How much do you need for retirement?

We recently had a financial advisor come to our office to give us the latest pensions and tax updates, which was really useful. The overarching theme was that we cannot rely on the government to support us when we want to retire. 

This is one of the reasons I got serious about my future and finances. The earlier we can start planning, the easier it will be to get to our goal. Mine is somewhat early financial independence!

Pensions are not what they used to be

While state pension could have previously supported us somewhat, for people my age this is looking less and less likely. The current full state pension is only £221.20 (roughly £964 per month) - I would honestly find it hard to survive on this, let alone have an enjoyable retirement.

And this is even if we reach the retirement age. For us millennials it will be at least when we’re 68 years old, but with the ageing population and the current deep government borrowing it could be much closer to 70.

I would rather not factor in the state pension for retirement and think of it as a nice to have (if it actually happens) or as someone called it ‘beer money’ 🍺.

The responsibility to save and prepare for retirement has shifted onto individuals.

The auto enrolment work place pension scheme has really helped many people to save more (including myself 🙋‍♀️ ), but will it be enough to sustain a lifestyle we all want in the future?

How to calculate what you need for retirement (or financial independence) 📝

When I was doing research on this subject, I came across the rule of 25, which comes from the FIRE (Financial Independence Retire Early) movement.

Take your desired monthly spending, multiply by 12 months and you have your yearly figure. If I wanted to live on £2,000 per month, yearly this would be £24,000.

You then multiply this figure by 25 to get your financial independence number. With the above example this would be £600,000. According to the financial community, this is what you need in order to sustain yourself without depleting your pot (provided it’s well invested).

You should then be able to withdraw no more than 4% in the first year (£24,000) and inflation adjusted percentage in subsequent years. By following this approach, in most cases you shouldn’t run out of money within the 30 year period.

There are some limitations with this approach and it’s a fairly rigid rule (which doesn’t always work in real life), so it’s worth doing more reading here to understand how you can apply it for your circumstances.

To recap:

👉 Calculate your expected annual expenditure

👉 Multiply by 25 to get your financial independence number

👉 Keep your retirement pot invested for money to grow

👉 In retirement you could withdraw up to 4%, but you may need to be flexible

Although this model isn’t perfect, it gives us a good indication on how to calculate what we might need for retirement.

My weekly recommendation

I came across this personal finance podcast from a really bright young couple living in the UK, who cover some really good investment and saving topics.

Since we’re talking about the retirement savings and how much you might need, here’s a solid episode about it from Stocks & Savings!

Until next time ✌️

Lina at Money Blues