Working out how much income you'll need in retirement sounds straightforward. Just look at what you earn now and decide how much you'll need to replace?
But retirement doesn't really work like that.
Your salary may stop, but so do some of the costs associated with working. Your mortgage might be repaid, pension contributions stop and commuting costs disappear.
At the same time, you may have much more time to actually enjoy spending your money.
Start with what you spend, not what you earn
Rather than asking “How much of my salary do I need to replace?”, look at what your lifestyle actually costs.
Think about your normal household spending and then consider what might change when you retire.
You might want to spend more on:
Holidays and travel
Eating out and socialising
Hobbies and leisure
Cars
Home improvements
Helping children or grandchildren
The retirement income you need should reflect the life you actually want to live.
Will I spend the same amount throughout retirement?
Probably not.
Retirement spending rarely follows a perfectly straight line.
Many people want to spend more during the earlier years of retirement when they're fit, healthy and have more freedom to travel and enjoy themselves.
Spending may then reduce later in life, although other costs can increase.
That's why simply choosing one annual income figure and increasing it with inflation every year doesn't necessarily reflect real life.
Where will my retirement income come from?
Your income doesn't have to come from one place.
You might use a combination of:
Pension withdrawals
State Pension
ISAs and investments
Cash savings
Rental or other income
How and when you use each of these can also affect the amount of tax you pay and how long your assets last.
What about one-off spending?
Retirement planning isn't only about monthly income.
You may want £30,000 for a new car, £20,000 for a special holiday or perhaps a larger amount to help your children buy a home.
These expenses need to form part of the plan too.
How do I work out my retirement income?
Start by thinking about the retirement you actually want rather than trying to fit your life around a generic income target.
Lifetime cashflow planning can then model your everyday spending alongside holidays, larger purchases, gifts and other plans.
It can show you whether your pensions, savings and investments are likely to support that lifestyle throughout retirement.
Ultimately, the question isn't simply:
“How much income do I need?”
It's:
“How much can I afford to spend and still feel confident about my future?”
Those are two very different questions.
More retirement questions
Can I afford to retire?
When can I afford to retire?
How much pension do I need to retire comfortably?
Can I retire early?
How long will my money last in retirement?
How do I make sure I don't run out of money in retirement?
I have pensions, ISAs and savings. How do I know if I have enough to retire?