How to plan for a comfortable retirement

Alice Guy examines how much you need for a comfortable retirement, what that retirement could look like and what to do if you haven't saved enough.

How do you make a plan when the goal posts are constantly moving? It’s not easy, but that’s the reality facing many investors, trying to save for a comfortable retirement.

Stock market volatility and economic uncertainty are making retirement planning a difficult challenge. Just when you’ve nearly saved enough, the stock market decides to take a nosedive, leaving you needing more cash.

Here, we look at how much you need for a comfortable retirement and what that retirement might look like.

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What is a comfortable retirement?

There’s no one-size-fits all here and a comfortable retirement will be different for everyone. We all have different spending priorities, hobbies and lifestyles. If your hobby is birdwatching or painting, you might need less money for a comfortable retirement than if you enjoy fine dining, sailing and foreign travel.

To solve this conundrum the Pensions and Lifetime Savings Association (PLSA) sat down with several pensioners to work out what they would consider essential for a comfortable retirement. All the figures assume that the pensioners concerned have no housing costs and have paid off their mortgages.

The PLSA worked out that for comfortable retirement an average couple would need £50,000, including the state pension. They could afford to spend an average of £100 per week on eating out and leisure activities; have money for decorating and paying for occasional gardening and cleaning, have two foreign holidays each year and run two cars: one five-year-old mid-range car and a cheaper run-around.

A couple with a modest retirement income would need £31,000, including the state pension. They could afford one summer foreign holiday, plus a short UK break each year; spend £50 per week on eating out and leisure activities; replace their car every 10 years and have some decorating costs but no spare cash to spend on a gardener or cleaner.

In contrast, a couple with a basic retirement income would need around £17,000, including the state pension. They could afford a UK holiday, plus a short UK break each year, spend £30 per month on eating out and takeaways and couldn’t afford to run a car.

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What size pension pot do you need?

The full state pension is currently £9,628, meaning that couples can achieve a basic, no-frills retirement just on the state pension, with no private pension, assuming they have paid off their mortgage.

Couples who want to achieve a modest retirement will need a private pension pot worth £135,000 each and a combined pot of £270,000. And couples who aspire to a comfortable retirement will need a combined pot of £590,000 or £295,000 each.

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What to do if you don’t have enough saved

For many of us, mid-life is a time to reassess our finances and take action on our pension. We all know we should prioritise pension-saving when we’re young but, let’s face it, finances are often extremely tight in our 20s and 30s. It’s a time when we often save hard to get on the housing ladder and, if we have kids, we’re likely to see a dip in household income and increased costs for many years. It’s easy to let saving for retirement take a back seat.

So, what should you do if you’ve reached mid-life and realise you don’t have enough saved to hit your retirement target? The answer depends partly on your age and other circumstances.

If you’re 40, and you have an existing pot of £100,000, you could up your pension contributions to £500 per month until you’re 65 and have £646,000 in your pension pot by the time you retire. That’s based on investment growth of 5% per year.

If you’re 50 or 60, then it’s a bit harder. A 50-year-old with an existing pot of £100,000 could expect to retire at 65 with a £345,000 pot if they contribute £500 per month and achieve 5% growth.

Meanwhile, a 60-year-old with a £100,000 pot will only achieve £162,000 if they contribute £500 per month for the last five years up till 65 years old. They might also need to consider working for longer, or reassessing their income needs and retirement living costs.

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Annuity versus income drawdown

You may be able to squeeze out a slightly higher income if you opt for income drawdown rather than taking an annuity.

If instead you bought an escalating annuity £590,000 give you an income of around £21,600. That’s based on buying an annuity that grows 3%, with a no guarantee but a 50% joint survivor benefit. This figure is slightly lower than the PLSA calculations because it's based on different assumptions and the latest annuity figures from sharingpensions. Whether you opt for a level or escalating annuity, a guarantee or joint survivor benefits makes a big difference to the amount you'll receive.

Of course, the exact annuity figure also depends on your health, age and other circumstances. You could also opt for an annuity with a five-year guarantee if you prefer, but this will leave you with a slightly smaller income.

In contrast, opting for income drawdown could give you a slightly higher income of around £23,600. That’s based on drawing down income of 4% per year from your pension pot. You’d be exposed to risk from the stock market, and you could end up with a smaller pot or even running out of money if the stock market performs badly or you withdraw too much. On the other hand, you’ll have more flexibility and could end up with great investment growth if the stock market performs well. You’ll also have money to pass on if you don’t use up all your pension pot.

If you opt for the income drawdown option, it makes sense to keep your finances, stock market performance and investment growth under review throughout retirement. Withdrawing too much from your pension pot could leave you having to survive on a much smaller pension in the future.

If you are approaching retirement, then it’s a good idea to take advice from an independent financial adviser who will be able to review all your circumstances and work out the best course of action for you.