How much you should save for a comfortable retirement – and when your cash will run out

The idea of finally retiring from work may fill some with joy – but it can also be a great source of anxiety. It is all well and good to dream of long summers, holiday homes and big family trips, but how much money do you need to fund a new life without a salary? 

An oft-cited rule of thumb is to multiply your working salary by 10. But the goal posts will move depending on when you want to stop working, your health and what kind of retirement you want.

Ian Cook, of the wealth manager Quilter, said: “In days gone by, defined benefit pensions meant that people typically didn’t need to worry about their pension income running out because they got a guaranteed income for life. 

“Now, in the world of defined contribution schemes, you need to carefully balance how much you want to have for your retirement and how long you want it to last for.” 

Below, Telegraph Money explains how you can fund a comfortable retirement, and why options like early retirement and the cost of care might mean you’ll need to set more aside.

How much does a comfortable retirement cost?

The table below shows how much pension income experts think you need each year, depending on your lifestyle. Generally speaking, if you want a “moderate” retirement, with a few holidays in Europe each year and occasional treats for yourself, then the experts think you will probably need an annual income of around £23,300 after tax. This assumes you own your own home. 

If you want a more comfortable lifestyle, the industry pegs this figure at around £37,300. On the other end of the spectrum, a minimum, no-frills retirement would only require £12,800.

These figures may not sound too far out of reach, but building up a pot big enough to consistently pay out these sums each year is not easy –  especially as the overall value of your pension will fluctuate depending on moves in the stock and bond markets.

The first thing to do is to check your state pension forecast, as these government payments will act as a helpful building block for your retirement income.

You will qualify for the full state pension if you have around 35 years of National Insurance contributions. This will vary according to your career history – for example, if you have ever worked abroad, your record may be lower – so it is always best to check beforehand. You can view your official state pension forecast here: https://www.gov.uk/check-state-pension

If there are gaps in your National Insurance record, then you can pay voluntary contributions or claim NI credits to help boost your state pension payments – you now have until April 4 2025 to fill any gaps from 2006-07 onwards.

The state pension age is currently 66, although it is in the process of rising to 67 by 2028, and is legislated to rise again in the mid 2040s to 68. If you want to retire before this age, then you will need a much bigger private or workplace pension to help you do so. 

Can you afford to retire early?

The earliest age at which most people can access their private pension pot is set at 55. This is meant to stay at around 10 years lower than the state pension age, so will likely move in the future, too.

If you want to retire early at 55 and maintain a comfortable lifestyle, you would need a pension worth around £700,000 on top of your state pension, according to calculations by Quilter. That would leave you with around £78,690 by the time you reach the age of 82. If you lived beyond this, your pot would be exhausted by the time you reach 88.  

Waiting for your state pension payments can alleviate some of the pressure. If you kept working until the current state pension age of 66, then your pot would need to be around £450,000. 

It would be worth around £122,176 by the time you reached 84, at the average life expectancy. It is important to keep these figures in mind as anything left in your pension can be passed on free of inheritance tax. 

Do your savings need a bigger boost?

Some people plan for retirement under the assumption that they will need less money as they age, because they will go out less and will have paid off any leftover debts – but this may not be true if you need help with care, Mr Cook added.

The “healthy” life expectancies of men and women are 63 and 64 years respectively, so you could feasibly need two decade’s worth of help. 

Given all these cost pressures, your pension pot may look leaner than you would like. The key is not to panic, as there are still lots of ways that you can help your nest egg grow, especially as the cap on lifetime pension savings is in the process of being dismantled.

Mr Cook said: “During your lifetime you may have increases in your salary, big bonuses or a windfall from an inheritance or elsewhere. Whenever this happens, think about your pension.” 

“With the annual allowance growing to £60,000 a year and the lifetime allowance set to be abolished it leaves people with a big allowance to play with.” 

The annual allowance caps how much you can save into your pension tax free each year. It is set at £60,000, but tapers down for higher earners. 

For people who have already retired and are considering a return to work, a different rule applies when paying into their pension – payments are subject to the “money purchase annual allowance” which is set at the lower level of £10,000. 

This article was first published on May 15 2023 and is kept updated with the latest information.