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Pension Calculator: how much money do you need to retire? – Ad | This is a paid partnership with PensionBee
How much money do you need to retire? And how much should you be saving today?
These are some of the most asked questions as we consider what our future lives hold financially.
To some, this is like asking how long is a piece of string?
And to others, it’s a goal setting question, and most of us don’t bother with goals.
Thinking about it, the answer to the first question isn’t quite exact, although we can make certain assumptions that can help get us there.
I previously wrote in our retirement case study that there are 5 other important questions to consider when trying to answer these questions.
- How much income do I need in retirement?
- And how large does my target pot of money need to be?
- How long in years do I need to invest my money for?
- What portfolio returns are realistic to use for my calculations?
- And what monthly (or annual) contributions do I need to make?
Considering each of these, in turn, will lead to the answer.
Q1 is pretty straight forward. If you’d like £2,000 in net income in retirement to meet your expenses, then that’s your answer. £2,000 a month or £24,000 a year.
Q2 has to do with how much of your retirement pot you want to withdraw each year.
If you want to withdraw 4% per annum, then you need a pot of £600,000 (being £24,000 divided by 4%).
Or, if you prefer a withdrawal of 3%, then you need a pot of £800,000 (being £24,000 divided by 3%).
Q3 refers to the time horizon that you have.
So for example, if you’re 35 and want to retire at 55, then you have a 20-year horizon.
Q4 refers to what returns you should assume in your calculations. I.e. Real returns (post-inflation) and net of investment fees.
So you could pick 3% – 5% as examples. You want something realistic here.
Q5 which is all about how much you should be saving today requires a bit of maths!
As someone who geeks out on Excel all the time, I knocked out a spreadsheet that helps me work this out easily.
However, recently, I came across the neat Pension Calculator from PensionBee that attempts to help you work out how much you should be saving.
I’m naturally sceptical of online calculators and usually need to understand the assumptions made in order to use them confidently.
Today’s post is my opportunity to review the pension calculator from PensionBee to see whether it’s something you might want to use yourself.
Who are PensionBee?
We met them a few months ago when I wrote a review on their offering to aggregate your multiple pensions.
They are an innovative company with the mission of making pension savings simpler.
Follow the above link to read more about them.
Pension Calculator: How It Works
The calculator has one goal –
To help you determine how much money you should be saving monthly in order to hit your future income goals at retirement.
It has been created to look as simple as possible with the option to change the following key items:
- What would you like to receive annually when you retire?
- Your current age and expected age of retirement.
- The amount of your current pension pot (if any).
- Personal monthly contributions you’d like to make.
- Any personal one-off contributions.
- The amount your employer might contribute
- Finally, you get the option to include your state pension in the calculations or not.
By setting #1 above and then adjusting the dials for #2 – 7 above, you should see a visual that projects what your expected future income is in retirement.
It looks something like this:
If the projected future income that results isn’t enough to meet income goals that you have in #1 above, you have the option to adjust:
- Your monthly contributions,
- Or your retirement age.
I tested this calculator myself and compared it to the results I got using my own spreadsheet (having mirrored their assumptions) and I can confirm it works accurately.
Why not check out the Pension Calculator yourself?
Pension Calculator: What We Like
Below are things I think make this calculator pretty neat, likeable and useable:
- It works very well on the desktop as well as on mobile. Having tested both, it is good to have the option to do this on the go.
- The results are generated in real-time and visually on an appealing dial.
- It is simple to use and can be understood by anyone.
- They separated personal contributions and employer contributions as these could vary significantly.
- There is the option of including your existing pensions or one-off contributions in the calculations.
- The option of including your full state pension in the calculation is available to give a more accurate picture.
Pension Calculator: Who Can Use It?
This calculator could be used by any adult in the UK who is considering what they should be saving for their retirement.
You can use it irrespective of the type of pensions or savings accounts that you have.
What this tool does best is help you estimate what sort of numbers you should be saving and investing for a specific future income level.
The Pension Calculator can also be used by someone outside the UK, although they’d have to turn off the option to include “State Pensions” in the calculations.
Pension Calculator: What Assumptions are Made?
The assumptions made are pretty robust and sensible. They include:
- It is assumed that investments grow at a rate of 5% and that the inflation rate is 2.5%.
- Cost of investing money with PensionBee is deducted as part of the calculations.
- A rate of 3% is used to calculate your annual income i.e. a Safe Withdrawal Rate.
- Monthly contributions are assumed to increase by 2% every year, which helps offset the impact of inflation at 2.5%.
Pension Calculator: Any Risks?
The key point to make here is that calculators only produce estimates.
The projected income at retirement is not guaranteed and is only a guide.
The calculator itself is just a tool like any other but helps give you results that can guide your decision making.
Pension Calculator: What Could Be Better?
I noticed a few things that I thought could be better with this calculator:
1. When I entered how much I thought I could contribute/save each month, I expected the calculator to immediately tell me by how much I need to save monthly (all things being equal) in order to hit my expected future income.
Instead, it told me what the implied future income is based on my monthly contributions, and I then had to move the dial higher and assume higher contributions.
I think it would be a good addition to have the above generated automatically.
Plus, it would be helpful to see what the shortfall is as a number, although you could easily work it out as the results show you what you expect in retirement annual income vs what you might get.
2. One of the key inputs for accelerating one’s future retirement pot is the level of returns expected.
The calculator made a reasonable assumption of 5% and then factored in inflation at 2.5%.
I would have liked the option to adjust this level of return as it is currently fixed at 5% and some might consider it too small a return whilst others might think it’s too ambitious.
3. The Pension Calculator appears mainly targeted at UK investors as those are typically the users of PensionBee.
However, this tool could be used by people outside the UK, and I think there could be an option to change currencies on the tool.
Overall, the team at PensionBee have created a simple, practical and useful tool that can help you gain more insights and plan better for your money.
This tool is ideal for the person who is planning for their retirement and needing to know what their contributions should be each month to hit their future income goals.
Given it’s accessible, flexible and simple to use, it is one you should consider checking out if pension contributions are top of your agenda.
- Reader Case Studies: When Can I Retire?
- How Much Money You Should Have Saved By Age
- Reader Case Studies: What Should I Do With My Savings?
- Investment Asset Classes: Pros & Cons
How confident are you about your savings for retirement?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.
Michael Harper says
Hi, just a quick comment that your answer to your Q2 does not take into account Tax.
Ken Okoroafor says
Michael, thank you. I thought my emphasis on “net income” from Q1 flowed through…