How Much is Enough in Retirement?

January 22, 2025

As a financial planner, I quite often get asked how much do I need in retirement?

The truth is, there is not a one-size-fits-all answer to this question. It depends on how you intend to spend your retirement, what your spending habits have been like historically and what your overall financial position is. However, I do find that understanding the different retirement stages that you may go through can give you a starting point to answer this question.  

The Stages of Retirement

I always say, ‘start with the end in mind and work backwards.’ This often means doing a budget plan. A budget plan is a good place to start because it will give you an indication of the income that you need when you come to retire. It is likely to be split between those essential items such as bills, food, clothing, and those unessential items such as entertainment, hobbies and memberships. The fun things.  

 As I run through the different stages of retirement, try and have a think about how you’re spending on these two different categories may change. This will help to give you an idea of how much you need in retirement.  

Stage 1 - Early Retirement

Quite often retirement is no longer I’m stopping work at 67 years old and that’s me retired. Although it does still work like that for some people, more often than not retirement is a gradual affair both mentally and physically.

Many of my clients will review their current working position and decide to start to reduce their working hours ahead of fully retiring. Often the need for more time, paying off your mortgage or inheriting some money will naturally start this thinking process.  

For those where reduced hours are not possible in their current role, they may consider switching jobs altogether opting for something part time which not only comes with less hours but perhaps with less responsibility and stress. Although if you do cut your hours down, ensure that you are strict at not working on your days off. I have clients who are in the position where they are working their normal hours in three days but have taken a 40% pay cut. Therefore it is best to ensure this is positioned correctly with your employer and clear boundaries are set.  

 On the other hand, sometimes the process of reviewing your employment leads to new opportunities which can generate more income than you are currently earning, such as consulting work, setting up your own business or leveraging existing contacts and networks. In this instance the best financial decision could be to work full time for a little longer to build a larger nest egg.  

Maintaining Income on Reduced Hours

At this point additional income may be made-up of taking a small defined benefit pension, dividends from investments or supplementing income with savings. Looking for tax efficient ways to boost an income is fundamental in making phased retirement work. Especially for those higher earners that have historically paid higher marginal rates of tax. If we can access savings in a tax efficient manner, it means we can draw less income overall to supplement leaving more invested to continue to grow for future planning.  

Things to think about here are your expenses reduced because you are now travelling less for work or are your expenses increased because you have a couple of days a week to do other things? 

As many people now go into early retirement it also has the impact of extending the number of years you are retired for. Therefore, it is not unusual for retirement to last 30 years. This also means that your assets need to do the same. The key in this stage is maintaining flexibility but getting your financial affairs in order ready to move into the next stage.  

Stage 2 - Active Retirement

Active retirement is generally classified as when you are no longer receiving employed income. It does not have to be when your state pension starts. However, it is likely that you will now be drawing your private pension benefits and that your income is almost entirely dependent on your own savings until you become entitled to the state pension. Quite often, because state pension age has increased, the planning process at this stage considers how to top up private pension income until the state pension kicks in. The idea here is to ensure you maintain the lowest possible marginal rates of tax which is not necessarily done by taking all of your tax-free cash out and spending it in one go. 

During this stage you are also likely to make some capital decisions, such as selling a business or downsizing your main property to produce a capital lump sum that can be invested to provide income for retirement. This is also the time in retirement where you will be most active, hence the name of this stage! Health wise you’re in the best position you will be in retirement, and this is when you do your travelling. This is the part of retirement that you need put the most effort into planning.   

Though essential expenditure is likely to remain in place, your expenses from work have now disappeared and excess income can be spent doing the things in retirement that you want to do. You may decide to volunteer. You might be working through a bucket list. You may be taking up new hobbies or joining new groups, all of which will have expenses attached to them. This is what you need to think about when trying to decipher if you have enough to retire, and only you can provide the answers which will help us figure out what active retirement looks like for you.

Stage 3 - Late Retirement

When you reach the Late Retirement stage you’ve likely worked through your bucket list and are more comfortable with a cup of tea and a piece of cake, opting to spend time with grandchildren or family rather than climbing Kilimanjaro. Though this stage can vary greatly from person to person, it is as this point that, though most of your essential expenditure will remain, the non-essential expenditure will start to reduce because you become less active.

This means that you can suddenly find yourself with more surplus income than you have had before, especially within defined benefit situations where income increases with inflation each year. In this case it needs to be asked, what do you do with that surplus?  

Though it’s likely you would have been considering the estate you leave behind and making some inheritance tax planning decisions throughout the previous two retirement stages, you might be thinking now about how this surplus income can benefit your loved ones. However, you must still look after yourself. This includes daily expenditure as well as also keeping in mind any additional costs that may be incurred for long time care.  

We have an article specifically about Looking After Yourself Financially: The Later Years should you wish to read up on that topic.  

Retirement is Bespoke

So, circling back to the original question of how much is enough in retirement, you can see it will be different for everybody. The best place to start is to do your budget plan and give significant thought to what active retirement looks like for you. What will you want to do during this time and what are the likely costs attached to them? 

Once we have this information we can build your financial plan. A plan that will identify if you have enough at the moment to achieve the things you want to do in retirement or, if you don’t, we can figure out what needs to be done and saved in order to do that. My aim as an advisor is to ensure that you get to Late Retirement without the ability to say I wish I’d done XYZ and I’ve got lots of money left over to do it, but I am now too old. Afterall, as my dad has always said “There is no point being the richest person in the graveyard.”

 

Article by Clare Ridlington
Head of Advisory, Chartered Financial Planner

Since retirement is bespoke, so should be the advice you receive.

The above article is a general indication of what to think about when retirement comes. It is not a financial plan or recommendation. If you would like bespoke advice tailored to your specific circumstances, needs and wants the team at Bigmore Financial Planning is here. 

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