How much do I need to save for a comfortable retirement in 2025?
- Noel Watson
- 5 days ago
- 7 min read
Introduction
The Pensions & Lifetime Savings Association (PLSA) has recently updated its Retirement Living Standards, stating that a comfortable retirement for a couple now costs around £60,000 a year. These standards are based on independent research conducted by Loughborough University and are shared with our clients during discussions on retirement expenditures.
Mike and Jenny
To evaluate how big a retirement pot might be needed to support this lifestyle, we will use an imaginary couple, Mike and Jenny Taylor. Mike, 63, and Jenny, 60, are planning to retire next year and wonder whether their desired retirement income of £60,000 (net) per annum is achievable with retirement savings of £800,000, consisting of the following:
Note: They have no debt, and we have excluded their house from the balance sheet.
Iteration One: Voyant baseline plan
We will start by building their financial plan using Voyant, our preferred cashflow planning tool, to assess the feasibility of their plan. We are using the following default assumptions:
Using the above data, our first iteration indicates that the investment pot will be depleted (red represents the shortfall) when Jenny is in her mid-70s, which we'd consider a failed plan. They will still have their state pensions (more on state pensions below) to fall back on, but these won't cover Mike and Jenny's desired retirement lifestyle.
Note: For simplicity, we assume Mike and Jenny do not contribute to their retirement pot in their final year of work, and their investment balance remains unchanged.
Iteration Two: Adding state pension and changing expenditure assumptions in Voyant
In iteration two of the Voyant financial plan, we will look to make it more reflective of real-world scenarios:
Mike and Jenny both have full state pensions (currently £11,973 each per annum), which we will add to the plan.
Expenditure tends to reduce as we age, and Mike and Jenny have decided to reduce their spending by 1% less than inflation each year (inflation rate reduced from 3% to 2% in our Voyant modelling).
Things are now looking more positive, with Mark and Jenny only having to rely on their state pension once they are in their 90s, but let's continue to optimise the plan.
Iteration Three: Adding later life care, optimising asset allocation and taxation in Voyant
Later life care
Mike and Jenny would like to make provisions for later-life care. Our default assumption is to add three years' worth of expenditure at £55,000 per annum for the last three years of the older partner's life. This is based on research from LaingBuisson and Bupa on the costs of residential care and the typical duration of care (although a relatively small percentage of people need to pay for care, we prefer to be prudent in our assumptions).
Optimising asset allocation
Mike and Jenny currently have £150,000 in joint savings. They would like to retain an emergency fund of around £20,000 (emergency funds are typically between three and six months of expenditure). Additionally, we will allocate the first year of retirement spending in cash (approximately £60,000). This leaves £70,000 to be invested, with the goal of generating superior longer-term returns compared to leaving the money invested in cash. We will use their ISA allowances, with the remainder invested in General Investment Accounts (GIA). The amended balance sheet is shown below.
Optimising taxation
We have not yet set withdrawal logic in our cashflow planning. By default, Voyant is configured to take cash first, then stocks & shares ISAs, then pensions. The annual taxation for iteration two of the Voyant plan is shown below.
We will alter Mike and Jenny's pension withdrawals to fully utilise their personal allowances. These each start at £16,760 per annum, tapering down to £796 once the state pension commences. The withdrawals will rise again once the cash and stocks and shares ISAs are exhausted - the idea is to optimise lifetime taxation to give Mike and Jenny the best chance of a successful retirement. We can see how these changes have improved the sustainability of the retirement plan. However, there is still some red in the plan, with later-life care not currently funded, and we would consider that the plan is not robust.
Note that for real-world clients, we would create numerous "what-if" scenarios, including either Mike or Jenny getting run over, to ensure the surviving partner's financial plan remained robust.
Iteration Four: Timeline baseline
Voyant is an excellent tool for building a high-level retirement plan, optimising lifetime taxation and creating "what-if" scenarios. However, where we feel it falls short is in modelling real-world outcomes. This is where Timeline comes in. We will make the following assumptions for our Timeline baseline case:
Total fees of 1.1%, which is (approximately) what we would charge per annum for this client.
A portfolio comprising 60% developed market equities (stocks) and 40% bonds.
How do things look? The short answer is "not good", with the plan succeeding in 29% of historical scenarios!
The worst-case historical outcome shows that the investment pot ran out (only the state pension income remained) when Jenny was 71. The impact of taking an initial 7.5% from the portfolio (£60,000/£800,000) in early retirement before the state pensions commenced could prove to be too much of a burden if Mike and Jenny were to experience a poor series of market returns/inflation in early retirement.
There are a couple of things to note:
The worst-case scenario for this particular asset allocation was for the 1915 retiree. Realistically, had Mike and Jenny retired during a World War, spending would naturally have been curtailed. The second-worst time to retire was the 1969 retiree, which we'll use as our more realistic worst-case historical scenario (it's also worth pointing out that the data for some of the holdings for iterations six and seven was only available from 1926 onwards). In this scenario, the investment pot ran out when Jenny was 75.
Note that the investment balance dramatically reduces in the year before their retirement. If this were to happen, Mike and Jenny may consider pushing back their finish date. This might seem like the obvious option, but a market crash can happen at any point (e.g. the first day of retirement!), so we'd suggest that you should try not to let prevailing market conditions influence your retirement date. Easier said than done!
Iteration Five: 100% equities in Timeline
What if we change the asset allocation to 100% developed market equities? This increases the success rate from 29% to 66%, a marked improvement. However, the 1969 retiree fares worse than in iteration four, with the money running out when Jenny is 73 years old. Bill Bengen also found similar results in his research, indicating that a portfolio of between 50% and 75% equities is the sweet spot for the highest sustainable withdrawal rate.
Iteration Six: A more diversified portfolio in Timeline
What if we adopt a more diversified, real-world portfolio, adding back bonds, introducing emerging market shares and tilting our portfolio slightly to small-cap value shares? Our portfolio, at a high level, consists of 70% equities and 30% bonds. At a more granular level, it comprises the following:
42% developed market equities (large and mid-cap).
14% developed small-cap value equities
14% emerging markets
30% bonds
Our success rate has decreased from 66% to 54% compared to the 100% equity portfolio in iteration six. For the 1969 retiree, the investment pot is exhausted when Jenny reaches 75, a two-year improvement.
The big question is, is this a viable plan for Mark and Jenny? At a high level, we typically look for a starting success rate of around 70-80%. Based on the above, we would suggest not.
Iteration Seven: Mike and Jenny work another year and add £50k to their retirement pot - does that make enough of a difference in Timeline?
The standard three levers to consider using to make a retirement plan more successful are:
Work longer (which has the effect of making your retirement shorter, AND means that you will typically save more money)
Spend less in retirement. Not an option for this (imaginary) scenario!
Accept more risk. We have seen that taking more equity exposure doesn't necessarily improve worst-case outcomes.
Mike and Jenny decide to evaluate the impact of pushing back their retirement by a year and committing to saving an extra £50,000 during that time, bringing the total retirement pot to £850,000 when they finish work. If we stick with the portfolio asset allocation used in Iteration six, things look a lot more promising. The success rate has increased from 54% to 73%, while the 1969 scenario has the money running out when Jenny is 79. If Mike and Jenny were to experience a series of poor returns in early retirement, small adjustments could be made in plenty of time to bolster the plan's success (see our article on risk-based guardrails to see how this might be implemented).
It's worth pointing out that we've focused on worst-case outcomes. If Mike and Jenny have average luck, their investment balance will be roughly the same when Jenny is 100 as when they first retired, based on historical outcomes. In the best-case historical scenario, the ending balance was almost ten times the starting balance! An adviser using risk-based guardrails should ensure that the money is spent and/or gifted to prevent the (very fortunate) client from dying with too much wealth.
Conclusion
We've covered a fair amount in this blog and have barely scratched the surface of the work required to build and maintain a robust retirement plan. We've covered the typical limitations of cashflow planning tools and why it might be best to use a tool that incorporates historical inflation and market returns to evaluate potential outcomes. We've seen how increasing the equity content of a portfolio doesn't necessarily improve worst-case outcomes, but diversification can help. Finally, we've seen how just one extra year of work and saving more can dramatically improve retirement outcomes.
Want to find out more?
If you want help with building a robust retirement plan, please get in touch.
About us
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide financial advice on pensions, investments, and inheritance tax.
Our office telephone number is 01932 645150.
Our office address is No 5, The Heights, Weybridge KT13 0NY.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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