How much is enough
A retirement number is not a target. It is a spending rate, and the spending rate is easier to think about...
"How much do I need to retire" is the wrong question, because the answer is a large number with no meaning. The right question is how much you will spend, and how long the pot has to last.
Start from spending
Not your salary. What you actually spend in a year, minus the costs that stop at retirement: the commute, the pension contributions, the mortgage if it is paid off. For most people that is between half and two thirds of their working income.
The rule of twenty-five
A pot twenty-five times your annual spending, invested in a mix of shares and bonds, has historically lasted thirty years while paying out four percent of its starting value each year, adjusted for inflation. It is a rule of thumb rather than a law, and it comes from one country's history, but it is a good place to stand.
A worked example
Spending of 24,000 a year, of which 9,000 is covered by a state pension. The pot has to supply 15,000. Twenty-five times that is 375,000. That is the number, and it is a good deal smaller than the one in the advertisements.
What moves it
- Retiring earlier lengthens the period, so the rate should fall to three or three and a half percent.
- A defined-benefit pension reduces the pot needed, pound for pound of income.
- Downsizing releases capital, and is the subject of a later post.
Anita Desai
Twelve years in pensions administration, now writing Atlas full time. Believes every money question has a worked example, and that most advice skips it.
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