As my mum would say, ‘how long is a piece of string’? Which is to say, it depends. 

There’s really four steps to this:

1. How much money do you want per year when you retire?
2. When do you want to retire?
3. How old are you, and what savings do you have right now?
4. The magic number: what you should pay in.

Seems simple, right?

Let’s break it down.

1. How much money do you want per year when you retire?

What’s your dream for retirement? Is it living it up on a beach somewhere in a low cost of living country, or is it skiing holidays and leaving some money to your children? People are different, and the goals that you have and the lifestyle that you want are as individual as you are.

The common concern is that you’ll need as much as you currently earn- but think about the fact that you may not have to continue paying a mortgage, and you won’t have commuting costs (except to the bingo).

A survey by Which? Suggested that the average couple spends around £27,000 a year in retirement, with those who want to live it up spending around £42,000 (mainly on long haul trips). 

We asked some of the Penfold customers how much they’re estimating:

“I’m going for about £50,000 for my wife and I. I’d like to see all the places on my bucket list”

“£20,000. I like working, and I think I’ll be able and want to continue into retirement age. I’m also struggling at the moment to make higher contributions than that because I’ve just bought a house”

“I have no idea. I should use this pension calculator. I read a lot of things about finances but at the moment I just pay in what I can afford, which varies”.

Even if you don’t have a specific number in mind, try to at least envision the sort of life you might like and the sort of person you are. Also bear in mind that expenditure in retirement may not be consistent- people tend to spend less on things like travel when they get older, and may need to spend more on healthcare. 

2. When do you want to retire?

The money you have in your pension can be used in a number of ways, but one of the common ways is purchasing an annuity, which is where you buy a policy from an insurance company for a fixed income every year until you pass away. Obviously, the younger you are when you retire, the more likely an annuity is likely to cost. Equally, if you want to do your own thing with the money, the younger you are when you retire, the longer it likely needs to last you. 

When you’re thinking about how much you want per year, you can also include the state pension, which you currently receive at 68 years old (unless you’re nearing retirement now, then you might have snuck into a bracket where you receive it earlier). It varies per person, but the average couple will receive around £15,000 a year. Again, if you’re planning on retiring around that time, the state pension will contribute to what you need. If you’re planning on early retirement, you’ll need to bridge that gap yourself. 

Some people are very interested in retiring early, pumping as much as they can into their pension and sacrificing lots of flat whites along the way. Others are not so fussed, aiming for more of a work-life blend into their twilight years.

Again, when you want to retire is a very personal choice that reflects your own personal circumstances. 

Let’s ask the customers:

“I can’t really see myself ever retiring fully. I guess I’d like to have the option, so I’m going to go with 65 because I don’t know how I’ll feel by then”.

“I bring a packed lunch and cut my spending now. I put everything in my pension so I can consider retiring at 50”.

“I guess I’m thinking I’d like to do projects in my late 60s and 70s. Genetically I’m likely to live to a ripe old age, but I’d like to slow down. I think I’d also be interested in consulting projects”.

3. How old are you, and what savings do you have right now?

The older you are, and the less you have in savings, the more contributions you need to be making. This is because you have less time to save, and less time to take advantage of compound interest and growth of your pension pot. 

On our website, we’ve built a nifty pension calculator for you. Simply pop in a rough estimate of the wage you think you’ll want based on step one, the age you want to retire based on step two, and what you have now, and we’ll calculate what you need to be saving.

4. Ta Dah! The magic number.

Now, it’s worth bearing in mind that this is just a tool to help you have an idea of what you need to be putting away to meet your individual goals. 

Some companies also go by a rough rule of thumb: to take your current age and halve it, and that’s the amount of your pre-tax salary as a percentage you should be saving. But in the world of freelance, it’s not always that clear cut, which is why we wanted to provide this guide.

As always, anything you read on the Penfold website does not constitute financial advice of any kind. Work hard and be nice to people.