How much money do you need to retire and what will your pension be worth?

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How much do you need to retire comfortably?

You shouldn't worry about what the average pension is or what the average income in retirement stands at. How much money is needed to retire depends on an individual's personal and financial circumstances.

Step 1 – How much money do I need for retirement?

First of all, you need to work out how much money you need for retirement. Only then can you work out how much you need to save for retirement.

To calculate how much money you need to retire comfortably, you first need to write down all your monthly outgoings such as bills. Include only those things that will continue once you've retired. Will you still be paying a mortgage? Think about how you are planning to pay off your mortgage.

Then simply total all these figures up to get a monthly figure. For my worked example I will say that I need a total of £1,400 a month after tax as I will have paid off my mortgage. This is the minimum monthly pension I need to retire when I want. That equates to £16,800 a year (after tax) or just under £20,000 a year gross. That is about right as it is 2/3 of my assumed current salary of £30,000 which is close to the national average. Two-thirds of your salary is what you should aim for in retirement in order to maintain your current lifestyle.

Step 2 – State Pension Calculation

Now that you know your required net retirement income, you need to work out how much you are likely to receive based upon your current financial circumstances.

So the next step is to calculate your state pension. Most people, assuming they have paid enough national insurance contributions, will receive a weekly state pension of just over £221.20 a week. This equates to £11,502.40 a year. Don't forget that this is liable to income tax.

Obviously not everyone will receive the full state pension, especially if they have had a significant break in paying national insurance contributions during their working life. For the purposes of this exercise, it's simplest to assume that you will receive the full £11,502. However, while it is possible to find out how much you are likely to receive as a state pension there is no simple state pension calculator online as forecasts rely on your personal national insurance record. If you are worried that you have gaps in your national insurance record then you can apply for a state pension forecast to find out what your state pension will be.

So for my example, I will assume my state pension will be £11,502 a year gross.

Step 3  – Quick UK pension calculation

You now need to work out what you will likely receive from your own personal pension arrangements. You can do this by using our simple pension calculator. Pension pot calculators can be quickly used to work out what your pension pot is worth (if you have one already) and how much income you will get. I have used our pension calculator to find out how much my pension will be. To do this I entered the following information into the pension calculator.

I have assumed I am 46 years old earning £30,000 a year with an existing pension fund of £60,000. I pay £125 a month into my pension which is matched by my employer. I am looking to retire at age 60. I also want to take 25% of my pension as a tax-free lump sum and use the rest to provide an income in retirement.

The calculator quickly calculates the following retirement figures (in today's money) if I retired at age 60:

• Estimated pension pot at retirement £119,415
• Desired tax free lump sum £29,854
• Estimated annual income £3,982

Assuming that you've just run the pension calculator for yourself then looking at your personal results, you'll also see an estimation of the size of your pension pot when you retire, in today's money. This figure assumes a 5% growth rate (which is the rate the industry regulator, the FCA, use as their mid-range assumption) and inflation of 2.7%.

You will then see an estimated amount of tax-free cash (that you can set to a maximum of 25% of your pension pot) which you can have tax-free and an estimate of the gross income you can take from the rest of the pension. Obviously, under the pension rules that came into effect from April 2015 you can take as much of your pension as you want as a lump sum, but, remember only 25% will be tax-free with the remainder taxed as income.

You are then presented with a summary (like mine above) of how far ahead or behind you are of the sort of income that you will likely need in retirement, given your current salary.

In my example, I am only 19% of the way to getting the retirement income (from my personal pensions alone) to give me the same lifestyle as earning £30,000 (my assumed current salary).

Step 4 – Work out your net retirement income

Don't forget that income from pensions is taxable. So while the calculated figures are in today's money (i.e. taking into account inflation) they are gross of tax. You can find out what your net monthly pension will be by using an income tax calculator.

I've therefore added together my state pension and final personal pension amount:

£3,982 + £11,502 = £15,484

Using the PAYE calculator above my net annual salary will be £14,901 which equates to £1,242 a month. This is less than the £1,400 minimum requirement I said I needed in Step 1, which was the amount I needed to retire.

Was it not what you were hoping for?

The chances are that your pension pot is not worth as much as you'd hoped and your retirement income will be lower than you need. So now look at:

How much do you need to save into your pension?

One way to boost your retirement income is to pay more into your pension. To work out how much you would need to pay, enter affordable amounts into the ‘personal contribution per month' section of the pension pot calculator. It will automatically recalculate the amount of pension you might receive in retirement. By playing with this section of the tool you can see how much you need to pay into your pension versus what you can afford.

If you are employed, will your employer pay into your pension as well? Some employers will match the amount employees pay into their own pension. If your employer will match at least part of your contributions it will give your pension pot a massive boost.

Once you've tried the above tweaks you need to work out when you can afford to retire.

When can you afford to retire?

If your pension pot is still not big enough to fund the retirement income you want then you may need to consider delaying your retirement. This gives you more time to pay into your pension and hopefully more time for your pension pot to grow. Alter the retirement age in the pension pot calculator to find out when you can retire. How much you need to retire at age 65 is a lot less then how much you need to retire at age 60 or age 55. Also don't just focus on your pension income….

Do you need your pension tax free cash to pay off your mortgage?

Don't forget to allow for any withdrawal of tax-free cash you plan to take. Alter the tax-free lump sum amount you plan to take to see the impact on your potential income. By not taking 25% of your pension funds as tax-free cash you will increase your retirement income by up to a third.

Get a low-cost pension

The costs applied by your pension provider will reduce your pension pot by thousands of pounds over time, which in turn will reduce your retirement income. So the key is to use a low-cost pension. By reducing the projected charges in the advanced settings of the pension pot calculator, you can see what the benefits of a low-cost pension could be for you.

One of the most important things you can do is ensure you are using a low-cost SIPP or pension to save for retirement. The cost of a pension is determined by the size of your pension fund.

For my worked example I decided to reduce the tax-free lump I wanted to take from 25% to 20% (i.e take 5% less as a tax-free lump sum as my repayment mortgage will have cleared my mortgage anyway).

That took my personal pension income from £3,982 to £4,247.

But if I delayed my retirement to age 68 as well then I will receive £7,007 from my personal pension. Add that to the state pension and my gross pension income would be:

£7,007 + £11,502 = £18,509

By using the aforementioned income tax calculator this equates to £1,443 a month. I also made sure I selected the option on the PAYE income tax calculator to say ‘yes' I am currently receiving a state pension. This stops national insurance contributions being deducted as they are not payable once you reach state pension age.

In my worked example I've managed to quickly calculate how much money I need to retire plus worked out when I can retire.

How much money do I need to retire early?

Now that you've run the pension calculator you can go back and see how much you need to retire at 55 or at age 60.

To do this set the retirement age on the pension calculator input screen to 55 and run the calculator. Now vary the monthly pension contribution amounts until you reach the level of income required. Bear in mind that if you chose to retire at age 55 or 60 then you won't receive your state pension until you attain your state pension age. So your personal pension will have to make up this shortfall. By varying the fund size and contribution levels you can see if you can retire early and how much money is needed to retire at that age.

The next step if you've not already got a pension

Now that you have an understanding of what you might need in retirement it is important to take action and put your plan into practice. Remember, if you don't plan for retirement, it will never happen. No one is going to do it for you. You can get a low cost pension online* with the UK's leading pension provider with a one-off payment of just £100 or with a regular contribution of £25 a month. Most people spend more than that on coffee each month.

You don't even have to decide your investment choices to get a SIPP (self invested personal pension) up and running. Plus it only takes a few minutes to set up. It's popularity stems from its cost-effectiveness, excellent customer service and online functionality.

As I said,  if you don't plan for retirement it will never happen.

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