Size of Pension Needed for a ‘Comfortable’ Retirement

According to a recent study, a person needs £645k for a ‘comfortable retirement’ in the UK.

This is so they have a comfortable post tax annual income of £37,300 (state pension included).

But what is the maths behind these figures, and what does it say about couples in retirement?

PLSA says a person needs a post-tax income of £37,300 to have a ‘comfortable’ retirement.

To get to this figure, they have assumed that the individual needs a pension pot of £645,000.

With a 5.1% annuity product, this would give them an annual post tax income of £26,700.

Combined with the current state pension (£10,600) this would give them the £37,300 total.

In this article, I go through these maths for a couple looking for a ‘comfortable’ retirement.

I also talk about the maths behind these figures and how long it would take to achieve them.

Finally, I talk about how to get started and where to go to find out more on ‘early’ retirement.

A Couple Looking for a ‘Comfortable’ Retirement

So what are the figures given for a couple also looking for a ‘comfortable’ retirement lifestyle?

According to PLSA, a couple needs a combined pension of £797k for a comfortable retirement.

You can read more on their site regarding what ‘comfortable’ involves – it is quite in-depth.

To have a comfortable lifestyle, they say a couple needs a yearly post tax income of £54,500.

With an annuity of 5.1%, this would give them a yearly post tax income of £16,650 per person.

Combine this with the state pension of £10,600 per person gives a total income of £54,500.

Now we know the income goal for an individual and couple to have a comfortable retirement.

So the question is how do we get there? And more importantly, how long will it take for each?

In the next paragraphs, I will go through the maths for both of these scenarios – using an ISA.

That’s right, I’ll show how you can achieve the figures with just an Individual Savings Account.

What is an ISA?

So the goal is for an individual to achieve a yearly post tax income of £37,300 for ‘comfort’.

So the question is: how do they do this? And how long will it take?

The goal is not to have a pension of £645k – that’s only if you want to follow the PLSA method.

To make it as simple as possible to understand, I want to demonstrate this case using an ISA.

ISA stands for an Individual Savings Account – it is a tax efficient way of investing in the UK.

Any money that goes into an ISA is after tax, so you don’t get taxed on it when you withdraw.

This is how it differs to a Pension or SIPP; both these account types get taxed on the way out.

What’s also good about an ISA is that you can withdraw money from it at any time you want.

That’s right, you don’t have to wait until you’re 55 to withdraw from it, you can retire anytime.

So how do we use an ISA to achieve our desired post tax income of £37,300 per year?

Individual: Comfortable Retirement Income of £37,300

To create the table above, I have used the following steps to achieve this target in just over 20 years:

1. Open an ISA using an Investment platform that charges low fees (e.g. I use Vanguard).
2. Choose a low cost Index Fund to invest in (e.g. I use the FTSE Developed World ex UK).
3. Add money to your ISA every month (In this example, I have chosen £1000/month).
4. Watch your account grow due to compounding (I have chosen an annual return of 10%).
5. Wait for your portfolio to reach your desired target (i.e. £37,500/0.051 = £735,295).
6. Once reached, you can withdraw this amount every year (i.e. £735,295×0.051 = £37,500).

In this example, I have assumed a yearly withdrawal rate of 5.1%, similar to an annuity rate.

This is how long it’ll take to retire using just an ISA, based on these returns and contributions.

But because you’ll have your workplace pension and a state pension, it will take much less.

Couple: Comfortable Retirement Income of £54,500

To create the table above, I followed similar steps to achieve this goal within just 18 years:

The main differences here are that for a couple, each one has to open their own ISA.

This is because the maximum you can contribute a year to an ISA is £20,000 (at the moment).

In this example, I’ve assumed they are each contributing £1000/month i.e. £24,000 a year.

That is why they would be using 2 ISAs instead of one, which is perfectly fine.

I have assumed the same rate of return for this example (10% per year, which is average).

However, to reach a yearly income of £54,500, they would need a portfolio of £1,068,628.

With a yearly withdrawal rate of 5.1%: £1,068,628 x 0.051 = £54,500 (their desired income).

Therefore, this is how a couple can retire using an ISA (based on these returns/contributions).

Even if they can’t make the contributions, they will still have their pensions to make up for it.

You too can have a Comfortable Retirement

I hope this article shows you how you can actually retire comfortably has an individual/couple.

In reality, you won’t have just your ISA; but also a workplace pension and the state pension.

But I wanted to demonstrate with just an ISA to not go into the taxes involved with pensions.

If you don’t already have an ISA, I highly recommend you set one up – they are free to open.

A work pension, ISA, and state pension will accelerate your path to a comfortable retirement.

If you’re interested in a comfortable and early retirement, check out: Quit Like a Millionaire.

In the book, the authors talk about how they retired not only comfortably, but in their 30s!

To find out more on ISAs, Vanguard, and passive Index Funds: check out my investing articles.

I talk all about which platforms to use, which funds to invest in, and which accounts to have.

Are you on the way to a comfortable retirement? Let me know in the comments below!