How much do you need to save for retirement at 25, 30, 40 and 50?

Ahead of Pension Awareness Week next week, interactive investor calculations, based on the 2022 PLSA Retirement Living Standards, show how much you might need to save towards retirement, depending on the age you start saving into your pension.

The annual PLSA Retirement Living Standards are widely used in the industry as a measure of how much personal pension wealth you need for different levels of retirement, with single people needing an estimated £36,500 for a minimum retirement, £248,000 for a moderate retirement and £530,000 for a comfortable retirement, and couples needing less as some costs are shared.

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But what do these amounts mean for pension savers? How much do people of different ages need to save to achieve a minimum, moderate and comfortable retirement?

Key data:

• A new pension saver aged 25 needs to save around £155 each month to achieve a moderate retirement.
• A new pension saver aged 40 needs to save around £314 each month to achieve a moderate retirement.
• A new pension saver aged 50 needs to make monthly contributions of £625 to achieve a moderate retirement, more than four times as much as a 25-year-old.
• Self-employed workers need to save more – a new pension saver who is 25 and self-employed would need to save £248 into their pension each month before tax to achieve a moderate retirement, or £1,000 each month if they don’t start a pension until they reach 50-years old.
• Single people need more in retirement than couples, who are able to share some of their costs.

Assumptions and sources: 2% inflation, 5% investment growth net of fees, retire at 67 on full state pension. 5% employee and 3% employer contributions, 2% annual contribution/wage increase. Income needed for minimum/moderate and comfortable retirement based on 2022 PLSA Retirement Living Standards.

Assumptions: 2% inflation, 5% investment growth net of fees, retire at 67 on full state pension. 2% annual contribution/wage increase. Income needed for minimum/moderate and comfortable retirement based on 2022 PLSA Retirement Living Standards.

How we worked out the calculations

Calculations are based on the private pension pot needed in retirement according to the PLSA Retirement Living Standards. We adjusted the pension pots needed for inflation, assuming 2% inflation each year until retirement at age 67.

We then worked out how much pension savers of different ages, with no previous pension wealth, would need to save to achieve those amounts. We assumed the employee increases their pension contributions by 2% each year. We’ve also assumed employer contributions of 3%, employee contributions of 5%, investment growth of 5% net of fees and retirement age of 67 years old.

Alice Guy, Head of Pensions and Savings, interactive investor says: “It’s great that Pension Awareness Week is encouraging more of us to check our pensions and start planning ahead for retirement.

“It’s encouraging that, if you start young, you don’t need to save thousands each month to achieve a moderate retirement. In fact, someone who starts saving in their 20s can potentially save enough for a moderate retirement with £155 pension contributions each month, which would only cost £124 after tax (assuming they increase their contributions by 2% each year and enjoy 5% annual investment returns). Their contributions will be boosted to £248 each month after employer contributions. The younger you are, the longer you have to save and the longer you have for investment compounding to work its magic. 

“In contrast, someone who starts a pension later, at 40 years old, will need to save around £314 each month for a moderate retirement. They will need to pay in twice as much as a 25-year-old to achieve the same level of retirement.

“Sadly, self-employed workers may find it much harder to save enough for retirement as they have to make all the savings themselves and don’t get any kind of boost from employer contributions. They need to save around 60% more than someone who is employed to achieve the same level of retirement.

“For employees, the good news is that pension auto-enrolment means the vast majority of workers are now saving into a workplace pension. But pension savers need to watch out because saving the minimum amount into your workplace pension might not be enough for a moderate retirement.

“For example, a 25-year-old earning £30,000 who pays 5% of their salary into their workplace pension and receives 3% contributions from their employer would only be saving £125 each month into their pension themselves, which will fall short of a moderate retirement income.

“The biggest thing you can do to make a difference to your retirement is to get started with pension saving, whatever your age. Small, regular contributions really mount up and just £50 each month could add up to £76,000 over 40 years and will only cost £40 after tax, assuming 5% investment growth.

“If your pension pot is lagging then here are some practical tips:

• If you can afford it, consider boosting your pension contributions by paying in more than the minimum amount.
• If you’re thinking of moving jobs, look at your prospective employer’s pension contributions as well as the salary. Some employers pay in more than the minimum 3% required and a small percentage boost could make a big difference in retirement.
• Check your pension and any ISAs at least annually and discuss your plans for retirement with your partner. Your partner’s pension could have an indirect impact on your plans as couples need slightly less in retirement than single people.
• If you’re a homeowner, then consider boosting your pension payments once you’ve cleared your mortgage.
• If you can’t afford your current pension contributions, then consider reducing the percentage instead of stopping them all together and be careful not to lose valuable employer contributions as some employers will stop their contributions if you stop yours.
• Don’t forget tax relief on pensions. The tax rules mean it only costs £80 to contribute £100 to your pension and £60 to contribute £100 if you’re a higher-rate taxpayer. You’ll also get 25% tax free when you come to draw your pension.
• Check your old pension pots and consider if you could save money and hassle by consolidating old pensions. You need to check first in case you lose any valuable benefits by transferring your pension.