How much annual income do you need to maintain your lifestyle?
The two-thirds replacement rule survives because it is memorable, not because it is accurate. What actually changes at retirement is specific and countable: pension contributions stop, National Insurance stops, commuting stops — and housing costs may not stop at all, which is where most estimates go wrong.
- What stops: pension contributions, National Insurance on earnings, commuting and work costs.
- What continues: everything domestic, and housing if a mortgage or rent remains.
- What rises: heating and daytime costs, travel and leisure in the early years, care later.
- The method: twelve months of actual spending, adjusted line by line.
Tom's replacement-rate calculation said he needed £38,000 and his actual spending, once he had stripped out the commute, the pension contributions and the National Insurance, came to £29,000. Nine thousand pounds a year is four years of retirement.
01 Why replacement rates mislead
A replacement rate is a percentage of pre-retirement income, and income is the wrong base. Two households on the same salary can spend wildly different amounts, and the one saving 20% of it needs far less in retirement than the one saving nothing.
The rule also ignores mortgage status, which is the largest single variable. A household that clears its mortgage at 62 has a step change in required income that no percentage of salary can capture.
Start from spending instead. Twelve months of bank and card statements, categorised roughly, gives a number that is specific to you and takes an evening to produce.
Shows: your retirement income requirement, built from current spending less what stops at retirement. Ignores: tax, inflation, care costs, and any change in spending across the phases of retirement.
On the defaults above, the worked example shows £32,400 a year. That is 77% of current spending, before any deliberate change in how you live.
Source: Plan your retirement income
02 What actually stops
Pension contributions stop, and for someone contributing 10% that is an immediate reduction in required income of the same amount. National Insurance stops at State Pension age even if you keep working, which is another few per cent of gross.
Commuting stops, and it is usually larger than people estimate once season tickets, fuel, parking and the second car are counted. Work clothing, lunches and the incidental costs of being somewhere five days a week go with it.
Together these commonly account for a fifth to a quarter of gross income for a mid-career employee, which is most of the gap between salary and required retirement income before any lifestyle change is considered.
One item deserves separating out because it distorts the comparison: the mortgage. Where it ends before retirement, the payment stops and the required income falls by the whole of it. Where it runs past the retirement date, it continues into a period when income is lower and less flexible. Two households with identical salaries and identical spending can therefore need retirement incomes several thousand pounds apart, and no percentage rule can express that.
Source: National Insurance: introduction
03 What continues and what rises
Every domestic cost continues: council tax, utilities, insurance, food, maintenance. Heating rises for a household at home all day. Travel and leisure typically rise in the first decade, which is the point of retiring.
Housing is the variable that dominates. A mortgage that runs five years past your retirement date has to be funded from retirement income, and rent continues indefinitely — which is why the published standards assume neither and have to be adjusted.
Care costs sit at the far end and are open-ended, which is a separate planning problem rather than a line in the annual budget.
Source: Retirement Living Standards
04 The three phases
Spending is not flat across retirement. The active early years are the most expensive discretionary period; the middle years typically see travel and leisure decline; the late years can see care costs rise sharply for a minority.
Evidence on UK household spending shows real spending declining through retirement for most households, which means a plan that increases withdrawals by inflation every year for thirty years overstates what is needed in the middle period.
That is not a reason to plan on spending less. It is a reason to plan the shape rather than a single number, and to hold the flexibility that lets the early years be more expensive than the middle ones.
The practical implication is to plan a front-loaded withdrawal rather than a flat one. Taking more in the first decade and less in the second matches what households actually do, uses the years of good health when they exist, and reduces the amount the portfolio has to carry through its most vulnerable period.
Source: Income and wealth
05 Doing it properly
Take twelve months of spending. Remove pension contributions, National Insurance, commuting, work costs and anything that ends with the job. Add anything retirement introduces — more heating, more travel in the early years, a private health policy if you want one.
Then check the housing line separately, with the actual end date of any mortgage. Then compare the result against the Retirement Living Standards to sanity-check it, remembering to add housing back before comparing.
The output is one number and a shape. That number, less guaranteed income, is what your savings have to produce, and it is the input to every other calculation in a retirement plan — the pot you need, the withdrawal rate you can sustain, and the date at which stopping becomes possible.
Ignore replacement rates. They are a percentage of the wrong number, and they systematically overstate what a saver needs and understate what a spender needs. Take twelve months of statements, strike out the pension contributions, the National Insurance and the commute, and you will usually find the answer is several thousand pounds below what any rule of the road suggested. Then handle housing separately with the actual mortgage end date, because that is the line that makes two identical households need completely different incomes.
FAQ
Is two-thirds of my salary a reasonable target?
It is a percentage of income when the relevant base is spending. A household saving 20% of its salary needs far less than one saving nothing, and neither is described by the same fraction. Start from twelve months of actual spending.
What stops when I retire?
Pension contributions, National Insurance on earnings once you reach State Pension age, commuting, work clothing and the incidental costs of being somewhere five days a week. For a mid-career employee those commonly total a fifth to a quarter of gross income.
Does spending fall as retirement goes on?
For most households, in real terms, yes — travel and leisure decline through the middle years. That does not mean planning on less; it means planning a shape, and keeping the flexibility that lets the early years cost more than the middle ones.
Should I include care costs in the annual figure?
No. Care is an open-ended contingency rather than a recurring line, and building an average into the annual budget both overstates most years and understates the years it actually arrives. It is a separate planning problem.
Sources
Regulator references
- Plan your retirement income · GOV.UK · 2025The government's own sequence for turning pension pots into income.Last verified: 2026-09-07
- National Insurance: introduction · GOV.UK · 2025Which class of National Insurance applies to which kind of earnings.Last verified: 2026-09-07
- Retirement Living Standards · Pensions and Lifetime Savings Association · 2025The minimum, moderate and comfortable income benchmarks used as the target.Last verified: 2026-09-07
- Income and wealth · Office for National Statistics · 2025The distribution this post compares an individual household against.Last verified: 2026-09-07
- MoneyHelper: pensions and retirement · MoneyHelper · 2025The government-backed guidance service, cited for the free-guidance route.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.