current full State Pension of £10,600 a year - reducing the amount they need from investments to £32,882. They are assumed to retire at age 65 but receive their State Pension from age 67. Life expectancy is assumed to be 20 years for a male and 22 years for a female, based on ONS data.  

The chart below lays out the progression of income needed for a 65-year-old female. This is based on income rising with inflation, with inflation at 2%, investment growth of 5% gross with 1% fees and no plan to pass on an inheritance. 

The base case for a woman aged 65 requires £640,000 plus full State Pension

Chart showing the base case for a woman aged 65 who requires £640,000 plus full State Pension

Source: Conquest Planning

Using the modelling tools available to Fidelity’s advisers, the amount needed for a female would be £640,000. For a male the figure falls to £600,000 to account for their shorter life expectancy. 

From this start point it is possible to tweak the factors at play to see how each changes the base level of required savings. 

What if you live longer? 

Male average life expectancy at 65 is 85 but 1-in-4 males will live to 92 and 1-in-10 will live to 96. The probability of reaching 100 is 2.9%. For females, life expectancy at 65 is 87 but 1-in-4 live to 94 and 1-in-10 live to 98. 

If you live to these higher ages, what does that do to the amount you need to have saved? According to the modelling the amount required increases to £750,000 if a male lives to 92, or £835,000 if he lives to 96. The equivalent figures for females are £790,000 and £870,000 respectively. 

What if inflation is higher? 

If your plan is to increase your income with inflation - as it should be - it matters what the rate of inflation is. The Bank of England has a target of keeping inflation at 2% in the long term, but there’s no guarantee of that. If it’s consistently higher then what you’ll need at the outset of retirement rises. 

According to the modelling, if inflation were to settle at 4% over the long term the size of fund required by males would jump to £803,000. For females it would need to increase to £890,000. 

What if investment returns are higher, or lower? 

Our assumed gross compounded return of 5% is the intermediate level set out in some industry standards. The corresponding lower rate is 2% and the higher rate is 8%. What effect does applying these have on our base savings amount? 

For males, the lower rate of 2% would increase the pot needed from £600,000 to £810,000. In contrast, an 8% return would reduce the amount to £460,000. For females a 2% return would raise the amount needed to £880,000, while an 8% return would reduce it to £483,000. 

What if you can reduce your income? 

What you need throughout is likely to change. You may want to spend more in the early years of retirement when health allows you to do more, but then reduce your income as your outgoings fall back at older ages. 

To model this, based on estimates of spending patterns, the analysis assumes that male income is level after inflation for the first 10 years but then reduces by 2.5% for the rest of expected life. This would reduce the pot required to £530,000. For females, income is level after inflation for 13 years but then reduces by 2.75%. This would reduce the pot required to £565,000. 

What if you reduce your fees? 

Our base case assumes fees of 1% to manage, administer and drawdown from your investments. It may be possible to do the job for less, or equally you may value advice or active management that costs more. 

If we increase charges to 2%, the fund required would increase to £660,000 for a male and £715,000 for a female. In contrast a reduction in charges to 0.5% would reduce the amount to £570,000 for males or £605,000 for females. 

What if you can work for longer? 

Delaying your retirement can be helpful to achieving your income goals in various ways. You’ll have longer to contribute to savings, have potentially fewer years of retirement to pay for and secure a higher State Pension by deferring it for a period. Under current rules, deferring the State Pension by a year increases what you eventually get by almost 5.8%. 

Our modelling does not take account of any extra saving (which may not be possible if extra time in work is on reduced pay or shorter hours) but does allow for a shorter period retired and any increases in the State Pension from deferring.   

If retirement is pushed back from age 65 to age 67, the amount required to fund a comfortable retirement would fall to £520,000 for males and £565,000 for females. Pushing it back to age 70 reduces it to £460,000 for males and £505,000 for females. 

What if you want to pass something on? 

Leaving a legacy to family is an aim of many retirees. Based on leaving a £100,000 inheritance the amount required at outset would increase to £640,000 for males and £679,000 for females. 

The best and worst case scenarios 

The chart below shows how each of the different variables effect the base level of income you need to achieve a comfortable level of income. These are the numbers for a female.

The impact of varying assumptions on the cost of a comfortable retirement

Chart showing the impact of varying assumptions on the cost of a comfortable retirement

Source: Data provided by Conquest Planning to provide an income of £38,860 for 65 year old female.

Taking all the variables together it is possible to work out the best and worst outcomes that retirees could face, within the limits of our assumptions. If several of these factors went against you, they would compound each other to make hitting your goals exponentially harder. 

In fact, were a male to encounter the worst outcomes in all cases the amount they would need would climb to £2.8m, while for a female it would climb to £3.1m. In the best case a male would need just £405,000 and a female £420,000. 

So much you can’t control - so control what you can 

This analysis makes clear how much factors beyond your control can affect your retirement prospects, and why planning for a certain cash income in retirement is difficult. Yet several of the factors we have looked at are within your control - particularly if you begin planning in good time before the point you hope to retire. 

Working longer, planning to reduce your income, paying lower fees and choosing to pass on an inheritance are all things you can influence. As, of course, is saving more during your working life to help build the biggest pot you can. 

Financial advice can help. Fidelity’s retirement advisers use cash-flow modelling tools to help you plot a sustainable - but optimised - plan for income in retirement. Meanwhile, the government's Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at or over the telephone on 0800 138 3944.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice. 

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