Budgeting for retirement: How much will you spend?

Back in 2021, Which? conducted research into the size of pension pots needed to provide certain lifestyles in retirement.

The report split single-person households and couples into separate groups. It then broke down potential retirement lifestyles into three distinct categories – “essential”, “comfortable”, and “luxury” – working out the average amount required each year to provide each type of lifestyle.

This data can help you to think about the size of the pension pot you might need. But it is important to remember that the Which? figures are only an average (we’ll look at these in more detail below).

Your expenditure in retirement won’t be static. In fact, a recent report from the Institute for Fiscal Studies (IFS) found that retirees spend more as they get older.

So how much will you need each year, and what does your potential future spending mean for the amount you save now?

Keep reading to find out.

Understand the type of retirement lifestyle you want then save to make it a reality

Which? found that the average two-person household spends around £2,170 a month, or £26,000 a year, in retirement.

This provides a “comfortable” retirement that includes all “essential” expenditures – household bills, transport, and insurance – plus some luxuries like holidays and meals out. If you are looking to live a “luxurious” lifestyle in retirement, however, you’ll need to save more.

Source: Which?

As a two-person household, you’ll need to save enough to provide an income of £41,000 a year to live a luxurious lifestyle. According to the report, this includes all essentials, plus long-haul holidays, a new car every five years, and expensive meals out.

If you are approaching retirement, now is the time to revisit your pension to look for a potential shortfall.

At HDA, we can help you consider:

  • When you want to retire
  • What you plan to do in retirement
  • How much your planned retirement might cost

You’ll then need to think carefully about the pension provisions you have already made and whether you might have a pension shortfall at retirement. Our cashflow modelling tools can help here so be sure to get in touch and see how we can help.

You’ll also need to remember that whatever type of lifestyle you are hoping to live when you retire, your expenditure will fluctuate year on year. You’ll also need to be prepared for the unexpected.

Estimating potential spending and income over a 30-year retirement can be complex

As UK life expectancies continue to increase, your retirement income could need to last three decades or more. And a lot can happen in that time.

The IFS report confirms that among higher earners, spending and income in retirement both increased as retirees reached 80.

But what does this mean for your plans?

Your average expenditure is unlikely to decrease through retirement

During your 60s and 70s, the so-called “active” years of your retirement, you might spend more money on travel and hobbies.

Later in retirement, other costs – those associated with motoring, for example – might fall, even as household heating bills rise.

The IFS found that spending on bills increased by £350 a year for individuals aged 75 to 85. One reason for this is that household bills don’t tend to decrease when a partner dies, effectively doubling the expenditure for the surviving partner.

The key point here: don’t assume that your expenditure will lessen as you get older.

Remember too that you’ll need to think about the potential costs of later-life care, and ensure you hold enough back.

Your income – and your savings rate – might increase as you get older

The IFS found that average income could rise as you get older, in some circumstances.

Increases to the State Pension or other index-linked income could help to increase your average monthly income. You might also find that in later life you receive a survivor’s benefit from a partner’s pension or insurance plan.

Rising income could lead to you saving more as your retirement progresses.

According to the IFS, those born between 1939 and 1943 have seen their household income increase by 24% on average (adjusted for inflation) between ages 67 and 75.

A long-term financial plan covering all contingencies is key

At HDA, we take a holistic look at your finances. This means understanding all of your potential income streams and outgoings at all stages of your retirement.

We then use sophisticated cashflow modelling to help ensure that you can live the retirement lifestyle you choose, for the whole of your retirement, whatever those years hold.

Get in touch

If you’re worried about whether you are saving enough to provide you with the retirement lifestyle you want, we can help. Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

 

Contact us

If you have a query or would like to arrange a no-obligation consultation at our cost, please complete the form and we’ll get back to you very soon.