6 minute read
Imagine waking up tomorrow and realising you never had to work another day unless you wanted to.
Not because of a lottery win or unexpected inheritance, but because the wealth you have spent years building could already support the life you want.
That is the real test of retirement readiness.
For many people, however, it is surprisingly difficult to answer. You might know the value of your pension, how much you have in savings and what sits in your ISA. But those numbers alone don’t tell you how much income they could provide, how long that money might last or what would happen if life didn’t go according to plan.
Government analysis estimates that 43% of working age people, equivalent to 14.6 million, are not saving enough for retirement to maintain the standard of living they are likely to expect after they stop working.
Working out if you could retire tomorrow starts with understanding what your money may need to fund.
At a glance
- Calculate what your retirement lifestyle could cost
- Bring together every source of future income
- Test how long your pensions, savings and investments might last
- Identify any shortfall while you still have time to address it
Start with what you want retirement to look like
How much you need to retire will depend on how you plan to spend your time, so start by working out what your lifestyle might cost if your salary stopped tomorrow.
Some costs may disappear or fall. You could spend less on commuting, work clothes or mortgage payments, while other expenses may increase because you finally have more time to travel, eat out, pursue hobbies or see family.
Think beyond your regular monthly bills as well. You may want several holidays a year, plan to help children or grandchildren financially, move house, buy a second property or spend part of the year abroad.
According to the Pensions UK Retirement Living Standards, a single person now needs around £45,400 a year for a comfortable retirement, while a two-person household requires £62,700.
These figures provide a benchmark rather than a savings target. Your own requirements will depend on your lifestyle, ambitions and responsibilities, which is why calculating your expected annual spending is important.
With that figure in mind, you can begin to work out how much money you will need each year.
Calculate the income you could have
The next step is to establish where that income could come from.
Start by bringing together your workplace and personal pensions, ISAs, investments and cash savings, along with other assets or income you expect to rely on, such as rental property. This will give you a clearer picture of the resources available once you stop earning a salary.
The State Pension can form an important part of that income. The full new State Pension is £241.30 a week in 2026/27, equivalent to £12,547.60 a year, although the amount you receive will depend on your National Insurance record. It is worth checking your forecast to understand how much you could get and when you can claim it.
Timing matters because your different sources of income may not become available at the same point. If you want to retire before your State Pension age, for example, your savings, investments and other pensions may need to support you until you become eligible.
If you and your partner expect to spend £60,000 a year for example, your State Pension income could eventually cover part of that amount. But if you stop working several years before becoming eligible, you may initially need to draw more heavily on other assets.
Looking at the size of your pension pot alone can therefore give you an incomplete picture. What matters is how your different sources of wealth and income work together throughout retirement.
Will your savings last as long as you do?
Knowing how much you have accumulated is only part of the calculation. You also need to consider how long that money may have to support you.
The latest Office for National Statistics figures show that at age 65, women in the UK have an average life expectancy of another 21.2 years, while men can expect a further 18.7 years. If you retire in your late 50s or early 60s, your savings may need to provide an income for several decades.
Working out whether they will last is not as simple as dividing the value of your pension by the amount you plan to withdraw each year. Some of your money may remain invested and have the potential to grow, while inflation can push up the cost of maintaining your lifestyle and market movements can affect the value of your investments.
The timing of those movements can make a big difference. If markets fall early in your retirement while you are taking an income, you may have to sell more of your investments to fund your spending. That leaves less money invested to benefit if markets recover, which could affect how long your savings last.
Your spending is unlikely to remain constant either. You might spend more on travel, hobbies and experiences during the early years, before your priorities and expenditure change as you get older.
Cashflow modelling can bring these different factors together. By testing assumptions around spending, inflation, investment returns and longevity, you can see how your finances might cope under a range of circumstances and identify any adjustments you may need to make.
You can’t know exactly what the next 20 or 30 years will bring, but you can test whether your finances could withstand a range of outcomes.
Prepare for the expenses you can’t predict
Even a carefully calculated retirement budget needs some breathing room. Once you stop receiving a salary, a large unexpected expense can have a greater impact because the money has to come from savings, investments or other retirement income.
Some costs, such as replacing a car or repairing your home, are easier to anticipate than others. You or your partner may eventually need additional care, for example. Age UK estimates that residential care costs around £1,100 a week on average, rising to £1,450 for a nursing home.
This doesn’t mean setting aside enough cash to cover every possible scenario. An appropriate reserve is a readily accessible pot of money for unexpected or short-term costs, with the amount depending on your spending, other sources of income and personal circumstances. Having this buffer can reduce the need to sell investments at an unfavourable time.
If you have a partner, consider how your finances could change if one of you outlives the other. Your household bills are unlikely to halve, while pension and other income could change, leaving the surviving partner with a very different financial picture.
Building some headroom into your retirement plan can make it more resilient, giving you greater scope to absorb unexpected costs without forcing you to rethink your longer term plans.
How to spot the gaps in your retirement plan
Once you have worked out how much you expect to spend and the resources available to fund it, you can start to see whether the two add up. If there is a shortfall, the important thing is understanding its size and what you can do about it.
For example, if you expect to need £50,000 a year but your pensions, savings and other income are on course to provide £44,000, you have a £6,000 annual gap to consider. Depending on how far you are from retirement, you might increase your pension contributions, work for another year or two, adjust your investment strategy or reconsider how much cash you hold.
Changes made several years before you stop working have more time to take effect, so identifying a shortfall early can give you more options.
Tax should form part of the calculation too. Pensions, ISAs and other investments are treated differently, so the order in which you draw from them can affect how much income you ultimately have available to spend.
You may also find that the numbers tell you something very different. Your finances could already be capable of supporting the lifestyle you have planned, or put you in a position to retire sooner than you expected.
Retirement is about having a choice
Being financially ready to retire tomorrow does not mean you have to hand in your notice. You might enjoy your career and want to continue working, reduce your hours, start a business or volunteer.
What changes is the role work plays in your finances. If your salary is no longer essential to support your plans, continuing to work becomes a choice rather than a financial necessity.
That is ultimately one of the most valuable things retirement planning can provide. Instead of focusing on whether you have reached a particular age or accumulated a certain sized pension pot, ask yourself a more useful question: if you stopped working tomorrow, what would happen next?
If you can answer that with confidence, you have a much clearer idea of whether you are ready to retire.
Ready to find out when you could retire?
Your retirement may be around the corner or still several years away. Flying Colours Advice can help you assess if your pensions, savings and investments could provide the income you need.
An adviser can help you calculate your potential income, model how long your wealth could last and identify any gaps before they become a problem.
You can arrange a conversation with an adviser here: https://fcadvice.co.uk/book-an-appointment/
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
Tax treatment depends on individual circumstances, thresholds, percentage rates and tax legislation may change in future Finance Acts.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.
Planning horizons are illustrative and will vary based on individual health, circumstances, and life expectancy.