The exact amount of money you need for a ‘moderate’ retirement – so will YOU have enough? Our experts crunch the numbers and reveal how you can hit the goal at any age

Working out if you’re on track for the retirement you dream of is essential to avoid running out of cash in older age. But the calculations are far from straightforward.

That’s why we’ve called on experts at investment platform AJ Bell to crunch the numbers to find out how much you need to be saving at every age to stand the best possible chance of attaining your ideal retirement.

The figures may look daunting, but there are plenty of tricks to make saving much easier, as our experts explain.

Work out how much money you will need to live on

Before you can start thinking about how much to save every year, you need to get an idea of what you’ll require for your ideal retirement.

Fortunately, there are industry figures, which were updated last week, that make this much simpler than you might imagine.

The Pensions And Lifetime Savings Association has rule-of-thumb figures for how much you would need for what it calls a minimum, moderate or comfortable retirement lifestyle.

For example, a minimum standard, costing around £13,400 a year – or £21,600 for a couple – would cover your basic needs and leave some left over for fun, such as eating out once a month, a self-catering holiday in the UK and some affordable leisure activities.

A moderate standard would cover all this, plus more luxuries such as an annual holiday abroad and a takeaway each week. For that you’d need £31,700 a year – or £43,900 for a couple.

A comfortable retirement would give you some day trips, extra-long weekends away and a four-star fortnight in the Med.

For that you’d need a substantial £43,900 a year – or £60,600 for a couple.

Once you’ve identified the type of retirement you would like to target, you can consider how much money in total you’d need in your pension pot to get you the yearly income that you need.

There are two main ways of producing an income from your pension pot.

You can use it to buy an annuity, which is a fixed income for life. They can pay out a fixed amount, or have protection against inflation. Alternatively you can keep your pot invested so it can continue to grow, and just draw an income as and when you need it.

In our calculations we assume that you opt for the latter option – known as income drawdown – and take 6 per cent of the value of your pot every year

What you need to do to reach your target

Once you have your target retirement pot figure, you can come up with a plan to get to it.

The earlier you start saving the better, as the contributions you make into your pension when you’re younger have decades to compound and grow. However, it is never too late to make a big difference to your lifestyle in later life.

AJ Bell has calculated how much you need to save at every age to be in with a chance of a moderate lifestyle in retirement.

If you would be happy with a minimum lifestyle or prefer a comfortable one, you will have to dial up or dial down your contributions accordingly.

The calculations assume that you contribute to your pension consistently throughout your working life. If you have time out of work, you will need to increase the amount you save in the years when you are earning in order to hit your target.

The calculations also assume that your pension pot grows by 4 per cent every year after charges, that you retire at the age of 68 and that you receive the full state pension.

To achieve an income of £31,700 for a moderate income, you would need to receive £36,500 before tax. The state pension would cover £11,973, leaving a hole of £24,527 a year to fill with private pension income.

That’s the equivalent of £490,000 when spread out over the course of a 20-year retirement.

How much you need to save in your 20s…

If you start to save for retirement in your 20s, you get ahead of the game and stand a much greater chance of reaching your target lifestyle.

Put £3,750 into your pension every year and continue to do so throughout your working life and you would end up with a pension pot of £568,752 on retirement at age 68, AJ Bell figures suggest.

If you take out your tax-free cash of 25 per cent, your pot size falls to £426,563, which would be enough to generate an income for a moderate retirement.

However, of the £3,750 you need to save, you will only need to put in £3,000 (£250 a month) and the taxman will top it up with the extra £750.

That is because pension contributions are free of income tax, so for every £80 you save the Government adds in £20, assuming you’re a basic-rate taxpayer.

Higher and additional-rate taxpayers get even more generous tax relief, so they only need to pay in £60 and £55 respectively to save £100 into a pension.

If you’re working for an employer, you are likely to receive contributions from them too. Auto-enrolment rules mean your employer must contribute a minimum of 3 per cent of your salary and you 5 per cent.

In that case you’ll have to pay in even less to achieve a moderate retirement.

If your employer paid the minimum, you would only have to contribute £156.25 a month or £1,875 a year to hit your target.

…In your 30s

If you wait to maximise your pension contributions until your 30s, reaching a moderate retirement becomes harder.

Tom Selby, director of public policy for AJ Bell, says: ‘While life can get in the way of retirement planning, particularly in your early years, delaying will mean you need to squirrel away more money each month to reach your retirement goal.’

The AJ Bell figures assume you have a £20,000 pension pot at this point, as most workers will be auto-enrolled into a pension.

The amount that you will need to generate your target income rises to an annual contribution of £5,000, which amounts to a total contribution of £195,000 by the age of 68.

Of that you will need to pay £4,000, or £333 a month – the rest will come from tax relief. If you’re in a company pension, this falls to £2,500 or £208 a month.

If you only start saving in your 30s, you’ll need to save even more to catch up.

…In your 40s

If you have managed to save £50,000 into a pension by this age, you’ll have to save £5,800 a year (£483 a month) to hit the target. If you’re a basic-rate taxpayer you would pay £4,650 of this (£386 a month) or £2,900 (£241 a month) through a company pension.

If you are a higher-rate taxpayer by this age, you will only have to save £4,230 a year (£362.50) and the rest would come from tax relief.

If you are paying into a company pension scheme, the amount you would have to save would fall to £2,712 a year, or £226 a month.

…In your 50s

Even if you have already accrued a £100,000 pension pot, you will still have to contribute £12,000 in your 50s – amounting to £228,000 in total – to achieve a moderate income. Of this, £2,400 will be tax relief if you’re a basic-rate taxpayer – or £4,800 if you’re a higher rate taxpayer.

If you receive at least minimum pension contributions from your employer, you would only have to contribute £4,500 of the total £12,000 – £375 a month.

Prepare to do some fine-tuning

These figures make a ‘moderate’ retirement sound achievable if you start early, but every situation is different.

‘In truth, people’s expectations of what a modest or comfortable retirement would mean to them personally will vary wildly,’ warns Jason Hollands, managing director at wealth manager Evelyn Partners.

‘The costs of delivering a moderate or comfortable lifestyle in retirement will really depend on your hobbies and interests, how often you like to change a car, preferred holiday destinations, whether you have children and grandchildren you like to see and treat, whether you are a drinker or smoker, the costs of maintaining your home as well as factors such as the transport costs involved.’

He adds that what you are happy with in retirement will be influenced by what you earned while still in work. ‘If the retirement income is only a fraction of what you were used to living off, your retirement lifestyle may not feel that comfortable,’ he says.

How to invest to achieve your goal

The key is to save what you can – and as early as you can. This is rarely easy – especially when your immediate costs consume much of your income. A workplace pension can help because your savings are taken from your income before you get paid so you don’t miss the money – and of course you get contributions from your employer.

If you would struggle to increase your pension contributions now, consider doing it when you next get a pay rise, before you have got used to the extra income.

There are also other actions you can take to increase your chances of building a decent pension pot.

Firstly, keep a watch on the fees you pay, as these eat into your returns and shrink the size of your pot. See Page 54 for more on when it can make sense to pay more on certain funds – and when you should look for cheaper options.

Secondly, make sure your pension pot is invested in a strategy that will get you to where you want.

The further away from retirement you are, the more risk you can afford to take with your retirement pot as you have longer to ride out the ups and downs.

As a rule of thumb, higher-risk portfolios tend to include a high proportion of shares, which are seen as riskier but with greater potential to grow in value.

Then, as you want to moderate your risk levels, you can start to increase the proportion of bonds, which are typically seen as lower risk and lower growth.

So that you don’t have all your eggs in these two baskets, you may wish to consider a small proportion – no more than a few per cent of your total investments – in assets such as gold, commodities, infrastructure and property.

When you’re in your 20s and even into your 30s, it is likely that you can afford to keep the vast majority of your pension pot invested in shares – a good 80 per cent, according to Hollands.

The AJ Bell figures assume a return of 4 per cent a year on average, but a high-risk investment strategy may well exceed that, though there could be bumps along the way and years where your fund hardly grows.

Experts often recommend that you move into lower-risk investments as you approach the last few years before retirement.

If you plan to buy an annuity, this is particularly important because you don’t want to risk a big fall in the value of your pension pot just before you cash it in to buy the income.

If you plan to keep your pension pot invested and only draw on it as and when you need it, you may be able to afford to keep the risk levels up for longer on large portions of your pension. That is because you may not have to spend it for decades after you retire.

If you would prefer the certainty of a guaranteed income in retirement, you can opt for an annuity rather than leaving your money invested and taking an income. However, in that case you will need to save more to reach a moderate standard of retirement and still release your tax-free cash.

A single person would need to save around £440,000 into their pension pot and use the entire pot to buy an annuity, or save just under £590,000, if they wanted to take the tax-free cash before buying the annuity.