You are using an outdated browser. Please upgrade your browser to improve your experience.

How Much Money Do I Need to Retire?

Last updated 24th March 2022

7 min read

an elderly lady with young boy in the garden

When planning for the future, the first question many people ask is 'how much money do I need to retire?' As part of your decision about how much to save for retirement, it's important to think about things such as:

  • How your costs will change when you retire;
  • The kind of lifestyle you want to have;
  • How long you'll need your personal pension to last.

The amount you'll need to retire differs based on your personal circumstances. Over the course of this guide, we'll look at a range of factors that you might want to consider, as well as how much retirees typically spend each year. We'll also explain how much you can save in your personal pension pot(s) without having to pay tax on your contributions.

Your costs will change once you've retired

Many people think that the amount they'll spend as a retiree will be roughly the same as their current annual income. Although everyone is different, many of us actually spend less than our previous salary once we retire - this is because our costs change.

Some types of costs could potentially increase in retirement and as you get older:

  • The cost of healthcare;
  • Utility bills (if you spend more at home);
  • Certain types of insurance premiums;
  • Funeral plan payments.

At the same time, remember that a lot of your costs may decrease with age and retirement, including:

  • Housing-related costs such as mortgage payments;
  • The cost of commuting;
  • Pension contributions;
  • Recreation, although this depends on your desired lifestyle (see below).

In most cases, the overall balance of these changing costs tends to result in a decrease in the amount we spend each year.

To learn more about how your costs might change once you retire, take a look at our 2021 survey on the costs of retirement.

How much do retirees typically spend?

Another 2021 survey from Which? asked 6,800 retirees in the UK about their spending habits. On average, the retirees who responded spent around £2,170 a month per two-person household (just over £26,000 a year).

£26,000 a year afforded the respondents a 'comfortable' retired lifestyle, including the following costs:

  • The basic costs of living, which amounted to £18,000 per year on average.
  • Other costs such as hobbies, recreational activities, and luxuries like European holidays (accounting for the remaining £8,000 a year on average).

The respondents who chose to live a more luxurious retired lifestyle spent around £41,000 a year per two-person household. This figure included more expensive outgoings like long-haul trips and a new car every five years.

Single and two-person retired households

As you might imagine, the amount of money you need to retire will be influenced by whether you live alone or with someone else. Helpfully, the Which? data is also broken down into the average costs for single and two-person retired households.

The average spending of retired single people was:

  • £13,000 a year for basic living costs;
  • £19,000 a year for a comfortable retired lifestyle (with hobbies, recreational activities, and some luxuries like European holidays);
  • £31,000 a year for a luxury retired lifestyle (including expenses like long-haul trips and a new car every five years).

For two-person retired households, the average spending was:

  • £18,000 a year for basic living costs;
  • £26,000 a year for a comfortable retired lifestyle;
  • £41,000 a year for a luxury retired lifestyle.

Overall then, your yearly spending during retirement tends to be lower per person if you live with someone else rather than on your own.

Planning your retirement savings based on lifestyle

As this data shows, the lifestyle you plan to have as a retiree is also a key factor when deciding how much you need to retire. Those of us who retire with a large pension pot have the luxury of being able to afford more expensive outgoings such as cruises and second homes.

When planning your retirement savings, consider whether your financial position would allow for these types of luxuries - and, for that matter, whether you can see yourself wanting to spend money on these kinds of things in the first place.

If you can imagine your retired lifestyle including more big-ticket items, then factor these into your estimation of how much you'll spend each year.

How long will your personal pension need to last?

Once you have a rough idea of how much you'll need each year, the next step is to consider how long your personal pension will need to last. Whilst this is a sensitive topic, it's one of the key things to think about when deciding how much money you need to retire.

Generally speaking, people try to save enough money in their personal pension(s) to last them for 20-25 years or so after they retire. We can expect to live for another 16 years on average once we turn 65 (according to the latest ONS data), but most people want to leave enough money to keep them going if they live longer than this.

You can continue to draw your State Pension for as many years as you need it. The current full rate is £9,628 per year (2022/23), but not everyone receives quite as much as this - check your State Pension forecast to find out how much you could get. Even if you receive the full amount, you may want to top this up with a private pension.

Adding up your pension pots and other income

When working out your retirement savings, it’s best to start with your State Pension. First, you might want to get an idea of how much money you could receive each year using the State Pension forecast tool.

Next, you can determine how much additional income you’ll need to top you up to the amount you expect to spend per year. This money could come from a combination of your personal pension(s) and other sources of income.

Income from your pension pot(s)

Different types of personal pensions provide you with money in different ways:

  • Defined benefit and final salary pensions pay you a regular monthly income. The amount you receive will be based on how much you earned. You can check the amount with your pension provider – and you can always top this up with a separate pension if you need.
  • Defined contribution pensions allow you to decide how you draw your retirement income. You can either opt for an income drawdown (taking money in instalments), a pension annuity (a type of insurance that provides regular payments for the rest of your life), or a combination of both.

Speak to your pension provider to find out the best way for you to withdraw the income you’ll need. They’ll also be able to tell you how much your pension contributions should be to save up the total amount required before you retire.

Other sources of income

As well as your State Pension and private pension pot(s), there may be other sources of income that you could draw on during your retirement. These could include:

  • Savings and investments;
  • Property rental;
  • The sale of assets;
  • Part-time work.

There are plenty of potential sources of income as a retiree. Take a look at our guide to making money in retirement to learn more.

Equity release is also an option you could consider, although it's important to do your research first. Many people also choose to speak to a financial adviser before releasing equity from a property.

How much can I save in my pension(s) without paying tax?

As we discussed above, your pension provider should be able to tell you how much your pension contributions will need to be to save up the total amount required.

That said, there are also some tax considerations to think about – namely, your annual pension contribution limit and your private pension lifetime allowance.

Your annual pension contribution limit

In the UK, you can only save a certain amount in your pension pot(s) each year before you have to pay tax on your contributions. This is known as your annual allowance. For the 2022/23 tax year, your allowance is £40,000.

All of your pension pots count towards your annual allowance. The total amount paid into any defined contribution pensions is counted (including contributions from you and your employer). If your defined benefit pension increases, the additional amount will also be counted towards your annual allowance.

If your contributions go above your pension contribution limit, either you or your pension provider will have to pay tax. Visit the annual allowance page to learn more.

Your private pension lifetime allowance

You can only pay into your private pension(s) up to a certain point before you have to pay tax. The tax-free lifetime allowance for personal pension pots is currently £1,073,100 (2022/23).

Any money that you save as part of defined contribution pensions will count towards your total lifetime allowance. If you have a defined benefit pension, the amount will be 20 times the pension you receive in your first year plus your lump sum. You can check with your pension provider to find out how much of your lifetime allowance you’ve used up.

If the total value of your pension(s) exceeds £1,073,100, then you will have to pay tax. In this case, your pension provider will give you a statement saying how much tax you owe and deduct this when you start receiving your pension.

The tax rate depends on how you receive your pension:

  • If you receive a lump sum, you’ll be taxed at 55% on the amount above your lifetime allowance;
  • If you receive your pension money in any other way (e.g. as instalments), you’ll be taxed at 25% on the amount above your lifetime allowance.

Visit the lifetime allowance page to learn more.

Next steps

Hopefully this guide has helped you work out an estimate of how much money you need to retire. Once you’ve calculated this, read our guide to retirement planning to help you work out your next steps.

SunLife offers a range of services that may be of use as you plan your retirement and beyond: