How Much Should You Be Saving For Retirement

We all know that we have to save more. There’s never a shortage of people telling you retirement is expensive or that you’ll have to pay for more of it yourself. But what you really need to know is how much you need to save, and by when. If you know these things you can begin to get your finances fit for retirement. If you’re younger, that might mean gradually increasing your savings into a pension, while older savers may wish to divert larger chunks from their earnings to beef up their savings for when work stops. Before you make those decisions, however, you need to have a target level of savings in mind.

UK households who manage to save seven times their annual household income by the age of 68 should be able to retire and maintain a similar standard of living as in their working life. This is based on average household incomes in the UK, with typically two working adults and two state pensions.

Knowing how big your pot needs to be before you can retire is important but, in order to hit that target, it is vital to know how much of your earnings you need to save at much younger ages. Savers should be putting away at least 13pc of their pre-retirement annual income before tax, each year, from the age of 25. Recent increases in the minimum auto-enrolment contribution rate mean that, for many of those who are in formal employment, at least 8pc might be taken care of by saving into a workplace pension and making the most of employer-matched contributions. This leaves you with a 5pc shortfall to make up yourself via a savings vehicle of choice such as an ISA or personal pension.

One of the biggest challenges people face when it comes to planning their retirement is determining how long their pension pot needs to last for. Based upon an assumed retirement age of 68 and a retirement timeline of 25 years, a withdrawal rate range of between 4.1pc and 4.4pc in the first year of retirement is potentially sustainable – with a maximum withdrawal rate of 5pc.

Of course, this will vary based upon matters you can’t control – such as how long you live, the rate of inflation, market returns – but also matters over which you do have some degree of control, such as your chosen retirement age.