How big does your pension pot need to be to retire when you want?
Hi Damien, I have been saving the same monthly amount into a pension plan for a number of years. Although I am not near retirement age I don't know whether I am saving enough or too little. While I would like to retire at age 55 I don't know if this is realistic. So how much does my pension pot need to be if I want to retire at age 55? Is there a simple way to work out how much I need to be putting into my Self Invested Personal Pension (SIPP) each month. I am realistic and realise that I might not be able to retire at age 55. So how much do I need to retire at age 60 or 65? Apologies for asking so many questions at once
Most people realise that they can't rely on their state pension for their retirement income and so need to fund their own retirement. At present the basic state pension is £115.95 a week which equates to just over £6,000 a year.
You don't mention your age or how much income you need in retirement or how much you are currently paying into your pension. But that doesn't matter as I will first of all tell you how to retire when you want to and then show you a simple pension pot calculator which will tell you how much pension you need to retire at your chosen age of 55 and how much you should be paying in now.
Quick guide on how to retire at age 55 or whenever you want to
Before we focus on how big your pension pot needs I suggest you first download this excellent guide which walks you through 8 simple and practical steps to ensure that you can retire at age 55 or when you want to. It also contains links to an excellent array of tools and guides to save you time. It is an excellent complement to the rest of this article and can be referred to offline.
Calculating how big your pension pot needs to be
So what is a good pension income?
In order to determine how big your pension pot needs to be to retire at age 55 you need to decide the level of pension income you require. A good pension income will be dependent on your own circumstances and finances but, as a guide, a good starting point would be around 2/3 of your working salary. Of course you may also be entitled to the full Basic State Pension although I will ignore that for the purposes of this calculation. In time the Government will likely have to reduce or possibly remove the Basic State Pension altogether so it’s best not to rely on it if you can help it.
So with the average UK wage around £27,000 an equivalent retirement income would be around £18,000 per year before tax. As I’ve said, exactly what is a good pension income for you personally will be determined by your own lifestyle.
How much pension do I need?
As explained above a good target is 2/3 of your current working salary. There is a very easy way to work out how big your pension pot needs to be by this using our excellent pension pot calculator. Then follow the steps below (it should only take a few seconds):
- Load up the calculator
- Enter your date of birth, gender and the age at which you’d like to retire (i.e. age 55)
- Enter how much you currently earn
- Fill in details of your existing pension fund size (if you have one) and any contributions you are making
- Choose the level of tax-free cash you want to take from your pension when you retire
Once you have completed the above click ‘calculate’.
In the results section you will see a calculation of how much pension you need to maintain your current lifestyle into retirement.
How big does my pension pot need to be?
The size that your pension pot needs to be is determined by how much retirement income you desire and at what age you plan to retire. The more income your want the bigger your pension pot needs to be.
You will need a bigger pension pot to retire at age 55 than you do to retire at age 60 or 65 with the same level of income. That’s because the younger you are when you retire the longer your pension income will need to be paid for, which requires a bigger pension fund.
Now go back to your results from the pension calculator you’ve just run and click on the button at the bottom named “Increase Pension Contributions”. What you need to do is keep increasing this figure until the graphic above the results shows that you are on target to hit your desired pension income.
Once you hit your target note down the ‘estimated pension pot at retirement’ figure. This is how much your pension fund needs to be to retire at your chosen retirement age. If this figure seems high don’t forget you don’t have to take tax-free cash from your pension at all and you could simply use your entire pension to buy a retirement income. If you change the tax-free cash amount to zero you will see your required pension fund reduce.
How much pension do I need to retire at age 55?
So you now know what is a good pension income for you and how much pension you need to retire at your chosen age. Now to find out how much you need to retire at age 55 simply change the selected retirement age to 55.
How much pension do I need to retire at age 60?
To find out how much you need to retire at age 60 simply change the selected retirement age to 60.
How much pension do I need to retire at age 65?
To find out how big your pension pot needs to be so you can retire at age 65 simply change the selected retirement age to 65.
How much should you pay into your pension each month?
To calculate how much you need to pay into your pension each month simply pick the most realistic scenario and retirement age from those that you’ve run and then ensure that the figures you’ve entered for your existing pension fund and contributions are correct. Then simply increase your contributions until you hit your required pension income level.