Is a ‘comfortable retirement’ affordable?

‘I have enough money to last me the rest of my life, unless I buy something.’ That quote by the American comedian Jackie Mason sums up the dilemma facing many retirees: Do they have enough financial resources to last for a lifetime? 

The Pension and Lifetime Savings Association’s Retirement Living Standards study calculates how much is needed¹. The study defines three categories of expenditure ‘modest’, ‘moderate’ and ‘comfortable’. The figures for a comfortable retirement are shown below.  

 Gross and net figures for a comfortable retirement 

^{Source: Retirement Living Standards, Pensions and Lifetime Savings Association, 2023} 
These figures are higher for anyone living in London. The net figures are the income required after tax and assume that in a couple both have pensions. The analysis also excludes NI contributions. In terms of defining ’comfortable’, it’s worth noting that this isn’t living extravagantly. The figures are based on using Sainsbury’s for the weekly shop, holidaying in the Mediterranean for two weeks each year (supplemented by three weekend city breaks) and driving a three-year-old Ford Fiesta².  

The magic number 

The million-dollar question is ‘how big a pension pot will provide the income level required’? 

That depends on a number of variables. Is there any income from defined benefit schemes? What about the State Pension? Fewer people will retire with defined benefit income, but most should be entitled to a State Pension.  If we assume the maximum State Pension is payable of £11,502 (and that both parties in a couple have a full National Insurance record), then the income levels required for a comfortable retirement would reduce: 

Gross amount required after allowing for full State Pension  

^{Source: Retirement Living Standards, Pensions and Lifetime Savings Association, 2023} 
More people now chose drawdown to manage their retirement income^3. The latest Morningstar analysis suggests a safe withdrawal rate with a 90% probability of money lasting 30 years is 4% (assuming a 40% equity weighting)⁴. This means a single person with a full State Pension would need a pension pot of nearly £1 million. A couple would require a combined pension pot a little over £1.1 million. The FCA in its thematic review raised concerns over the use of a single withdrawal rate, but it does give us a starting point. 

An alternative approach would be to buy a lifetime annuity. A level lifetime annuity for a 65-year-old would provide £7,345 pa for a purchase price of £100,000⁵. This would reduce the pension pot required to under £550,000 for a single person or around £685,000 for a couple both aged 65. However, this income would not increase with inflation.  

These figures suggest many people could fall short of the amount required for a comfortable retirement. A 2022 ONS report on pension wealth suggests that the average pension pot for men in their 60s is £228,200 and for women in their 60s is £152,600⁶.   

Squaring the circle 

There are actions that can be taken if a comfortable retirement looks challenging. For example, delaying retirement. This gives more time to save and more time for savings to grow (though the value of investments can fall). Someone over State Pension age could defer the State Pension.  

Another solution could be to take more income from a drawdown pot. The FCA review concluded that withdrawal rates should reflect the client’s circumstances. Someone with access to other assets as a backstop might opt for a lower probability of success. For example, a 70% probability of success that money should last 30 years, increases the safe withdrawal rate from 4% to 5%⁷. Alternatively, someone whose life expectancy is likely to be reduced by poor health or lifestyle factors, or who is older than 65, could choose a rate predicated on money lasting, say, 20 years rather than 30. This would increase the rate to 5.5%⁸.  

Expenditure could reduce over the course of retirement therefore it may not be necessary to fully inflation-link income. In its 2022 report, Morningstar modelled partial inflation-linking, assuming income was inflation-linked by 1% less than the actual rate of inflation. This increased the safe withdrawal rate by 0.5%⁹.  

Other solutions may include leveraging other assets (including property equity), working in some capacity during retirement or simply accepting a lower standard of living.  

You can find out much more about this subject in our report ‘How much does a comfortable retirement cost?’