How much retirement income is enough?

This is the second of four Insights in our ‘Rough Guide to Retirement’.

In the first Insight, we looked at why having a rough plan beats having no plan or using ‘Rule of Thumb’ shortcuts which mislead you and may put you off saving anything at all.

Start there if you’ve not read that first Insight.

So, in the rest of this series we want to equip you with a simple and sensible way to start planning your retirement income.

And we’ll get into this now by exploring what the research shows is ‘enough’ income for people in the real world – we’ll show you how to set a sensible income target for yourself.

This is a 5-10-minute read — depending on your speed.

Are your forecasts based on today’s weather?

We explored four traps with Retirement Planning ‘Rules of Thumb’ (ROTs) in a companion Insight to this series.

And it’s worth a quick reminder of the misleading ‘old school’ idea that you’ll need two-thirds of your current income when you retire.

Two-thirds of your income sounds like a sensible target — especially if around a third of your income today goes on a mortgage, you’ll have paid off by the time you retire.

And a two-thirds-of-income target can work for some – like working couples on average or lower incomes who can combine modest private pensions with two State Pensions worth c. £26,000 a year.

But for higher earners, the two-thirds income target can be a trap.

A high-flying 35-year-old on £180,000 a year, using this rule, would be chasing a target of £120,000 a year, and could easily find they need to personally fund £30,000 a year in contributions to hit it, even with a generous employer and optimistic assumptions.

The error is using your current income to forecast what you’ll need to be happy in your later years.

As Psychology Professor Dan Gilbert outlines in his book ‘Stumbling on Happiness’, it’s extremely hard to forecast what will make us happy (or unhappy) in the future.

And this is such a big topic that we’ve written more on it, and on two practical ways to work around it, in another Insight, ‘How many ways are you unique? ‘

For now, our guidance is simple.

Develop your retirement income target based on how people actually live, rather than a straight-line projection from what you earn today.

And thankfully, there is some readily available research which provides those benchmark numbers.

What will ‘enough’ actually look like?

Every year, researchers at Loughborough University publish benchmark data on the income levels required for individuals and couples to sustain three different Retirement Living Standards.

And their data, which shows what you could afford at each level, is now widely used by financial planners. So, it’s a great starting point because it’s based on real household budgets, not guesswork.

The three living standards are:

• The minimum – which shows what income you’d need to cover the basics. It assumes you will not run a car but will have enough for one modest, UK-based holiday each year.
• The moderate lifestyle assumes more financial security and flexibility: a car, a two-week holiday in Europe, and more choice over food and clothing.
• The comfortable lifestyle gives you more financial freedom: long-haul travel, a newer car, and few everyday spending worries.

The (2026/27) estimated annual costs for these living standards are:

• Minimum: £13,900 for one person, £22,500 for a couple.
• Moderate: £32,700 for one person, £45,400 for a couple.
• Comfortable: £45,400 for one person, £62,700 for a couple.

A few points about the numbers:

They’re reviewed each year, and you can find all the details here.

A couple’s income needs are far lower than those of two single people, because many essential expenses are shared.

Some costs are not included, because they vary widely from person to person. These include:

• Housing costs, such as rent or mortgage payments.
• The costs of any social care.
• Costs to provide for dependants.
• Costs of caring for pets.
• Costs of various other personal hobbies and interests.

So be sure to add expense lines to your plan if you expect to have any of these costs in retirement.

And note that this reinforces our suggestion (in the first Insight in this series) to pay off any mortgage you have before or soon after you retire.

More generally, these figures are just a rough guide to the income you might need for various ‘normal’ living standards.

There is no luxury lifestyle cost in this list. So, whether luxury is your aim or you have different priorities, as most of us do, it’s vital to create your own intentional spending plan for the time you’ll be stopping or slowing down from work.

How much retirement income will be enough for you?

To help you work through this, let’s use an example of Chris, who is 45 and wants to work out what income he will need in retirement.

Drawing on the numbers in the Retirement Living Standards, Chris developed an intentional spending plan for his retirement years, covering everything from groceries and bills to travel and hobbies.

And he used numbers to reflect what he’d actually want, not just what he’d need to get by.

That exercise landed Chris on a target of £40,000 a year, after tax, ideally starting at age 62, when Chris expects to be mortgage-free.

Chris’s partner did the same exercise separately and found her ideal net income in retirement was £35,000 a year.

So, together, their household target comes to £75,000 a year.

And that, you’ll notice, is a bit above the ‘Comfortable’ Retirement Living Standard (RLS) for a couple.

Of course, the RLS for couples assume shared living costs. So, Chris and his partner are aware they have a good buffer in their plan, and they’re happy to plan on that basis.

Your number could be very different from Chris’s.

So, set aside some time to explore your own ‘income want’ number, drawing on the RLS data where it’s relevant but based on what you’d like to be able to spend when you stop or slow down from work.

And, if you have a partner, you might want to work out your own numbers independently first, then compare notes.

You may find the two of you have different ideas about what “enough” means, and it’s easier to agree a shared target once you’ve each worked out your own ‘income-wants’ number.

Will you actually want the same income every year?

Almost certainly not.

Research into how retirees actually spend (not how they plan to) shows that, on average, spending tends to be higher in the early, active years, fall gradually through the middle of retirement, and rise again later if care needs appear.

Researchers sometimes call this the “retirement spending smile.”

So, that’s a real pattern in the data, but it’s an average across thousands of people, not a forecast for you.

Some people spend heavily in their early retirement years — on holidays and home improvements, for example. Then ease back on spending and restart some paid work to keep their mind active and regain a sense of purpose.

Others never reduce their spending in retirement.

And that’s the point: the average shape of spending through retirement (or the average living standard) is very unlikely to describe your needs and wants.

Either way, for this ‘Rough Guide’ we’ll keep the planning simple. So, we’ll assume you’ll target an income that remains broadly steady in real (after inflation) terms throughout retirement.

If it turns out that your spending falls after a few years (and follows that ‘smile’ shape), that’ll be a bonus you can decide how to spend later on.

Of course, you could develop a model to account for changing spending patterns, later-life care costs, and potential large inflows of money (for example, from downsizing your home) if you like.

And that’s the kind of detailed cash flow model a good financial planner can set up — so you can explore various scenarios.

For now, we’ll work with a steady retirement income target, so you can sketch out the sources (and any gaps) on one sheet of paper.

Are you ready to sketch your retirement income picture?

You’re nearly ready.

Just remember that, to start drawing your picture, you’ll need to know roughly what you can expect, as slices of income, from your current and any previous pension and investment plans that you’ll earmark towards your retirement income goal.

So, you’ll need statements on the current and projected values of those plans.

If you have a ‘Defined Contribution’ workplace or personal pension, you should receive an annual statement automatically, which shows your projected income in today’s money terms from a defined date.

And if you’d like to see what income could be payable from a different date, you can request a revised statement or ask your financial adviser to estimate that number.

If you’ve accrued any ‘Defined Benefit’ pensions, you may receive an annual statement automatically, or you may need to request one; it depends on the scheme you’re in.

Either way, you’re entitled to request a statement each year, although the scheme may take up to two months to provide it.

So, it’s a good idea to find or request these statements now.

And please be warned: You may find some of the pension statements extremely hard to understand.

The rules of these schemes (described in their booklets and statements) can vary between schemes. And some use pension-technical terms without any plain English explanations.

That’s them being poor at communication. It’s not a failing on your part.

The fact is, it may be hard to see at a glance what those schemes are worth to you at the ‘normal’ age when they start paying pensions.

And you might want to know how that income would be different if you took benefits earlier or later than the scheme’s normal age.

It’s common to assume that taking benefits early is unfairly penalised, and thus never worth doing.

However, that’s not always true; once you consider the extra years of income you’ll enjoy during your lifetime if you take benefits early. And many schemes don’t penalise you at all for taking benefits early due to ill health, for example.

So, it’s vital to read your pension scheme rules in detail OR, if you find this all too confusing, ask a professional adviser to explain them to you.

With your permission, an adviser can request and interpret statements for you, and run sample numbers on early access if that’s relevant, rather than you having to guess at what all the small print means.

A competent adviser can take a lot of work and worry off your shoulders.

Where are you now, and what’s coming up?

If you’re following the steps in this series, you’ll now have a good idea of the (net, after tax) income you’ll want, in today’s money terms, from all sources, when you stop or slow down from work.

You’ll also have gathered in all your pension and other investment plan statements to get a ‘rough’ idea of their current and projected values.

So, you’re now ready to start drawing your ‘layer cake’ picture of your future income sources – on one sheet of paper.

And that’s what we’ll get into in Insight 3.

See you in there when you’re ready for that.