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Skyrocketing Retirement Costs: How Much Savings You’ll Need for Financial Freedom

Writer's picture: Greg HeathGreg Heath

Everyone desires to retire with financial security, but the increasing expenses have made it necessary for individuals to save a larger amount in their pension funds than they had initially planned for.


Rising food, energy and motoring costs have pushed up the amount of money needed in your pension needed to fund a comfortable retirement, research suggests.


The Pension and Lifetime Savings Association (PLSA) frequently releases data on the expenses involved in supporting a basic, moderate, and comfortable retirement lifestyle.

This provides a useful guide to calculate how much you need to retire and how much to put into your pension.


Its latest findings show the cost of living crisis and high inflation from earlier in 2024 is hitting retirees, especially those looking to help their loved ones with responsibilities such as caring for grandchildren.


According to the PLSA, the rises are a result of shifts, specifically in the realm of food prices and energy expenses, as well as evolving preferences within the elderly community. The research indicates a growing desire among individuals to support their family members, as highlighted in focus groups where participants mentioned allocating £1,000 for grandchildren's activities and an additional £100 monthly for dining out with relatives.


According to the PLSA data, the cost of a 'moderate' standard of living in retirement for a single person has increased by 34.3%, amounting to £8,000 per annum more than in 2022/2023. Additionally, the required funding for a minimum or comfortable retirement is also increasing.


The amount needed depends if you are single or in a couple and while the increasing state pension and rising annuity rates may help, it could also mean having to save more for your retirement. Afterall the cost-of-living has put enormous pressure on household finances over the last year and, as the research shows, this is no different for retirees.


The PLSA said the increases reflects changes, particularly in food prices and energy costs but also changing priorities among pensioners.


It found that more people want to help family members, with focus groups suggesting being able to budget £1,000 to assist with grandchildren activities as well as £100 per month to take relatives for a meal.


The PLSA data shows a ‘moderate’ standard of living in retirement now costs a single person £8,000 or 34.3% more than it did in 2022/2023, while the level of funding needed for a minimum or comfortable retirement is also on the rise.

The amount needed depends if you are single or in a couple and while the increasing state pension and rising annuity rates may help, it could also mean having to save more for your retirement.


The cost-of-living has put enormous pressure on household finances over the last year and, as the research shows, this is no different for retirees the PLSA.

The amount you will need to retire comfortably will depend on your own lifestyle and spending needs.


The costs of enjoying the finer things in retirement has shot up from £37,300 to £43,100 for a single person and to £59,000 for a two-person household. 


The cost of a comfortable retirement, which includes spending around £130 per week on groceries and £80 a week per couple on meals adds extra luxuries such as regular beauty treatments, theatre trips and two weeks holiday in Europe a year. 


Interactive investor highlights that these figures are after paying tax, so you technically need to earn more to meet these standards.


Planning for the Future: How Much is Needed for a Moderate Retirement?


To achieve a moderate retirement, you would need a pension income of around £23,300 to £31,300 for a single person and from £34,000 to £43,100 for a couple.


To afford a comfortable retirement, one should budget approximately £100 per week for groceries, £60 per week for dining out, maintain a small used car, take a week-long vacation in Europe, and enjoy a long weekend getaway in the UK.


It is important to point out that the definition of a minimum, moderate, or comfortable living standard for retirees is largely subjective. The significant increase in the funds needed to support a moderate lifestyle is influenced by the higher cost of living and the increasing expectations associated with this 'average' retirement standard.


Emerging priorities such as the ability to eat out more, enjoy more time out with loved ones and help out family members financially highlight the evolving expectations and desires of the future generation of retirees.


Retirement on a Budget: What It Really Takes to Cover the Basics 

For a no frills type of retirement, you would still need a pension income of £14,400 - up from £12,000. For a couple, this has jumped from £19,900 to £22,400.

This costs is based on £95 for a couple’s weekly groceries, a week’s holiday in the UK, eating out about once a month and some affordable leisure activities about twice a week. It does not include budget to run a car. 

Annual expenditure

Single person

Couple

Minimum retirement

£14,400

£22,400

Moderate retirement

£31,300

£41,300

Comfortable retirement

£43,100

£59,000

 How much will you need to fund your retirement lifestyle?

To have a simple retirement, you would require a pension income of £14,400 instead of £12,000. For a couple, this amount has increased from £19,900 to £22,400.

T

The annual new state pension is rising to £11,502 in April 2025 will help fund much of the minimum standard shown above but you will need a larger pension pot to purchase an annuity or earn enough from drawdown for a moderate or comfortable retirement.


Analysis by Quilter suggests that a single person would need a pension pot worth £459,000 to get a moderate level of income from an annuity, rising to £738,000 for a comfortable retirement. A couple would need £515,000 to purchase an annuity for a moderate lifestyle and £929,000 for a comfortable one.


The amount you need to put away in a pension to build a pot worth £738,000 will depend how far away you are from retirement.


For example; If you have 40 years to save, then you would need to put away £7,500 per year. But that rises to £12,650 over 30 years and £23,850 over 20. This assumes a 4% annual real return on your investment fund.


The sooner savers grasp the distinction, the simpler it will be to strategize how to reach - or reach the goal that is unique to them. Regrettably, no one will do it on their behalf.


The recent increase in inflation has certainly made the challenge more difficult, but there is no easy solution when it comes to creating a retirement fund that aligns with your objectives and financial needs.


To achieve a moderate or comfortable standard of living, it is important to start saving as much as possible as early as you can. This involves leveraging the benefits of pension tax relief, tax-free investment growth, and, if applicable, employer contributions. Although the thought of accumulating substantial fund sizes may seem daunting, creating a practical budget and establishing a consistent savings strategy can significantly ease the process.


How to boost your retirement savings

Increasing pension contributions can be challenging, particularly when dealing with inflation, in order to maintain the desired retirement living standards.

By gradually increasing how much you put into your pension could help boost your retirement fund significantly.


Research indicates that an individual in their twenties who saves an additional 1% annually, with their employer matching this amount, could potentially boost their retirement savings by 25%.


For instance, a basic rate taxpayer who is 25 years old and earns £40,000 annually could boost their contributions by 1% of their salary, which would be matched by their employer. The cost to the employee of this increase is a reduction in take home pay of less than £23 per month or £272 per year but this would boost their pension pot at retirement by 25% from £198,683 to £248,353. (This assumes their salary increases by 2.5% each year, pension charges of 0.75% apply, investment growth is 5% each year and the pension value is adjusted for inflation at 2.5% each year).


In other words small increases can have a significant impact on your pension savings, but small reductions in your pension savings can also make a huge dent.


The key take away from this discussion and research is that it pays to understand where you are now, where you want to be and how do you get there. That is what a financial planner does for you; creates a plan and helps you get there.





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