Britons to ‘use 25 times rule’ to work out how much to save for comfy retirement

Saving for retirement is a priority for many, but working out just how much to put away and for how long is a question that plagues many.

To estimate a comfortable retirement income, Pete Hykin, CEO and co-founder at Penfold, a workplace pension provider, said: “Financial experts often suggest aiming to replace about 70 to 80 percent of your pre-retirement income during your retirement years.

“So, if you currently earn £50,000 a year, you might aim to have a retirement income of around £35,000 to £40,000 per year.”

As of 2023, the full new state pension amounts to £203.85 per week, equating to around £10,600 per year, and is paid to those at state pension age, which is currently 66.

However, the actual amount a person receives depends on their National Insurance record and how many years they’ve contributed. To get the full state pension, people typically need around 35 years of contributions.

People can then calculate the gap by deducting their estimated state pension from their annual income needs.

Mr Hykin said: “If you need £35,000 a year and you’re getting £10,600 from the state pension, then you’ll need another £25,650 from your private pension per year.”

To work out the total savings needed, Mr Hykin suggested using the “25 times rule” as a starting point, which is where people save 25 times the annual withdrawal they’ll need in retirement.

Mr Hykins said: “If you need to withdraw £25,650 a year, you should aim for a goal of £641,250 in retirement savings.”

To calculate how much people would need to save monthly to achieve this, they’d need to consider their current age, their planned retirement age, and the expected rate of return on their savings.

Mr Hykins said: “Suppose you’re 30 and plan to retire at 67 (giving you 37 years to save), and you’re starting from zero.

“Assuming an average annual return rate of five percent – which is a conservative estimate given the long-term performance of diversified portfolios – you would need to save about £275 per month to accumulate around £641,250 in 37 years.”

However, it should be noted that these calculations do not account for inflation, which reduces the future purchasing power of money.

There are ample tips and tricks to saving more and making money work harder, and one that’s key is to start early. Mr Hykin said: “The power of compound interest means that the earlier you start saving, the less you’ll have to put away each month to reach your goal.”

Most employers also offer a pension scheme and will match contributions up to a certain percentage of a person’s salary. Mr Hykin suggested contributing “at least” as much as an employer will match.

Using an ISA and setting up automatic contributions can also make the process “easier”, according to Mr Hykin. He added: “ISAs offer a tax-free way to save for retirement. The annual limit as of 2023 is £20,000.”