How Much Do I Need to Retire?

The question has a defensible answer and it is smaller than most headlines suggest, because the headlines usually forget the part that is already paid for.

Start from spending, not income

Retirement planning usually starts from a percentage of salary, but salary is the wrong base. What you need is what you will spend, and spending in retirement is different: no commute, no pension contributions, often no mortgage, but more heating, more leisure and eventually more care.

A workable starting point is your current essential spending plus what you want to do with your time. For many people that lands between 60 and 80 percent of their working-life take-home.

Subtract the guaranteed income

The State Pension provides a guaranteed, inflation-linked income for life, currently a little under 12,000 a year for those with a full contribution record. Any defined benefit pension from an employer does the same.

This income never runs out and does not depend on markets. Everything it covers, you do not need savings for. Subtract it from your spending target before doing anything else. This single step routinely halves the pot people think they need.

The multiple

What remains has to come from a pot you draw down. The well-known 4 percent rule says that withdrawing 4 percent of a balanced portfolio in year one, then rising with inflation, has historically survived 30 years in almost every period. Four percent implies a pot of 25 times the annual draw.

Many planners now prefer 3 to 3.5 percent, which implies 28 to 33 times, for longer retirements or a more cautious view of future returns.

A worked example

Target spending of 25,000 a year. Full State Pension of roughly 11,500. Gap from savings: 13,500.

• At 4 percent: 13,500 × 25 = about 340,000
• At 3.5 percent: about 385,000

Ignore the State Pension and the same person appears to need 625,000. The difference is not arithmetic. It is whether you counted the income you already have.

What moves the target

• Retiring earlier stretches the pot over more years and delays the State Pension. Each extra year before state pension age needs the full spending amount from savings.
• A paid-off home removes the largest cost from the target and is often worth more than years of extra contributions.
• Inflation erodes a fixed pot. The 4 percent rule already assumes withdrawals rise with prices, which is why it needs a balanced portfolio rather than cash.
• Part-time work in early retirement, even a modest amount, cuts the draw substantially in the years when the pot is largest and most vulnerable.

Getting there

Take any employer match in full. Aim for total contributions, yours and the employer’s, of something like 12 to 15 percent of salary from your thirties, more if starting later. Check your State Pension forecast online, since gaps in the record can be filled and are cheap to fill early.

The target is large but it is reached the same way as any other: a rate held for a long time, not a lump found at the end.