Calculate your retirement easily

Whether you want to retire at 67 or 27 you can use the information in this guide to calculate your retirement easily.

We explain how you can use the 4% rule. We also introduce a couple of online calculators to do the serious number crunching so you don’t have to.

You’ll be able to calculate how much you’ll need in retirement, time to retirement, retirement age and much much more.

Do you have to retire at 67?

Once upon a time the UK had a default retirement age of 65. However, since 2011 that’s no longer the case. The law was changed to prevent employers forcing people to retire at 65.

In other words, according to UK law you can work for as long as you want.

Reg Buttress chose to work at the Cwymbran, South Wales branch of Sainsbury’s until he was 95 years old.

Heart surgeon Dr. Ellsworth Wareham of Loma Linda, California assisted surgeries until he was 95 years old!

But of course there will be people looking at this from the opposite side of the coin, who see retirement as something that they want to enter a.s.a.p. and as far as the law goes there’s nothing to stop them either.

The retirement ages that you often hear bandied about are 55 and 66.

55 is the minimum age you can start receiving a personal or workplace pension, whilst 66 is the age at which you can start collecting your state pension. An increase to 67 is just around the corner, though.

What is the average retirement age in the UK?

According to lovemoney.com The retirement age in the UK is currently 66, but men retire at 64.7 years old on average, while women leave work at 63.6 years old.

Globally that looks about average to me. There are places with lower averages like South Africa (60) and France (60.8) but at the same time there are places with higher averages like Japan (69.95) and South Korea (72.3).

How to calculate your retirement

Warning, there will be some number crunching involved in these retirement calculations, but rest assured we are keeping it simple. Yes, you’ll need a calculator (or spread sheet), but no you won’t need a degree.

Now, when it comes to pensions a lot of people just go with the flow. For some this works out just fine, whilst for others not so much.

For most people, it makes sense to get a handle on your retirement as soon as you can and that’s because small changes made early on can have big impacts later.

To understand this you just need to think about what a pension actually is.

What is a pension?

On the surface, a pension is simply savings that we are going to use in retirement. But when we look under the hood there’s a little bit more to it.

Traditional pension providers usually take our money and invest some if not all of it into the stock and bond markets to take advantage of compound interest.

Nobody knows exactly what that compound interest is going to be but it has been around 10% historically for both UK and US stocks.

So we can use that to make a quick comparison:

Save £1K a year for 30 years and you’ll have……….£30K
Invest £1K a year for 30 years with 10% returns and you’ll have……… £181K

Nice work if you can get it!

Of course you may not get those returns, particularly as most pension providers will allocate some of your money to the bond markets which tend to generate lower returns. But over the long term it is likely to leave you with a lot more in your pot than you would have had you simply saved.

Incidentally, though you get lower returns, you invest in the bond markets because they are less risky. They help to even out the ride.

And you’ll notice I said over the long term. That’s an important differentiator between a pension and saving for something near-term like a car or property deposit.

In the short term stock markets are volatile. They can go up like a rocket on occasion, but at the same time they can drop twice as fast. 10% drops occur all the time. Everybody experiences 20% plummits with their investments and there’s a strong likelihood you’ll experience at least one 40-50% plunge during the course of your investment timeline.

Now that said, if history is anything to go by none of that should matter.

That’s because since the dawn of time most country’s stock markets, most of the time have bounced back to reach new highs and the global market as a whole as always done this.

The key is giving the market time to recover. In many cases this takes months, but in some cases it takes years. That’s why you only invest in stocks for long term savings goals like pensions.

Now, as well as taking advantage of compound interest, pension products shield your investments from tax. This means you get to keep more of your gains.

Why you don’t need a pension per se

However, if you are one of the many that doesn’t have any kind of pension provision outside the state pension, don’t worry, you can still take put a pension together easily if you want to.

Everybody in the UK can make tax sheltered investments for their future.

The easiest way is to open a SIPP (Self Invested Personal Pension), but if for some reason you can’t do that. Investing via an ISA (Individual Savings Account) will do something similar.

And in fact, even if you don’t have access to either of those for whatever reason (perhaps your an expat!), you can still invest tax efficiently by buying index tracking ETFs from one of the many investment platforms that accept expats. (You can read more about that here if you are interested.)

The State Pension

And let’s not forget the institution that is the State Pension. The pinnacle of German ingenuity! But we didn’t hang around implementing the Old Age Pension in the UK. It came into effect in 1909.

To receive the State Pension you need to have paid National Insurance Contributions for at least 10 years. But to receive the full State Pension you’ll need to have 35 years worth of contributions. You can check how many years you’ve contributed here.

The full new State Pension is £185.15 a week right now. That’s £801.67 per month or £9,620 per year.

How to estimate your retirement income?

Now you may or may not want to incorporate the state pension in your calculations.

Essentially, when thinking about retirement income there are two ways to figure out how much you need.

You can either base it on your current spending or aim for a preset living standard.

With option one the consensus seems to be assuming you’ll need 80% of what you spend pre retirement. So if you spend £40K assume you’ll need £32K in retirement.

The alternative approach is to pick a Retirement Living Standard courtesy of the Pension and Lifetime Savings Association (or Which Magazine or The Minimum Income Calculator {see below for details}):

Pension income required for different living standards

A few things to bear in mind with the living standards approach.

• These aren’t suitable for London. If you want to retire in London you are going to need to increase these numbers somewhere between 20 and 50% based on how centrally you intend to locate.
• These are after tax numbers, so you’ll need a bit more before tax. Tax is complicated, and depends on your exact situation. Because all Brits are eligible for the Personal Allowance this should only impact the moderate and comfortable numbers. For ball park figures I’d add 10% to the numbers to take account of this and be happy in the knowledge with the fact that Which Magazine have similar standards which are lower.
• The Minimum Income Calculator is another great alternative. You key in your situation and it will determine how much you need to live off for a decent standard of living. There’s a couple of advantages with this one. First, it gives you both pre and post tax amounts and breaks everything down for you. And second, it gives you a value based on your actual situation. You can put in children and their ages for example.

Once you have a figure in mind you can subtract any income you know you’ll have.

For example, if you are waiting until your mid 60s to retire then you could knock off the State Pension.

So a couple, who are both eligible for full state pensions only require an additional about 12K a year on top of their State Pensions to enjoy a ‘moderate’ standard of living.

You may have a private or workplace pension you could knock off or even buy to let property income.

Once you have a target number you can move onto the next stage.

How to calculate how much you need in your pension pot to fund your annual spend

I’m going to assume you’ve decided you need £20K a year in retirement.

We can use this number to calculate how much of a pension pot you’ll need to cover your life expenses.

To do this you simply divide the number by 4% or 0.04.

£20,000/0.04=£500,000

It’s that easy.

In other words, you need a pension pot of half a million pounds to provide you with £20K a year.

(Dividing by 4% comes from the 4% rule. See details at the end of the article).

How much do you have in your pension pot now?

Once you’ve got a handle on how much money you need in retirement the next step is to figure out how much you have now so that you can bridge the gap.

You need to add up any savings, investments and pensions you have.

Most pension providers allow you to login to their online portal. But where this isn’t the case, you should receive a pension statement annually, which will show a breakdown of your pension.

A pension statement should tell you how much you have and project your retirement income.

So let’s say you have £20K in savings £10K in investments and £70K in your pension. Assuming you are keeping it all until retirement you’ve got a current principal of £100K .

How to calculate how much you’ll have in retirement

You can use your current balance to calculate how much you’ll have in retirement based on this.

Enter your current balance, number of years left to save and assumed interest rate into a compound interest calculator and you’ll get a good idea of how much you’ll have in retirement.

Though unlikely you may find you have enough money already.

We recommend Money Chimp to crunch the numbers, but any will do. (It doesn’t matter that Money Chimp shows dollar signs. You can still use it if you are dealing in pounds).

Money Chimp just needs the following information to calculate your retirement number.

• How much money/pensions/investments do you have now? (Current Principal).
• How much do you plan on saving each year? (Annual Addition).
• How many years do you plan on saving for? (Years to grow).
• And what returns are you expecting? (Compound interest).

Calculate your retirement with Money Chimp

So if you start with 100K, add 5K a year for 20 years with investment returns of 6% you’ll have just over half a million.

How much should I save?

For 99% of the population, you should save as much as you can.

As much as you can!

The Financial Independence Retire Early (Fire) movement would have you living out of a cardboard box until you had enough to retire.

While there’s a certain nobility to that, for most of us, it is totally unrealistic. We’ll be saving for a long time. In fact, a lot of us will spend more time saving for retirement than we do actually retired. We’d probably do best to enjoy the saving time too.

Now, that said, the more you can save the quicker you will be able to retire.

There are two ways to save more.

• Earn more money
• Cut back on costs

With the first one there are things you can do that everybody talks about, but trying to get a promotion at work, moving jobs, setting up a little business on the side and the like aren’t going to be things everybody can do. If you think you can, go for it, it’s definitely going to be worth it.

On the other hand cutting back on costs is an option open to all. If you can’t think of any obvious costs to cut, it maybe worth doing a budget.

It’s a simple concept to help you take control of your finances. If you know all your outgoings and incomings you can get rid of the ones you don’t need and lower the others.

I’m not going to wax lyrical about the power of budgeting. People have written books about budgeting and there are literally hundreds of free budget tools on the web. We recommend Martin Lewis’ Budget Planner if you are interested.

I’ll just leave you with the fact that most people who budget do save money.

Time to retirement

We are now ready to calculate your time to retirement.

You’ll need a special kind of investment calculator for this. We recommend the one at Candid Money.

Let’s say I’m aiming to save up £750K and I already have £370K in the bank. How long will it take me to reach my goal if I’m saving £1.5K per month?

Using the Candid Money How Long calculator you can just enter those numbers followed by a couple more:

• an expected investment return (I’m using 6.5% which is as good a number as any based on historic returns)
• an expected interest rate. (I’m using 3%, a good long term average)

Most people won’t need to complete the other options but there are instructions at Candid Money if you think you need to.

So based on the above, it will take 6 years and 4 months to save reach my total, but an additional 7 months if we take inflation into account.

Determining your retirement age

If you’ve read up to here, it should go without saying that you can also use a How Long calculation to work out your retirement age. Based on the above example, if you are 33 and 1 month old, you can retire on your 40th birthday!

The 4% rule

The theory behind some of the things we’ve covered here is based on financial concept termed the 4% rule.

The 4% rule is a generally accepted rule of thumb for retirement planning. You withdraw 4% of your pension in the first year and then the same amount adjusted for inflation in subsequent years.

So if I’ve got £500K in my pension pot I withdraw £20K in year one and then let’s say the cost of living rises 2% I would then withdraw £20,400 in year two.

Now, I would be remiss if I didn’t mention the fact that there are a few people out there that have a problem with this rule. In the main, they don’t think it is conservative enough and they are unhappy that it is based on data and research focused on the US stock market.

So for what its worth my take on it goes something like this.

Addressing the conservative issue in general.

The first thing to say is that based on average returns the safe withdrawal rate should in fact be more like 6.5%.

The reason it is reduced to 4% is to account for the fact that the stock market may have a mega crash within the first 10 years of your retirement if you are unlucky.

Now, there have been a number of studies looking at the 4% rule. In each case, whilst the odd person did run out of money, most people adhering to the 4% rule end up with far more money than they started with.

Similarly other studies have shown spending throughout retirement is not consistent. In fact, spending goes down in retirement not up.

The world’s expert in all this is a gentleman by the name of Michael Kitces. His research suggests spending in retirement reduces by about 1% a year.

As a consequence there are those out there who actually suggest increasing the number to 4.5%.

And let’s say you were unlucky and there was a humongous crash in your first decade of retirement. There would be nothing to stop you with withdrawing a bit less until the markets recovered or dare I say it even getting a part time job.

The bottom line being 4% is pretty conservative already.

Then as for it being only valid to US investors, I’d argue the following:

The best long run global data I’ve seen comes from famed professors Dimson, Marsh and Staunton and that shows plenty of country’s stock markets doing similar to the US. The UK being one of them!

And this whole idea that the US has done well in the past so will continue to do well just doesn’t add up. One of the biggest phenomenons in finance is reversion to the mean. In this case, it means if one country’s stock market out performs during one time period the chances are it won’t during the next time period.

Additionally, I think it’s hard to argue that UK investors shouldn’t be globally diversified these days anyway. Investing in UK markets is an active bet that the UK will outperform other markets. Do we really think that likely?

Some people also talk about the currency risk of investing in foreign markets, which for bonds has some logic but not for stocks. The big UK companies do the bulk of their business overseas anyway so there’s no difference between investing in them and investing and foreign companies.

The bottom line being you should invest in the global market and if you are truly globally diversified more than half your stocks will be US companies anyway.

All that said, even if you decide 4% isn’t conservative enough for you all you need to do is replace 4% with whatever you number you decide is. Some people like 3.5%, other super conservatives opt for 3% and at the end of the day playing it safe probably never did anybody any harm ( I’m still good with 4%, though).

Retirement calculations – Summary

Whether you want to retire at 67 or 27 you can use the information in this to crunch the numbers.

Here’s a summary of the steps you need to take:

• Use your current income or pension standards to determine how much annual income you’ll need in retirement
• Use the 4% rule to calculate how big your pension pot will need to be
• Establish how much you’ve already got in savings, investments and pension products
• Do a budget to determine how much you can save
• Calculate your time to retirement using an online calculator

And here’s a quick example to leave you with.

The Smiths are going for a moderate retirement of £31K.

Using the 4% rule that means they need a pension pot of £775K.

They’ve already got £400K so they need another £375K.

After they did a budget and found some costs they can cut back on they established that they can save £1500 a month.

Using the Candid Money How Long calculator, assuming inflation of 3% and investment returns of 6.5% it will take just under 7 years to reach their target or just under 10 years if they take account of the price of living increase.