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How much will I need in retirement?

Working out how much money you need to save for retirement is not an easy task. There are a number of variables that need to be considered.

For example, you need to work out what age you plan to retire and roughly how much you plan to spend per year in retirement. Are you planning to enjoy a luxurious retirement that includes holidays abroad, or keep things simple and live cheaply? How long do you expect to live? What will inflation rates be? These are just some of the factors that need to be considered.

The multiply by 25 rule

The multiply-by-25 rule (also known as the 4% rule) estimates how much money you’ll need to save for retirement by multiplying your desired annual income by 25.

If you plan to spend £30,000 per year in retirement, you’ll need to save £750,000. If you plan to spend £40,000 per year, you’ll need £1m.

As to how much you may spend, Which found last year that households on average spent around £26,000 per year in retirement. This included all the basic areas of expenditure and some luxuries such as trips to Europe, hobbies and dining out. Using the multiply-by-25 rule, you would need to save £650,000 to live this lifestyle.

If you plan to take long-haul trips around the world and upgrade your car every few years, you may need closer to £39,000 per year and would, therefore, need to save £975,000.

The multiply-by-25 rule does have its flaws. It doesn’t take into account any other sources of income you may have such as rental income, or access to state benefits. It also makes assumptions that your capital will continue to be invested after retirement and that future returns will look similar to returns we have seen in the past. It’s not perfect as a retirement calculator rule, but it’s helpful as a rough guide.