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Calculate your likely spending and the pension you'll require
You are unlikely to spend as much post-65 as you spend now. For most people – certainly those with families to fund, spending is likely to drop once the mortgage is paid off and children leave home. So what sort of monthly income will you need in retirement – and how much will you need to save to ensure you can afford your lifestyle? Take the Aegon budget test.
Step 1
Gather together
• your and your partner's bank and credit card statements for the past three months
• your pay slips and records of any other regular income
• all shopping receipts
• a calculator, and some ruthless honesty.
Step 2
Fill in all "current spend" and "post-65 spend" boxes on this expenditure chart. You and all family members need to come clean about what they really spend. If you want to be accurate rather than relying on memory, carry a notebook with you for a month and note down every penny spent. If you've no choice but to guess at an expense, always overestimate.
For occasional outgoings like Christmas, birthdays, holidays, car maintenance and house decoration divide your annual layout by 12 for a monthly spending figures. Allow a realistic amount for irregular and often unexpected costs like repairs and furniture or white goods replacement.
When filling in your "post-65 spend", you obviously can't be sure at this stage exactly how much you'll spend on each item in retirement. Aim instead to make an informed prediction based on what you expect to happen between now and then. Will your mortgage be paid off, for example? Will you be buying food, clothes, holidays etc for two rather than a family? Do you expect to have stopped work – therefore spending nothing on commuting but perhaps more on heating your home? With more leisure time, do you reckon you'll spend more on hobbies, entertaining and holidays?
Step 3
Now work out how much you need to save.
Once you've filled in the boxes, add up your total "current" and "post-65" monthly spends and compare the two. Remember, the state pension will cover part of your spending. The full weekly rate is £95.25 for a single person and £152.30 for a couple. That's the equivalent of £413 a month if you're single and £660 for a couple.
Work out what you'll be spending above that level, and that's the amount you'll need to generate each month from your pension savings. Don't forget you may also be liable for income tax on whatever your private pension arrangements generate.
The table below shows you how much you need to save into a pension pot to give you various monthly pensions in retirement at current annuity rates.
An annuity is a guaranteed monthly income, paid out by a pension company. At present, you are required by law to convert your pension savings into an annuity before you reach 75.
The figures are truly frightening: you need to save nearly £300,000 just to be sure of an income of £1,000 a month in retirement that's guaranteed to keep pace with inflation.
We've done the figures for the annuity assuming a couple, both aged 65. One column shows you the size of pension pot for a "level" or fixed-rate pension where the monthly amount stays the same. The second shows the size of pot to get an inflation-protected pension where the monthly amount goes up in line with inflation.
What people actually need in retirement On average in Britain, a man will live for 17 years more after retiring at 65, while a woman will live for nearly another 20 years, which is why we need so much in the way of savings to survive.
If you are one of the increasing number of people who live to 100, you will have spent a total of £708,500 after retiring – according to a report by the Centre for Economics and Business Research – because of the way inflation works. In real terms, the amount you spend drops as you age, but the actual cash you need rises, as inflation pushes up the price of almost everything.
The study, commissioned by Life Trust, says that in the early years of retirement (when people are still in their 60s) spending on recreation, culture and transport are the biggest items in the budget. Retirees typically spend £5,000 a year on recreational activities, such as cinema tickets, theatre and home entertainment equipment.
By the time you reach 85, your total weekly spend is expected to rise to £366 (which takes into account inflation), with a large proportion going on housing, fuel and power costs (25%). After that, spending on healthcare and dom*estic help increases – but clothes spending drops to just 1% of the typical budget.
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