How much do you actually need to retire?

So how much do you actually need? Not a vague "enough", an actual figure: a pot big enough that you stop needing income from work. Ever.

It sounds like a job for an adviser and a week of spreadsheets. It isn't. It takes a couple of numbers and some honesty about what you spend, and none of the maths is hard.

I'm writing this for anyone still building their pension, because that's when the number is most useful. You're far enough out to do something about whatever it tells you.

Start with what you actually spend

Everything else rests on your baseline: the recurring costs you'll still have in retirement. Most people estimate it from the last few months, which is the first mistake. Recent spending is skewed by whatever happened recently, and we all give the last few weeks more weight than they deserve. Pull the last two or three years of statements instead.

Then split what you find into two piles.

Costs tied to where you are in life right now. These are the ones that should fall away:

• The commute, which gets expensive fast if you travel into London
• The mortgage, if it'll be paid off by then
• School runs, childcare and education costs
• Work clothes and tech
• Life insurance you carry because your family relies on your income and your assets don't yet cover them
• The second car that only exists because two jobs and a school run don't fit into one diary

Costs that carry on regardless. Utilities, council tax, food.

Drop the first pile and keep the second. What's left is your baseline recurring expense. Then add whatever retirement will bring in that isn't there today: hobbies, more travel, the things you've been putting off.

I'd take this exercise seriously. I've seen a gap of anywhere between 50% and 100% between what people think they spend each month and what the last two or three years of statements say they spend. Whatever the gap is gets multiplied by 25 in the next step, so a small error in the monthly figure turns into a big one in the target.

To check you're counting the right things, Pensions UK publishes Retirement Living Standards, reference figures for singles and couples in retirement. They're argued about a lot online, so your own numbers may well come out different. Just keep them grounded in real data rather than instinct.

Turn the baseline into a big number

Multiply your annual baseline by 25. That's a reasonable guide to the pot you'll need. If your baseline is £30,000 a year, then £30,000 × 25 = £750,000. Both figures are in today's money, so you can leave inflation out of it.

The 25 comes from the 4% rule, developed by Bill Bengen in the 1990s. Take out 4% of your pot in the first year, adjust for inflation after that, and historically the money has lasted 30 years. Four percent is a twenty-fifth, hence the 25. If you spend any time in the FIRE (financial independence, retire early) community, you'll know this as your FIRE number. Same maths, different label.

Two caveats worth knowing:

• It's based on historical US data. UK figures may differ a little, but they should land in a similar range.
• It was built around a 30-year retirement, so a longer one calls for a more cautious approach than 4%.

What the number is good for

It's a rough guide, and that's fine. If you're a long way from retiring it's good enough, because the real figure will keep moving as your life does. Treat it as a baseline to steer by.

It also shows you what lifestyle inflation costs. An extra £10,000 a year of spending means an extra £250,000 in the pot. Worth remembering the next time a new monthly cost sneaks in.

And it tells you where you stand today. Put your current pension and other assets next to the target and you can see how far along you are. If you're behind, you find out early enough to change something.

Make it yours

Once you have the baseline you can bend it around your own life. A few things worth adding:

• State pension timing. Once it starts, it covers part of your spending and the pot has less to do. If you stop work before then, the pot has to carry you across the gap.
• Downsizing or relocating. Either can release a chunk of cash.
• A lump sum for early-retirement travel. The trips you want to take while you're still fit enough to enjoy them.
• Money you want to give your kids.

None of these change the method. They change the number, and that's the point of running it for your own situation rather than someone else's.

A calculation like this goes out of date the day something in your life changes: a new job, a house move, a child, a different idea of when you want to stop. Gild puts your accounts, pensions and investments in one place, so the starting point for this maths is your real position and not a guess. It also lets you plan around your life stages and the bigger what-ifs, such as downsizing or retiring earlier, so you're not rebuilding a spreadsheet every time something shifts.