‘It’s fairly simple maths’ How to work out how much you need for retirement – Express

STATE PENSION age is continuously being pushed back meaning people may not receive this income until they are 67 or even 68. For this reason, it is important for Britons to know how much is needed for a “comfortable retirement”, so they know they will have enough amid the wait for their “state top up”.

Moneybox give advice on how much to save for retirement

Get pensions news and advice plus latest money alerts for FREE now

Invalid email

We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info

In retirement most people will have less coming in than they are used to as they are no longer earning a salary or running a business. Instead, some may be expecting state pensions, workplace pensions, and income from rental properties to help them to get by. However this may not be enough to cover someone’s “desired lifestyle” in retirement, so it’s important people are saving and investing throughout life, and building up assets to support one through life.

Having enough is dependent on how long people live, the amount of income they receive each month and the types of investments people have. All of these factors affect the amount each people need.

On the Meaningful Money YouTube channel, financial planner Pete Matthew explained how Britons may be able to calculate their desired retirement amount taking into account all the different factors.

He said: “We use rules of thumb to help us – like the four percent rule.

“This rule says you should be able to draw four percent of the value of your portfolio each year and it will last the rest of your life.

READ MORE The Apprentice winner now turns over £1.6m a year despite ‘disaster’ right before launch

Retirement

People can use the four percent rule to calculate the amount needed for retirement (Image: GETTY)

“You need to work out what you would need in one year to make up the difference between your income and your outgoings and then multiply that figure by 25.”

To calculate how much someone will need for one year, they need to know what income they can expect to be coming in if they had worked for as long as they planned. For example, if someone is 40, and they plan to retire at 60, their sum would include the amount they would have received for working an extra 20 years.

Mr Matthew gave an example of how to use the four percent rule using the scenario above.

“Let’s say you’ve worked an extra 20 years; chances are you will have the full state pension.

“In 2021, the full state pension is £9,339. Let’s say you also have a rental property that’s bringing in £500 a month after costs, that’s another £6,000 a year.

DON’T MISS

“If you are lucky enough to have a defined benefits pension scheme, you will need to ask your employer what you are likely to get from that scheme if you carry on working and remain in the scheme until 60. Make sure it is in today’s money. Let’s say the total of that is £9,661.

“That adds up to £25,000 a year in income. If you wanted that ‘comfortable lifestyle’ and you needed £36,000 a year for it, the shortfall between those numbers is £11,000. This is what you would times by 25 to work out the gap.

“£275,000 that would be your number.

“It is fairly simple maths.”

Some people may be overwhelmed at their number however there are ways that one can close the gap and get to their “magic number”.

pENSION

There is tax relief offered when investing in pensions (Image: GETTY)

Mr Matthew continued: “I wish there was a shortcut by the only way is to pay yourself first, put money aside every month and invest intelligently.”

People can use retirement calculators to work out how much is needed to save each year from now until they reach financial independence.

Mr Matthew suggested that people should use all the tax breaks possible.

“Pensions are best for this, you get free money from the government,” he said.

Those under 40 can also consider investing the maximum amount into a Lifetime ISA. This comes with a Government bonus as long as people use it for retirement or to buy their first home.

He suggested people “invest aggressively” with a high allocation to shares. With investing capital is at risk but over time “the growth will follow”.

If people use the calculator and can’t afford to save the amount they need each year, he stressed that people should just save what they can, and what is manageable for them.

He said: “Try to put this figure up every year, even if it’s by £5 or £10. Commit to saving the majority of any bonuses. Don’t let lifestyle creep and get in the way and rob you of your future.

“Working towards this ultimate goal is exciting, challenging and sometimes a little bit disheartening but always worthwhile.”