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Just “How much do I need to retire?” The answer to that question tells you whether your pension is on track, and when you can finally call it a day.

Everybody’s circumstances are different, so we’ll guide you through a straightforward process to find your number.

The two retirement riddles we need to solve are:

How much retirement income do you need to fund the lifestyle you want? (We’ll cover that in this post).

What size pension pot will deliver that income? (That’s in the next post).

Your response to the first question unlocks the answer to the second.

How much do you need to retire?

The amount you need to retire is the annual income that can comfortably pay your bills and life’s extras – once you’re no longer earning.

Thankfully that figure needn’t match your current pay.

Many expenses fall away in retirement. You’ll probably pay less in taxes too, and you won’t need to fund your pension anymore.

How much you need to retire is obviously a personal number. Inevitably it takes a bit of guesswork to visualise the life you’ll lead in the future.

Step one: track your expenses

The best place to start is with your current expenses. They already include many of the expenditures you’ll pay for in retirement. We’ll delete the costs that won’t apply later.

If you already track your expenses then most of the work is done.

If not, tot up your current spending using a budget planner. This tool helps you remember all the expenses you’d prefer to forget – dentist’s bills and the like.

Do this step as accurately as you can. Excavate your credit card and bank statements to fill in the budget planner.

It’s good practice to record your monthly expenses for a year at least.

If you’re happy with a lower resolution snapshot that’s fine. It’s better for your numbers to be mostly right than to skip this stage entirely.

Step two: remove pre-retirement lifestyle expenses

Now for the fun bit: offloading all the expenses that won’t bother your budget in retirement.

Create a retirement duplicate of your expenses’ planner. Then strike out all the costs you won’t have to pay later in life.

For example you can nix:

Commuting costs, such as petrol, train fares, et cetera
Work clothes
Professional fees
Networking lunches and drinks
Other work expenses – Costa Coffee pick-me-ups, baby shower gifts, billionaire shortbread buckets to get the team through another Wednesday.
Mortgage payments (assuming the mortgage will be paid off when you retire. Sadly becoming less common in the UK.)
Insurance bought to replace your employment earnings, such as income protection, critical illness, life cover, and mortgage payment protection.
Child-related expenditures – namely the cost of bringing up the kids before they fly the nest.

Other expenditures won’t disappear but they will change.

You’ll still want clothes and haircuts. But you can save a packet when you don’t need them to be office glam standard.

Perhaps you’ll replace your car less often – or spend less on repairs and servicing – when you’re not piling on the work miles.

Discount these sorts of expenses in blocks such as 25% or even 50%. You only need a rough estimate.

Make conservative reductions to be on the safe side.

Step three: add retirement lifestyle expenses

A fresh stage of life means new spending priorities. You may want to increase your outlay on:


Have fun dreaming about how you’ll live when your time is your own.

If you’re really struggling, the Pensions And Lifetime Savings Association has funded research that visualises a trio of retirement budgets using a bronze, silver, and gold framework.

For example, the ‘moderate’ £30,600 couple’s budget includes two weeks holiday in Europe and a long weekend staycation per year.

Your own parents will be a good reference point for health. After all, they’re more like us than we might care to admit. (A temperamental early model, naturally. You 1.0 before the kinks were ironed out.)

Insurance companies inquire about our family history for a reason. Try asking your parents what they spend on health per year.

Elsewhere, your social and entertainment spend may well include lines for retirement pleasures like spoiling the grandkids and catching up with friends.

We’ll take a deeper dive into the spending insights revealed by retirement research in a later post.

Monevator Minefield Warning #1: Retirement research doesn’t tackle the cost of adult social care. In other words, how much might you need to cover care at home or in a home? This is a huge unknown that every government has failed to tackle for 15 years or more. Your future liability is a lottery but there is useful information out there. We’ll cover this issue in a follow-up post. In the current environment, long-term care is likely to cost you something but there are options that don’t involve the ‘leaving your spouse homeless’ nightmare.

Step four: allow for depreciation

Some big-ticket expenses only show up once in a blue moon. They can too easily be overlooked in the steps above.

Hopefully your retirement will last for decades, so your income needs to account for replacing items like the car, boiler, TV, and white goods.

There’s house maintenance, too.

You can estimate an annual allowance to cover these costs. Applying depreciation to the stuff you own is one way to do it.

Step five: subtract other retirement income like the State Pension ­

Income from other sources takes the pressure off your private pension.

The State Pension is the main alternative income stream for most retirees.

You can deduct the State Pension and any other income you can reliably expect from non-investment sources from the total spending estimate generated by steps one to four.

The remaining sum is the retirement income you need to generate from your private pension and any stocks and shares ISAs.

Subtract your significant other’s State Pension too if you’re calculating a budget for two.

(Add up your retirement income as two individuals first. Then combine your numbers as a grand total at the end. We do this because you’ll adjust for tax as individuals in step seven.)

Your State Pension forecast reveals how much money you can expect to come your way courtesy of UK PLC. The State Pension can be a solid wodge, provided you max out your National Insurance record.

Other retirement income sources may include:

Defined benefit pensions
Property rental income
State benefits
Passive income – trust payments, royalties, and so on

Only include income streams you’re confident of receiving throughout your retirement.

Part-time work or a side hustle can do a lot of heavy lifting, especially early in retirement. But it’s not reliable enough to be a key part of your plan. Such work can dry up, or you may suffer ill-health or just decide you don’t want to do it anymore.

Treat any uncertain income as a bonus or back-up instead. The same goes for inheritance money.

Only deduct the amount of income you’ll receive from other sources after tax. Otherwise, you’ll deduct an unrealistic amount of income from your total so far. See the tax section below.

What if your State Pension will only kick in later than your intended retirement date? Well, you might temporarily draw more from your private pension and other investment pots like ISAs to bridge the shortfall.

However, this approach comes with its own risks and uncertainties. It also means you’ll have less to take from your depleted investment pots after the State Pension finally arrives. I’ll point you in the right direction in my next post.

Step six: build in a safety margin

You’ve probably noticed that answering the question: “How much do I need to retire?” involves a lot of guesswork.

That doesn’t make retirement income planning pointless. It’s better to be roughly right than precisely wrong!

A better answer to the precision problem is to add a safety margin. This shock-absorber protects you against undershooting your retirement target.

There are a few ways to build such a buffer:

Underestimate how much you can subtract from pre-retirement expenses.
Overestimate how much extra you’ll need for retirement expenses.
Round up your total number by another 10% or 15%.

In practice, actual retirees cut their cloth just like they did when they earned.

Their pension is effectively their salary. If a bigger than expected bill comes in, they cut back in other areas for a while.

So your retirement spending needs flexibility.

If your budget includes plenty of optional extras, this automatically gives you room to tighten your belt when necessary by putting them on pause.

Downsizing, reverse mortgages, and annuities are all tools that can provide financial reinforcements later. You needn’t worry about them now.

There’s also time to adjust before retirement. Delaying hanging up your boots for a year or two can make a big difference.

The important thing is to have a number that will guide you towards retirement. This can tell if you’re on track as you get closer to your destination.

Step seven: adjust for tax

Your total number so far is net retirement income. That is to say it’s the annual amount you’ll need to retire after paying tax.

Sadly, there’s no escaping tax in retirement so we need to cover that, too.

Use a good tax calculator to work out your before-tax gross income.

First, tick the No NIC box (National Insurance Contributions).
Check the calculator is set to your particular country in the UK.
Pop your net income total into the Gross Income Every [Year] field.
Increase this figure by your best guess of your annual tax bill.
Keep adjusting this gross amount until the Net Earnings field (circled) is close to the net income amount you want.

Hey Presto! The Gross Income figure is now the amount of total income you need when you retire.

It’s expressed as an annual retirement income at today’s prices.

We’ll deal with inflation shortly.

Customising your tax number

Do this calculation twice if you’re part of a couple.

It is pretty likely for example that your pension pots are unequal and one person will bear more of the tax burden. We’ll explain how much you can expect each pension pot to deliver in the next post.

Your State Pension and private pensions are taxable (except for the 25% tax-free lump sum).

If you deducted your gross State Pension from your net retirement income in step five then we need to adjust the Tax Free Allowances setting in the calculator.

This prevents you from double-counting your income-tax-free Personal Allowance.

(Your State Pension only counts as tax-free in step five because it uses up some of your Personal Allowance.)

Adjust your Tax Free Allowance down in the UK Tax Calculator like this:

Type your gross State Pension income into the Allowances/Deductions Field as a minus figure. For example: -9000.

The tax calculator deducts that amount from its Tax Free Allowances field to show you’ve already counted some of your Personal Allowance.

You can see that I’ve adjusted for a £9000 annual State Pension income in the tax calculator picture above.

What about ISAs in retirement?

ISA income isn’t taxed at all.1

We need to remove income that’ll be generated from ISAs from your tax calculation, as you don’t pay tax on that.

So temporarily deduct your ISA income estimate from your net retirement income figure. Then add the ISA income back into your total after you’ve calculated your Gross income.

This stops you inflating your gross income figure with tax you don’t have to pay.

(How much income can your ISAs produce? That’s also in the next post!)

Do the same for your 25% tax-free lump sum if you think you can tax shelter it quickly enough. That’s possibly doable with a flexible annual ISA allowance of £20,000 per person, depending on how big your pension pot is.

Incidentally, pensions beat ISAs as a retirement savings vehicle for most people. A mix of both works, with pensions doing the heavy lifting.

Monevator Minefield Warning #2: It’s fair to assume that tax rates will have changed by your retirement date. But we cannot see into the future. So our best model for the tax burden tomorrow can only be the tax burden today. Add an extra percentage if you fear things will get worse. For example, you could tick the NICs box, assume your ISAs will be taxed, or suppose that the tax-free lump sum is eliminated. This all simulates increased tax in the future without having to know the unknowable right now.

Accounting for inflation

This process all tells you how much you need to retire on at today’s prices.

That’s fine because you can easily adjust this number for inflation.

Simply check the annual inflation rate once a year or so.

The picture below shows how the official rate looks on the Office For National Statistics website:

Multiply your retirement income figure by the CPIH inflation rate every year.

For example:

Your retirement income number is £25,000 per year.
One year later, the annual CPIH inflation rate is 2.9% (as in the graphic above).
Your retirement income number adjusted for inflation is now:
£25,000 x 1.029 = £25,725

In other words, your pension pot must generate £25,725 income per year to keep pace with current prices.

Next year, multiply your latest retirement figure (e.g. £25,725) by that year’s inflation rate. And so on.

Yes it’s a faff. But this annual calculation ensures your income estimate keeps up with official inflation.

You should multiply your investment contributions and target pot size by inflation every year, too.

It’s the same calculation as above and helps prevent your forecasts being boiled away by the slow pressure cooker of inflation.

You can go even further and calculate your personal inflation rate. But there comes a point when life is too short, even for retirement planning.

The State Pension is up-weighted every year by at least the annual inflation rate. Small mercies!

Can I really know how much I need to retire?

As long as you treat the process as an ongoing estimate then this method answers the nagging question: “how much do I need to retire?”

Admittedly, it all takes a fair bit of work if you’re starting from scratch. But once you’ve done it, you’ve got a target to aim for.

Complete the process and you’ll drastically reduce one of life’s big uncertainties.

Adjust your number as you go, and it will help you keep your retirement on track for years to come.

Which in turn will be an enormous tick off your To Do list.

Oh, and please don’t be put off by the unknowns.

Your best educated guess will be good enough, because retirement planning cannot be precise.

We’ll walk through how to translate the amount you need to retire into, “how much pension pot do I need to retire?” in the very next post.

Take it steady,

The Accumulator

You already paid tax on the money you put into your ISA.

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The best way to calculate the retirement income you’ll need.
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