In 2022, Which? conducted a survey asking thousands of retired couples how much they spent each month and what they spent it on.

The survey revealed that the average retired couple spent just under £2,340 per month, or £28,000 per year. Which? considered this enough to provide a ‘comfortable’ retirement, covering all the necessities plus a few luxuries like a European holiday and eating out.

Couples considered to be enjoying a ‘luxurious’ retirement received an income of £3,750 per month or £45,000 per year.

While the ‘comfortable’ retirees spent a similar amount on utilities, groceries, charitable donations, clothing and recreational activities as the ‘luxurious’ retirees, the latter typically spent an extra £8,000 on long-haul holidays, £2,000 on private medical insurance, and £5,000 towards a new car every year.

In contrast, couples with only the state pension to fund their retirement could only cover the necessities. So, if you want your retirement to include holidays and other leisure activities, you’ll need a retirement plan.

One of the most obvious considerations is how long you expect your retirement to last (or put simply, your life expectancy). Based on average life expectancy in the UK, a 65 year-old today can expect to live to age 85 (for males) or 87 years (for females). There’s even a 1-in-4 chance of living a further seven years beyond that.

Within those timeframes, you’ll need to think about your incoming bills and what you’d expect to spend each month on groceries, going out, holidays, clothes, leisure activities and hobbies.

You can exclude the things you won’t have to pay for when you retire – usually things like childcare, a mortgage, life insurance, critical illness cover, commuting costs, and pension contributions.

To take it step further, you might consider what falls under ‘essential’ spending and what you consider ‘lifestyle’ expenditure (the things you wouldn’t want to give up), then calculate the minimum and maximum you’ll need each month. Then it’s time to dream a little: if money was no object, what would you choose to do in retirement?

• Essentials
  Utilities, groceries, household maintenance, insurance, healthcare, clothing and transport
• Lifestyle
  Holidays, eating out, designer clothes, redecorating, a new car, hobbies, recreational and leisure activities
• Luxuries
  Buying a holiday home, funding your grandkids’ education, paying off your children’s mortgage

Don’t forget to factor in the cost of replacing large household items every few years, too. Household appliances, boilers, sofas and furniture…they won’t stop ‘wearing out’ just because you’ve retired.

Coming up with an accurate figure can be complicated and subject to other factors that are often difficult to calculate (for example, the impact of unexpected life changes, stock market performance, and so on). A financial planner will be able to ‘model’ this for you, and help you create a plan that’ll help you achieve your goals.

Many people choose to keep working beyond retirement age, or phase their entry into retirement by working part-time and leaving part of their pension invested. Phasing your retirement is a good way of making your pension pot go further and last longer.

For more on phased retirement, see Is ’phased retirement’ right for you?

For most people, retirement income will come from a pension that you’ve invested into over a number of years (either through your employer, or privately), and the state pension.

– Your State Pension

The full state pension is £185.15 per week (2022/23) or £9,627.80 a year.

To claim the full amount, you need to have made 35 years of National Insurance (NI) contributions by the time you’re eligible to receive your state pension. That’s currently 66 years old but will rise to 67 from 2026 (and later, 68), depending on the year you were born.

Many people, especially women who took time out of the workplace to raise a family, don’t realise they may not be entitled to the full amount. To check your state pension forecast, go to https://www.gov.uk/check-state-pension

But even if you can claim the full amount, you will need to top up your income with a private or workplace pension to enjoy a comfortable or luxurious retirement.

– Defined contribution and workplace pensions

If you’re an employee over 21, your employer will have registered you for a workplace pension, which they’ve been mandated to provide since 2012. Provided you didn’t choose to opt-out of it, your employer will contribute a minimum of 3% of your pay to your pension, and you’ll contribute a minimum of 5%.

These types of workplace pensions are what’s known as ‘defined contribution’ pensions, which means the size of your pension pot is based on how much you’ve put into it. You can also arrange a private defined contribution pension (separate from your employer).

– A defined benefit pension

You might be lucky enough to have a defined benefit or ‘final salary’ pension. This type of workplace pension is increasingly rare, and is more common among people who work in public sector jobs, like health and education. Instead of building up a pension pot over time, it provides you with a guaranteed annual income for life based on your final or average salary.

If you’ve had several jobs over the years, it’s likely you’ll have more than one pension. You may also have one or more private pensions.

In these cases, some people choose to consolidate some of all of their pensions into a single pot. This can often save on fees, allow you to keep a closer eye on investment performance, and make changes more easily, where needed. However, it’s important to seek professional advice before consolidating your pensions – especially if you have a defined benefit pension. You may lose certain benefits if you transfer your money.

A financial planner can provide best and worst-case retirement projections based on your current pension pot and the age you want to retire. Once you know how much your pension pot is worth, they’ll calculate how much more you need to contribute each month to afford your ideal retirement.

Life can be expensive, especially if you have young children and a large mortgage. You might not be able to save as much as you need right now, but as your children get older and your career progresses, you can increase your contributions over the years. It’s worth remembering, though, that time is your friend when it comes to pension saving. So the earlier you begin, the better.

As a guide, according to calculations by Which?, if you’re 40 years old and haven’t yet saved any money towards your pension, you and your partner will need to save £329 per month for a ‘comfortable’ retirement when you reach the state retirement age. By comparison, the same couple would need to find £1,068 monthly to afford a ‘luxurious’ retirement.

These are just estimates, so seeking advice is essential to ensure these figures are tailored to your circumstances. It’s also important to remember that pensions are a type of investment. Their value can go down as well as up and you may not get back the full amount you invest.

Pensions are a tax-efficient way to save for retirement because your pension contributions are tax-free. If you’re a basic rate taxpayer, you’ll receive 20% pension tax relief on your pension contributions up to £40,000 per year. You can claim 40% tax relief if you’re a higher-rate taxpayer.

Pension tax relief is calculated slightly differently in Scotland – you can find out more at https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

A pension is arguably the most important life event you need to save for. The earlier you start, the less you need to contribute because your savings will benefit from the effects of compound growth over the years.

But even if you’ve left it late, it’s not too late to start contributing. Speak to one of our pension planning experts, who will help you implement a plan that will allow you to achieve the retirement you want.