How To Calculate Your Retirement Income Needs Step-by-Step

Start with your current spending

The first step is to track what you actually spend now. Look at your bank statements from the past six months and categorise everything: housing costs, utilities, food, transport, entertainment, and those little luxuries that make life enjoyable. This gives you a realistic baseline rather than guesswork.

Most financial planners suggest you'll need around 70-80% of your pre-retirement income to maintain your current lifestyle, though this varies considerably depending on your circumstances. Some costs will disappear (like commuting or mortgage payments if you've paid off your home), while others might increase.

Factor in the State Pension

The full new State Pension currently pays £230.25 per week (£11,973 annually) if you have 35 qualifying years of National Insurance contributions. This provides a foundation, but it's rarely enough on its own. You can check your State Pension forecast online to see what you're entitled to and whether you have any gaps in your National Insurance record worth filling.

Calculate your retirement income gap

Here's where you work out your specific needs. Subtract your expected State Pension from your estimated annual retirement spending. The difference is what you'll need to generate from your workplace and personal pension savings, as well as any other investments.

For example, if you estimate needing £30,000 annually and your State Pension provides £11,973, you'll need to generate £18,027 from your private pension savings each year.

Apply the 4% rule as a starting point

A widely used guideline suggests you can safely withdraw 4% of your retirement savings each year without running out of money. Using this rule, if you need £18,027 annually from your workplace and personal pensions, you'd require approximately £450,675 saved by retirement. This is a simplified approach, but it gives you a tangible savings target to work towards.

Don't forget inflation and longevity

According to the Office for National Statistics, a 65-year-old man can expect to live another 18.1 years on average, while women can expect 20.7 years. However, many people live considerably longer, so planning for 25-30 years of retirement is prudent. You'll also need to account for inflation eroding your purchasing power over time.

Review and adjust regularly

Determining how much money you need to retire isn't a one-time calculation. Your circumstances, goals, and the economic landscape will change. Review your retirement income needs annually and adjust your savings accordingly.

Since 2014, LDB Wealth has been helping clients throughout the UK navigate these crucial decisions from its offices in Dartford. Understanding the fundamentals of retirement planning early gives you the best chance of achieving the retirement you envision.

Call the experienced advisers at LDB Wealth today to create a personalised retirement plan that aligns your lifestyle goals with your financial resources.