How much do you need to save for retirement in the UK? It might not be as much as you think

Saving for retirement might seem like a daunting prospect, but building a comfortable pension pot might not be as hard as you think.

Rupert Hargreaves

Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. As well as writing for the Motley Fool, he is the editor of Hidden Value Stocks, covers value investing for Gurufocus and hedge funds for ValueWalk.com. Rupert began his career as a proprietary currency trader and still trades on a daily basis. Rupert holds professional level qualifications from the Chartered Institute For Securities & Investment and the CFA Society of the UK. He can be found on Twitter @ruperthargreav1

Published 18 August, 2019 11:11 am BST

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

How much do you need to save for retirement? This is a question on every saver’s lips, but unfortunately, there’s no easy answer.

How much you need to save is going to depend entirely on what sort of life you want to live in retirement.

Consumer magazine Which? has a great guide on this. The magazine has surveyed more than 6,000 real retirees to find out their spending habits and compile a guide of how much money the average retiree needs to live comfortably every year.

Three brackets

The results of the survey revealed that there were three main income brackets for retirees. On average, respondents said they spent £2,220 a month or £27,000 a year, but the results varied greatly.

Essential spending averaged £17,800 per year, which gives us a great idea of the lowest bracket. Including a few European holidays every year, spending increased to £27,000. And for the highest bracket, which includes the basics and “luxuries such as long-haul trips and a new car every five years” the cost rises to £42,000.

How much do you need?

So, depending on what sort of retirement you want to have, you’ll need either £17,800, £27,000 or £42,000 in income every year. These figures exclude any State Pension income. If we deduct this income (currently £8,767.20 per annum), the numbers fall to £9,032.80 for the first bracket, £18,232.80 for the second bracket and £33,232.80 for the third, luxury bracket.

Once you know how much income you’ll need every year in retirement, the next stage is to calculate how much you need to save. To do this, we can use the multiply by 25 rule to give a rough answer. The results of this are in the table below:

Pension bracket	Basic	Average	Luxury
Funds needed on retirement	£225,820	£455,820	£830,820

Building the pot

The best way to build your pension pot up to the level required is to invest your money. A low-cost FTSE 100 or FTSE 250 tracker fund is a great instrument you can use to do this if you have no investing experience.

Over the past decade, these two indexes have produced returns of between 7% to 10% per annum.

At a rate of return of 10% per annum, accumulating a pension pot of £225,820 will take around 26 years of saving £150 a month according to my numbers.

If you want to invest directly in stocks, then there are plenty of other options. I recommend looking for companies that have a durable competitive advantage and track record of creating value for investors because, if you’re investing with a 20 or 30-year time horizon, you need to be sure that the companies you buy will still be around when it’s time to retire.

Companies like GlaxoSmithKline fit the bill perfectly, in my opinion. Investment trusts might also be a great option, as many of these have been around for over 100 years. Some have been paying and increasing their dividends for the past 40 years straight.

So all in all, if you invest sensibly and keep saving a little every month, nothing is stopping you reaching your pension target, no matter which level of income you choose.