A question I get asked countless times is, how much do I need to retire? While there is no exact answer, and certainly not one figure that applies to everybody, there are two methodologies we can use to come to a conclusion.

The Salary Method

You’ll probably have seen various interpretations of this approach. There has been a traditional general assumption that most people/couples will need total pensions equivalent to two-thirds of salary. This two-thirds rule of thumb has been reached based on an assumption of lower spending in retirement. Some say that if the State Pension takes care of one-third of salary (that’s a big if!) then we should aim to build up private pensions that produce the remaining one-third of salary. I don’t like this methodology for two reasons, 1. Our current salaries may be too high or too low to act as a correct benchmark, and 2. Expenses are too important to be reduced to a secondary consideration.

The Expense Method

I favour this method as it’s far more likely to give you the correct answer (even if hearing it is not particularly comforting). Here we ignore salary and simply estimate what our annual expenses will be in retirement. I like the very user friendly Standard Life online calculator which tells me that my wife and I will face annual expenses of €50k living a comfortable but not extravagant retirement (I multiply the result for a single person by 1.6 to get the estimate for a couple).

So, How Much Do I Need To Retire?

In our case, if I subtract (one) €20k annual State Pension – which we can’t necessarily bank on – that means I will need a pension pot that can pay my wife and I a net €30k (let’s say a gross €40k) per annum all through retirement. Which means (I use a multiplier of 25) that we will need a total private pension pot of around €1 million to secure the retirement we want. Ouch!

That’s a big and scary number (and based on lots of assumptions about the future). Of course in reality, some of us will have additional capital (from non-pension savings or perhaps a property downsize) and some of us will maybe retire a bit later than planned. But the clear message for us all is that we really need to think very seriously about how much we need to retire and make every effort to maximise our pension contributions.

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