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Placing a cost on retirement

Retired couple on bench overlooking park

How much income do you need for a comfortable retirement?

New research has put a post-pandemic price on the answer.

One traditional way to answer the question of how much income you will need in retirement is to fix the amount as a percentage of pay. For example, when final salary pension schemes were more common, their target was often around two-thirds of earnings. While this approach produces an easy to calculate number, it is arbitrary. For low earners, it may produce too low a number, while at the opposite end of the scale the result may be too high.

An alternative is to focus on retirement living standards, an option that has been supported in the UK by the Pension & Lifetime Savings Association (PLSA) and is mirrored by approaches used in other countries. PSLA sets three levels of post-pandemic retirement:

 

Minimum

Moderate

Comfortable

What standards of living could you have?

Covers all your needs, with some left over for fun.

More financial security and flexibility.

More financial freedom and some luxuries.

House

DIY maintenance and decorating one room a year.

Some help with maintenance and decorating each year.

Replace bathroom and kitchen every 10|15 years.

Food & Drink

A £41 weekly food shop.

A £47 weekly food shop.

A £59 weekly food shop.

Transport

No car.

3-year-old car replaced every 10 years.

2-year-old car replaced every 5 years.

Holidays & Leisure

One week in the UK and a long weekend in the UK every year.

2 weeks in Europe and a long weekend in the UK every year.

3 weeks in Europe every year.

Clothing & Personal

£410 for clothing and footwear each year.

£730 for clothing and footwear each year.

£1,200 for clothing and footwear each year.

Helping Others

£10 for each birthday present.

£30 for each birthday present.

£50 for each birthday present.

 

Where would you want to be on those scales? Most of us would likely veer towards ‘Comfortable’.

Now for the annual cost in terms of after-tax income:

 

Minimum

Moderate

Comfortable

Single

£10,900

£20,800

£33,600

Couple

£21,100

£30,600

£49,700

 

If the numbers surprise you, then it is probably time to start checking that your retirement funding will meet the standard of living you want.

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