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 relying on ‘Rule of Thumb’ shortcuts, which can mislead you and discourage you from saving 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.

We’ll get into this now by exploring what the research shows is ‘enough’ income for people in the real world— and how to set a sensible income target for yourself.

This is a 5- to 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 here’s 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 that 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 reasonable assumptions.

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

It’s like forecasting next summer’s weather based on what we experience in the winter!

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?