How Do I Know If I’m Saving Enough For Retirement?

If you’ve ever wondered “am I saving enough for retirement?”, you’re not alone. It’s one of the most common questions we hear.

Part of the problem is the world we’re living in. Inflation quietly erodes purchasing power, while we’re also living far longer than previous generations too. Add in difficulties from pension shortfalls and constantly changing rules from the Government, coupled with volatile markets, it’s clear why saving enough for retirement can often feel like hitting a moving target.

So where should you start?

What enough really means

One useful way to approach retirement income planning is simply to stop thinking of a single magic savings number you have to reach. Instead, it can be far easier to think about income.

Many planners use income replacement ratios to help their clients reach their financial goals. Typically, people aim to maintain 60-80% of their pre-retirement income to maintain a similar standard of living. The reason it’s not 100% is that some common costs usually disappear in retirement. For instance, pension contributions, commuting and maybe a mortgage. Of course, others do go up too – such as travel or healthcare.

In fact, retirement income planning shouldn’t simply be seen as trying to meet and continue your end-of-career salary. Instead, it can be helpful to look at income as a means of maintaining your pre-retirement lifestyle. Bearing that in mind, ask yourself:

• What do you actually want to do with your days in retirement?
• Do you want to go on more holidays or simply enjoy a quieter pace of life?
• Will you be helping family or downsizing at all?

Answering these questions makes saving for retirement easier because it’s directly tied to the life you want, not just the salary you earn today.

Common benchmarks: savings milestones by age

Of course, for some, having a saving benchmark can sometimes act as a useful sense-check. We detail often used milestones below but remember, they’re not rules. Everyone’s circumstances differ as lifestyle choices can significantly affect how much you’re able to save. As a result, these figures should be seen as guiding ranges, not pass-or-fail targets.

For instance, below, we look at how much needs to be saved to generate a retirement income of £50,000 a year from the age of 65. However, while that may be appropriate for some households, it may not be for others.

If £50,000 a year is what you are aiming for, saving just over £1,000,000 could provide that, if that pot is invested to generate the income. This income would typically come from a combination of pensions (workplace and private) and/or other long-term investments, not cash savings alone. This uses a sustainable 4% withdrawal guideline to provide income over a retirement of about 25-30 years.

How much should you have saved by 30?

When you hit 30, some planners recommend aiming for around 1x your annual salary in savings. This figure usually refers to money invested for the long term, primarily within pensions, but it can include ISAs and other savings products too. However, it’s important to stress that this amount is not a requirement. Many people will understandably fall short at this age due to other outgoings such as student loans, saving for a first home or starting a family.

It’s important not to get disheartened if you don’t achieve this by the time you are 30. At this stage, time is your friend and biggest ally. Even modest contributions can add up, thanks to the power of compounding over decades.

Amount needed to generate £50,000 a year

If you started saving for your pension at 25, and you are now 30, to hit your £1million by age 65, having almost £35,000 saved between your pension and savings will keep you on track. You’ll also need to be contributing between £500-£600 a month at this point, but need to then increase it by 2% a year. Finally, to reach the £1million pot, your money will also need to see a 5% average return (net of fees) until you retire.

How much should you have saved by 40?

By 40, you’re likely earning more, so you may want to be putting more into your pension. However, you are likely also paying a mortgage, coupled with other competing priorities, too. So what should you have saved? Benchmarks often suggest you should have 2 times your salary in pensions and savings products. Again, this is a broad suggested number and assumes consistent pension saving throughout your 30s. However, it’s crucial not to panic if you’re not where you want to be; you still have time to make a difference to your pension pot.

At this stage of your life, it’s important to reassess your pension planning, too. For instance, if you are attempting to reach a £50,000 a year amount in retirement, is that still suitable for you? If no and you want more, are your contributions increasing as your income rises? Are your investments working efficiently?

Amount needed to generate £50,000 a year

You’ll still need to aim for £1million if you want to generate £50,000 a year in income when you hit 65. To be on track for that, you’ll need just under £150,000 in savings and now be contributing between £600 and £700 a month. Those contributions also need to rise by 2% a year and achieve the same 5% average return (net of fees) until you retire.

How much should you have saved by 50?

At 50, a guideline of 4 times your salary in your pension pot and savings is a good target. While you still have some time on your side, urgency is higher, particularly if you have not put aside as much as you would have liked in the past. To change that requires proactive planning and foresight at this stage.

Generating £50k a year, for instance, means you need to look at what pensions you have: are they delivering what you need them to, and do you need to make any adjustments? Just a few tweaks at this age can still make a huge difference. But you need to know whether your pension is on track first to give you the income to afford the lifestyle you want.

Amount needed to generate £50,000 a year

As before, you’ll need £1million if you want to generate £50,000 a year in income when you hit 65. At this stage, having close to £360,000 put aside (across pensions and savings accounts) and contributing around £800 a month, will help you reach that £1million. You’ll still need to increase contributions by 2% a year and achieve the same 5% average return (net of fees) until you retire.

How much will you need to retire?

Ultimately, there is no one-size-fits-all answer to this question. That’s because ‘enough’ depends on you and your situation. The factors that affect your circumstances are:

• Retirement age: If you want to retire earlier, your pension pot needs to last longer.
• Desired lifestyle: For you, £1 million may not be enough; for another, it may afford the retirement they want.
• Pension options: Income can come from different sources, such as a workplace pension, a SIPP, ISAs or other investments. They all add up, but also come with different benefits and drawbacks which impact how and when you make withdrawals.
• Inflation and longevity: You need to factor in how inflation will eat into your income’s purchasing power. Rising costs matter more than most people realise.
• State pensions: Don’t forget to include your state pension when determining your retirement income. That said, the pension age and amount can change so it’s important to update these assumptions each time the state pension rules change.
• Investing for retirement: Your approach to risk, the asset mix you invest in and the costs of investing can all influence how much your investments grow.

How much should you save into your pension?

Again, rules of thumb only go so far. However, a common starting point for how much you should save into your pension each month is half your age as a percentage of income when you first begin pension saving – adjusted over time. As this is only a rule of thumb, it’s vital to keep asking, does what you’re saving today align with the income you want in retirement?

Plus, it’s crucial to understand limits that apply to pension saving. You have an annual allowance on how much can be contributed into pensions each tax year that will be eligible for tax relief. These limits can change according to rules set by the Government.

The aforementioned tax relief is a major reason that pensions are such a powerful way to plan for retirement. In practice, tax relief is when some of the money, which otherwise would have gone to the Government as income tax, is instead added to your pension. For example, if you are a basic-rate taxpayer contributing £80 into a pension, you will usually see this topped up to £100. If you are a higher and additional rate taxpayer, you may be able to claim even more through your tax return.

The difference tax relief can therefore make to retirement saving is vast. But, it’s reliant on individuals making contributions in the first place. Being intentional and deliberate about saving into a pension is what can make the biggest overall difference.

How to stress-test your progress

Guessing whether you have enough is never the best way to a dream retirement. Instead, stress-test your approach to retirement income planning by asking:

• What if markets underperform?
• What if I live longer than expected?
• What if inflation stays higher?

Questions like this mean you are planning for different futures or outcomes – not just the optimistic ones. Once you know you are going to have the retirement you want, even if things don’t go to plan, you’ll truly know where you stand.

When to seek professional help

If thinking about your finances for your future makes you jittery, or if you have several pensions spread across providers, or you simply want clarity, professional advice can help join the dots.

Professional advice will also help you stay abreast of any upcoming changes to pension rules. For instance, pensions are expected to come within the scope of inheritance tax (IHT) in the future, while limits on pension contributions and overall pension benefits remain under review and may well change in future Budgets. Staying informed of these on your own and understanding the corresponding impact is tough.

Overall, then, professional advice won’t just calculate figures for you. It will mean you can make fully informed decisions making the most of tax allowances, structuring investments and building a plan that works with you – if and when your life changes.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.