Can I Afford to Retire?

The affordability question

"Can I afford to retire?" is one of the most important financial questions a person can ask. It is also one of the most commonly answered incorrectly — either because people focus only on their pension pot without considering all their income sources, or because they compare their pot to a headline figure without reference to their own spending.

The correct answer requires you to compare two things: what retirement will cost you, and what income you will have to pay for it. If your income exceeds your spending with some margin for error, you may be in a position to retire. If there is a significant gap, you need to understand it before making the decision.

Steve's observation

The most common mistake I see is people asking "can I afford to retire?" without having first worked out what retirement will cost them. They look at their pension pot, compare it to a number they've seen online, and either feel reassured or worried — often without good reason either way.

The question only becomes answerable once you know your spending. Once you have that, the calculation is straightforward. Without it, you're comparing your pension to an imaginary number.

Step 1 — Know your retirement spending

Before assessing affordability, you need a realistic estimate of what retirement will cost you. This means working through your expected expenditure honestly — not just the essentials, but the lifestyle you actually want.

Include:

• housing costs — rent or mortgage if applicable;
• household bills;
• food;
• transport;
• holidays;
• hobbies;
• healthcare;
• helping family;
• irregular costs such as replacing cars and home maintenance.

If you have not yet worked through this in detail, our completed guide ODW-RP-001 — How Much Money Do I Need to Retire? — covers the process step by step.

Step 2 — Know your retirement income

Now identify all the income you expect to receive in retirement. This includes:

• State Pension — check your actual forecast, not the maximum;
• defined benefit or final salary pensions;
• workplace defined contribution pensions;
• personal pensions;
• ISAs and savings;
• investments;
• rental income;
• any continuing employment income.

Be careful to note when each source of income starts. If you retire before your State Pension age, there will be a period when you receive less guaranteed income and your private pensions and savings need to work harder.

Also consider whether each income source is fixed, inflation-linked or variable. A pension in drawdown can fluctuate with investment markets. A defined benefit pension may increase with inflation. The State Pension increases annually under the triple lock. These differences matter for long-term planning.

Step 3 — Calculate the gap

Subtract your expected retirement income from your expected retirement spending. If your income exceeds your spending, you have a surplus. If your spending exceeds your income, you have a gap.

A gap does not necessarily mean you cannot retire. It means you need to understand how the gap will be funded — whether from drawing down a pension pot, using savings, or some other source — and whether those resources are sufficient to last the length of retirement.

For example, if your spending is £35,000 a year and your guaranteed income is £15,000, you have a gap of £20,000. If you have a pension pot of £400,000 and expect a 30-year retirement, you need to assess whether £400,000 can provide £20,000 a year for 30 years, accounting for investment returns, inflation and charges.

Our completed guide ODW-RP-002 — How Much Pension Do I Need to Retire? — covers the pension pot calculation in more detail.

Step 4 — Stress-test the plan

A retirement plan that only works if everything goes perfectly is not a robust plan. Before concluding that you can afford to retire, test what happens under less favourable conditions.

Consider:

• What if investment returns are lower than expected?
• What if inflation is higher than expected?
• What if you live significantly longer than average?
• What if you face unexpected care costs in later life?
• What if you need to help family members financially?
• What if tax rules change?

If the plan still works under these conditions, it is more robust. If it fails under any of them, you need to understand the risk and consider whether to address it before retiring.

What if there is a shortfall?

If your assessment reveals a shortfall, you have several options. None of them is automatically the right answer — the best approach depends on your circumstances, your priorities and how large the shortfall is.

Options include:

• continuing to work and save for longer;
• increasing pension contributions in the years before retirement;
• reducing planned retirement spending;
• taking a phased approach to retirement, reducing hours rather than stopping completely;
• accessing other assets such as ISAs or savings;
• considering whether your home could contribute to retirement funding through downsizing.

Understanding the shortfall early gives you more options. The closer you are to retirement, the fewer levers you have available.

The timing question

Retirement timing has a significant effect on affordability. Retiring two or three years earlier than planned can materially change the picture — less time to accumulate, a longer retirement to fund, and a longer period before State Pension begins.

Conversely, working a few years longer can substantially improve affordability — more time to save, a shorter retirement to fund, and a smaller gap before State Pension starts.

If the affordability calculation is marginal, testing different retirement dates can reveal whether a modest change in timing makes the plan significantly more robust.

What a robust retirement plan looks like

A robust retirement plan is one that:

• is based on realistic spending, not an optimistic minimum;
• accounts for all income sources and when they start;
• is built to last longer than average life expectancy;
• has been tested under less favourable conditions;
• has some flexibility to adjust if circumstances change;
• is reviewed regularly rather than set once and forgotten.

What should I do next?

If you have not already done so, work through your expected retirement spending in detail. Then identify all your income sources and check your State Pension forecast.

Once you have both figures, calculate the gap and assess whether your pension pot and other assets can fill it for the length of retirement you are planning.

If the position is complicated, if the numbers are marginal, or if you are approaching a significant retirement decision, regulated financial advice can help you model different scenarios and understand the risks and trade-offs involved.