THE BIG QUESTIONS

How much money do I need to retire?

There isn't one number that tells everyone they have enough to retire. The amount you need depends on the life you want to fund, how long it may last, what income you already have and how much uncertainty you are comfortable with.

By Scott Gallacher · Chartered Financial Planner · Author of 50 Today 100 Tomorrow

That's why starting with a target pension pot can be misleading.

What kind of life am I trying to fund?

Someone wanting several overseas holidays each year, a second home and substantial gifts to their children needs a very different amount from someone perfectly happy with a quieter life close to home.

You then need to consider pensions and other income, savings and investments, debts, expected spending, inflation, tax and how long your money may need to last.

But there is another complication.

People often discover that retirement isn't constrained by their money at all. They have accumulated enough financially but haven't yet given themselves permission to stop accumulating.

That is why retirement planning should ultimately be about choices rather than simply wealth.

Start with what you actually spend

One reason retirement can appear more expensive than it really is is that we often confuse everything leaving our bank account with spending.

Imagine you currently take home £5,000 a month. It is tempting to assume that you need £5,000 a month in retirement to maintain the same standard of living.

But perhaps £1,000 goes towards the mortgage, £500 into savings and another £500 into pensions and investments.

Those aren't necessarily costs that need replacing in retirement.

The mortgage may have been repaid. Pension contributions stop when you begin drawing on the pension. And once you've accumulated enough, you probably don't need to continue saving for retirement during retirement.

So don't begin by asking how much income you earn.

Ask how much of it you actually spend on your life.

Even then, be careful.

It is equally easy to underestimate retirement spending by remembering the council tax, electricity, food and annual holiday but forgetting the car that needs replacing every few years, a new boiler, decorating, home repairs or other large irregular expenses.

A realistic retirement budget needs to capture both.

Your pension pot isn't the whole answer

Two people could both want £40,000 a year in retirement and require completely different pension pots.

One might have a substantial defined benefit pension and a full State Pension covering much of their desired expenditure.

Another might need to generate almost all of that income from pensions, ISAs, investments and savings.

That is why asking “Do I need £500,000, £1 million or £2 million to retire?” without looking at everything else tells us surprisingly little.

Before deciding whether you have enough, establish what resources you actually have.

That sounds obvious, but in my experience people frequently know the value of each individual piece — their pension, ISA, savings account, investments and perhaps other property — without ever looking at the complete picture.

This is where cashflow planning can become particularly useful.

A cashflow plan doesn't predict the future. Nobody knows precisely what investments will return, what inflation will be, how tax rules will change or exactly how long they will live.

Instead, it asks a more useful question:

Based on what we know today, does this look broadly sustainable?

It can then test what happens if you retire earlier, spend more, investment returns disappoint or you live considerably longer than expected.

Your spending probably won't stay the same

Another assumption I regularly challenge is that retirement spending will simply rise with inflation every year for the rest of your life.

Real life rarely works that neatly.

A healthy 65-year-old might spend heavily on travel, hobbies, restaurants, cars and experiences.

At 85, life may look very different.

This is why in 50 Today 100 Tomorrow I divide later life into four broad stages: the Super-Accumulation Years, Enjoy-It Years, Slowing-Down Years and Legacy Years.

The precise ages don't matter. The principle does.

Different stages of later life bring different priorities, opportunities and financial demands.

Your retirement plan should reflect the life you are actually likely to live rather than assuming that every year from 60 to 100 will look identical.

How long does your money need to last?

This is where the question becomes more difficult.

Retire at 60 and your money may conceivably need to support you for another 40 years or more.

Planning for longevity matters because running out of money in later life is a genuine risk. Inflation matters. Investment returns matter. Unexpected expenditure matters. Care may matter.

But there is a danger in allowing longevity planning to become solely about protecting your 95-year-old self.

Your 65-year-old self matters too.

You may have more money at 75 than at 65, but that doesn't necessarily mean you'll have more choices. Health, energy and opportunity are resources as well, and unlike money, they cannot always be saved for later.

So a good retirement plan has to balance two risks:

spending too much, too soon — and spending too little, too late.

A better question

Instead of asking:

“What size pension pot do I need?”

try asking:

“What life am I trying to fund, and do the resources I have give me a reasonable chance of funding it?”

That small change moves the conversation away from an arbitrary number and towards what the money is actually for.

What if the answer is “more than I have”?

There is an important danger in talking about “enough”: it can sound as though everyone approaching retirement has already accumulated plenty of money.

They haven't.

Some people genuinely need to save more, work longer, spend less in retirement or reconsider the retirement they had imagined.

The earlier you discover that, the better.

One of the themes in 50 Today 100 Tomorrow is that time creates choices. Starting earlier gives you more opportunity to save gradually, adjust your plans or change your retirement date. Leaving it until the last moment reduces those choices.

Knowing that you don't yet have enough may be uncomfortable.

Not knowing is worse.

What if the answer is “more than enough”?

This is the other side of retirement planning, and one we talk about far less.

Sometimes a cashflow forecast shows someone's investments continuing to grow throughout retirement.

I call this the Sea of Blue because of the way investments appear on the cashflow charts I use.

Instead of gradually running down their wealth, some people are projected to become wealthier and wealthier.

For them, the question changes.

It is no longer:

“Can I afford to retire?”

It might become:

“What am I waiting for?”

That could mean retiring earlier. Travelling more. Helping children or grandchildren. Working fewer days. Giving more away. Or simply enjoying the confidence that comes from knowing they have choices.

It doesn't mean spending money for the sake of it.

It means recognising when the habits that helped you accumulate wealth are preventing you from using it.

The book describes exactly this problem: without a clear definition of enough, there is always another year, another bonus, another contribution and another opportunity to accumulate a little more.

So, how much money do I need to retire?

Enough to fund the life you want with a reasonable margin for the unexpected.

For some people that will require a substantial pension and investment portfolio. For others, secure pension income means the capital required may be surprisingly modest. Some will discover they need to work or save for longer. Others will discover they passed “enough” some time ago.

There is no universal number because there is no universal retirement.

The objective isn't to die with the largest possible pension pot.

Nor is it to spend recklessly and hope everything works out.

It is to find the balance between living well today, remaining financially secure tomorrow and using the wealth you've accumulated for the purpose you intended.

And once you know you have enough, an even harder question appears:

What are you going to do with it?