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How much will I need to retire? It’s perhaps the toughest question for any saver because so much is unknown, not least how long you will live. So, it’s difficult to be precise.

By following some general principles, though, it’s still possible to plan ahead effectively – whether you seek to do it yourself or with expert support from a financial adviser

Setting realistic targets is key. Many studies have tried to determine what percentage of their pre-retirement income people need in order to maintain their standard of living after they retire. Several, such as the first report from the UK government’s Pensions Commission1, have suggested a figure between 50% and 80% of pre-retirement income.

Just what your own “replacement ratio” should be will depend on your personal circumstances.

But one thing is probably clear: even if you qualify for the full new state pension, currently £9,339.20 a year, most of us will have to rely on our own savings to provide an adequate income in retirement2.

The good news is that you may need less than you think to maintain your current standard of living. Many costs that were deemed essential before retirement often change or fall away when you retire.

To get an idea of how much of their pre-retirement income a retired person would need to maintain their existing standard of living, we looked at two key factors that put a dent in most people’s spending funds when they are working but less so when they retire: the money they save and the money they pay in tax3.

Quite simply, the more you save when working, the less you have available to spend – but also the less you’ll need to match similar levels of spending in retirement. Retirement may also mean moving to a lower tax band. So, in effect, you need less money to arrive at the same net total.

The table below illustrates that and shows how much we think three different people who habitually divert 10% of their gross earnings to their pension would need in retirement.

Replacement incomes assuming 10% pension savings rate before retirement

Pre-retirement income Equivalent post-retirement income Gross replacement ratio
£25,000 £19,963 80%
£50,000 £37,963 76%
£100,000 £71,803 72%

Source: Vanguard calculations. Notes: Figures assume investors reside in England, Wales or Northern Ireland and take into account projected inflation.

But the tax you pay and the rate at which you save may well be just part of each and everyone’s story because there may be other potential changes to your financial circumstances that you have to consider, such as:

  • Work income.This may rise rapidly at some points in your career and less at others, affecting both your ability to save and your standard of living. A higher work income generally means you can accept a relatively lower income in retirement as tax reductions tend to have more impact for high earners. It also isn’t uncommon to see people working past retirement age, both for financial reasons and their personal well-being.
  • Regular expenses. Before or around retirement these may go down, as you pay off your mortgage, or stop paying for children living at home or university. On the other hand, you may have to pay more for healthcare as you get older.
  • Lifestyle expectations. Some people may have visions of long-haul holidays, while others may be content with a more frugal lifestyle. Forecasting can be tricky but a good indication is provided by your most recent spending habits pre-retirement. A reasonable starting point, therefore, might be to assume your spending level after tax remains consistent both before and after retiring after adjusting for inflation.
  • Savings accounts. Where you save – whether it’s an individual savings account (ISA) or self-invested personal pension (SIPP), or a general account – and how you draw your income can make a big difference to the amount of tax you pay. There may also be additional charges if your pension pot exceeds the lifetime allowance, currently £1.07 million.

How much?

Once you’ve factored in all these elements and established your desired income target, the next big question is how to get there.

Unfortunately, low interest rates mean a cash savings account is unlikely to work hard enough to build your pension. Although nothing is guaranteed and you could lose money, a stock market investment in shares and bonds is much more likely to generate the growth necessary over the long term.

To unravel what that might mean in concrete terms, let’s consider the hypothetical case of a 25-year-old earning £25,000 a year who aims to retire at the state pension age of 68, when their salary might be more like £60,000 in today’s terms.

According to our calculations, this person would need to retain around 75% of that final pre-retirement income – or £45,000 – to maintain the same standard of living4, which would mean their pension would probably need to be worth around £507,000 at the point of retirement5. Under these circumstances – assuming they qualified for the full new state pension – we calculate that our hypothetical investor would have an 85% chance of fulfilling their retirement goals by the time they retired.

Getting there

But to get to this position how much would they need to put away in a pension? After all, £507,000 is an awfully large sum of money. It’s also a lot more than the current average size of a defined-contribution (DC) pension pot in the UK, which is a little over £40,000.

However, first impressions can be deceiving. Today’s DC retirees have typically been saving for less than 15 years, while our 25-year-old investor has 43 years to get there (their pension pot will also remain invested subsequently, earning an additional return even as it is drawn down in retirement).

To give you an idea, here’s one hypothetical route they could take: let’s assume that their contributions (including their employer’s) total 12.5% of their salary – or around £260 a month – and that they build steadily in line with their projected income to about £625 per month6. So, in addition to the mandatory 8% that is automatically paid into their workplace scheme, this person diverts a further 4.5% of their salary into a pension scheme.

Let’s assume also that their pension savings are invested in a globally diversified portfolio, with 60% in shares and 40% in bonds, and that they earn – in keeping with our long-term market projections – an average 4% a year after inflation across the whole time the money is invested.

Under these conditions, we calculate that our hypothetical investor would have an excellent chance (more than 85%, to be precise) of achieving their retirement goals7.

Be realistic and plan ahead

Of course, nothing is guaranteed with the stock market and your pot may end up being worth less. Mind you, it could also end up being worth more – after all, the investor in our example could, potentially, earn a bigger return with a higher weighting in shares, given the amount of time ahead of them.

The point, though, is to think about the level of contributions that you’re making to your pension that will give you the best chance of long-term success whilst being affordable.

In any case, remember that it is a burden that you need not bear alone. While you contribute in 5% of your paycheck, your employer will put in least 3% to your pension and the government helps by giving tax relief on pension contributions up to £40,000 a year, assuming you don’t breach the lifetime limit.

So, don’t be daunted. Plan ahead, start saving early and set a realistic target. If you can keep to the path you have set, a comfortable retirement is an attainable prospect.

But if you do feel a little daunted or suspect that it might be too much work, don’t worry. Remember that a financial adviser may be able to help. Vanguard Personal Financial Planning can also design, monitor and manage a personalised financial plan just for you. By helping you to navigate the ever-changing tax landscape, they can do a lot of the heavy lifting and help you stay on track towards your retirement goal.

In our next instalment, we’ll look at how best to invest towards your retirement as well as how best to invest once you’re retired.


1 Pensions: Challenges and Choices, The First Report of the Pensions Commission, 2004,

2 As good as it gets? The adequacy of retirement income for current and future generations of pensioners, Resolution Foundation and the Intergenerational Commission, November 2017:

The UK replacement ratio: Making it personal, Hank Lobel, CFA, CFP, Colleen Jaconetti, CPA, CFP, Ankul Daga, CFA, Garrett Harbron, CFA, CFP, Vanguard Research, Dec 2020

4 The UK replacement ratio: Making it personal, as above.

5 Figure assumes the targeted gross annual income grows with inflation (2%) over the following 20 years (until age 88, three years beyond the current average life expectancy in UK), the investor receives the full state pension, also growing with inflation each year, and market projections based on the Vanguard Capital Markets Model (VCCM).

6 We used the median wage path experienced by full-time workers in UK based on data from the Office of National Statistics plus a flat percentage rate from pension contributions. 

7 This is after running the numbers through 10,000 forward-looking market scenarios based on the VCCM as of December 2019.

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The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

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