How Much Should You Be Saving for Retirement?
Introduction
Planning for retirement is one of the most important financial decisions you’ll make. But one of the most common questions people ask is: “How much should I be saving?” The answer depends on multiple factors, including your desired lifestyle, expected expenses, and sources of retirement income.
In this guide, we’ll explore how to determine your ideal savings rate, what strategies you can use to grow your retirement pot, and how a real-life client case study highlights effective inheritance tax and retirement planning.
1. Understanding Your Retirement Needs
Before determining how much to save, you need to estimate how much you’ll need in retirement. A simple rule of thumb is:
The 70-80% Rule: Most retirees need about 70-80% of their pre-retirement income to maintain their lifestyle.
The 25x Rule: To determine how much you need to retire, multiply your desired annual retirement income by 25 (e.g., £40,000 x 25 = £1,000,000 in savings required).
The 4% Withdrawal Rule: In theory, you can withdraw 4% of your retirement savings per year while maintaining the capital for a 30-year retirement.
2. Setting a Realistic Retirement Savings Goal
Your savings goal should be based on factors like:
Your current age and how long you have until retirement
Your desired retirement lifestyle (basic, comfortable, or luxury)
Inflation and future cost of living adjustments
Expected returns from investments and pensions
Whether you plan to downsize or keep property assets
A quick example: If you earn £50,000 per year, and aim for a 70% replacement rate in retirement (£35,000 per year), you’ll need roughly £875,000 saved by retirement.
3. How Much Should You Be Saving Each Month?
To break it down, let’s look at recommended savings rates based on your starting age:
| Age You Start Saving | Monthly Savings (for £1m at 67) |
|---|---|
| 25 | £400 - £600 |
| 35 | £750 - £1,000 |
| 45 | £1,500 - £2,000 |
| 55 | £2,500+ |
The earlier you start, the lower the percentage of income you need to save.
4. Maximising Pension Contributions and Tax Relief
Employer Contributions – If your employer matches contributions, always contribute at least the minimum required to get the full match.
Personal Pensions & SIPPs – Contributing to a Self-Invested Personal Pension (SIPP) allows tax-free growth.
Tax Relief Benefits – Pension contributions get tax relief at your marginal tax rate:
Basic rate taxpayers: 20% tax relief
Higher rate taxpayers: 40% tax relief
Additional rate taxpayers: 45% tax relief
Maximising Your Annual Allowance – You can contribute up to £60,000 per year (2024 limit) with tax relief.
5. Investing for Retirement Growth
Simply saving money isn’t enough—you need to invest for growth. A typical long-term retirement portfolio should include:
📌 Stocks & Shares ISAs – Tax-efficient investing with no capital gains tax.
📌 Pension Funds & ETFs – Diversified global exposure.
📌 Bonds & Fixed-Income Securities – Reduces volatility as you near retirement.
📌 Property Investments – Rental income can supplement your pension.
Asset allocation should shift towards bonds and fixed-income securities as you get older.
6. Case Study: A Client’s Retirement & Inheritance Tax Strategy
A recent client wanted to retire comfortably while minimising inheritance tax (IHT) exposure. Here’s what we did:
📌 Took out a Life Insurance Policy to Cover Inheritance Tax
Since IHT can reduce wealth passed to beneficiaries, we set up an insurance policy in trust.
📌 Started Gifting Cash to Family
We utilised annual IHT exemptions (£3,000 per year) and larger gifts that would be exempt after seven years.
📌 Transferred Shares of His Limited Company into a Trust
This ensured business assets were transferred tax-efficiently while maintaining control.
📌 Planned to Downsize Property & Distribute Excess Cash
Selling the family home allowed the client to pass cash to beneficiaries while reducing the taxable estate.
Result: He secured his retirement income while reducing his estate’s future IHT liability.
7. Adjusting Your Plan Over Time
Your financial situation will change over time. Key adjustments to make include:
Increasing contributions with salary growth
Rebalancing your investment portfolio as retirement nears
Reviewing estate planning strategies to minimise tax
Factoring in inflation and longevity risk
Conclusion
There is no one-size-fits-all answer to how much you should save for retirement, but by:
✅ Setting clear savings goals
✅ Investing for long-term growth
✅ Taking advantage of tax-efficient pension contributions
✅ Planning for inheritance tax early
You can secure your financial future and retire comfortably.