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Can you recreate your salary in retirement?

Replacing your salary is hard - but you may not need to.

Ed Monk - Ed joined Fidelity in 2016 following a 13-year career in newspaper journalism, most recently as Investment Editor at The Daily Telegraph.

When you find out how much you need to save to generate the income you expect in retirement, it can come as a shock.

For most people, generating an income from savings that matches their pre-retirement salary will be very hard, if not impossible.

But there is some good news. First of all, you may not need as much to live on in retirement as you do as a working person, because some costs like paying a mortgage or forking out for children tend to fall away as you reach retirement age.

That’s not all. The fact that you are saving money through your workplace pension means that, although you earn more as a working person, a proportion of this money is not actually available to you for spending. Once you hit retirement you can turn from building your pot to spending it, and no longer need to shovel a chunk of your income into savings.

Finally, there’s some help in the tax system as well which means those past their State Retirement age get to keep a little bit more of their money. And, of course, they may have the State Pension itself to boost their income.

Taken altogether, these things mean that the amount you need from a retirement fund to match your salary as a working person may not be as high as you think.

To help show what we mean, consider the example below which looks at the case of someone earning £60,000 in work.

The same level of spending from half the earned income?

A person earning £60,000 a year could take home £3,624 a month after paying tax and National Insurance. If they were contributing to pensions and other savings, however, the amount they have available to actually spend is lower.

For example, were they contributing 10% of their salary to a pension (not including anything their employer may pay in for them) their take-home pay would fall to £3,324 a month. If they were then saving £500 of their pay into savings the money available to them each month for living expenses drops again to £2,824.

How much would it take to recreate that £2,824 a month of expendable income in retirement, once they’ve hit their State Retirement Age, stopped working and ceased their saving?

Believe it or not, thanks to the fact that National Insurance is no longer due for those over their State Pension age, and because they no longer need to set aside amounts for saving inside and outside a pension - the annual income they would need to produce £2,824 a month to spend would drop from £60,000 to around £39,250.

And, of course, they will be receiving a State Pension, the full entitlement of which amounts to £9,339.20 a year in 2021/22.

So - the amount they have to generate from their own retirement savings income (not including State Pension) to leave with them the same amount to spend each month would be a little under £30,000 - half their £60,000 pre-retirement salary.

This is purely an illustration and we’ve made a number of assumptions about their circumstances. In particular, that they are eligible for a full State Pension, which requires 35 years of National Insurance contributions, and that they go from saving significant sums as a working person but then cease their saving completely once retired.

But it helps to show how income in retirement may not need to be as high as you first imagine. When funding your retirement seems like a struggle, that should be welcome news.

Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. The minimum age you can normally access your pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless you have a lower protected pension age. Tax treatment depends on individual circumstances and all tax rules may change in the future. Pension and retirement planning can be complex, so if you are unsure about the suitability of a pension investment, retirement service or any action you need to take, please contact Fidelity’s retirement service or refer to an authorised financial adviser.