What does a £16k retirement look like?

In the UK we have the government-funded Retirement Living Standards to help guide us in planning for our retirement. They do research each year to show us what retirees can expect to spend, according to three tiers of luxury.

In recent years these figures seem to have grown a lot, to the point that they set an unrealistic target for people to strive for. It can be quite demoralising to hear that you are going to need spending of over £60,000 per year as a couple in order to be "comfortable". Since most people aren't spending anything like this whilst they are still working, where does all the extra come from?

When I looked at the "basket of goods" which is used, it was quickly apparent that some of the spending assumptions aren't at all correct for me. But we're all different. Perhaps some people are indeed spending £1000 a year on clothes and £1200 a year on "food for others". And this is at the "moderate" level, not the "comfortable" one.

I'm going to take the RLS categories of spending and adapt them for what I think is a reasonable benchmark - a £16k retirement. That's £16k spending per person, whilst living as a couple. Compared to the three RLS categories of minimum, moderate and comfortable, this fits squarely between the first two. You can tell me in the comments whether this feels too basic or if it is in fact quite comfortable.

All figures here are per week, per person. Grocery prices sourced from Aldi.

Food     £110pw          

Groceries     £42pw:

cereal £0.95, milk £0.99, bread £1.49, margarine £1.49 per 8 weeks,  jam  £0.89 per 8 weeks, coffee £2.49 per 4 weeks, orange juice £1.15,  bacon £2.69 per 2 weeks,  croissant £1.99 per 2 weeks, yoghurt £1.09,  banana  £0.16 x 3,  eggs £1.75 6pk per 2 weeks,  sausages £1.79 6pk per 2 weeks, chocolate biscuits £0.89,  nuts and raisins £1.69 per 4 weeks, tea bags  £1.39 per 8 weeks, apples £2.75, cream cheese £0.95 per 2 weeks, cake £1.99 per 2 weeks, 

oranges £1.89 per 2 weeks, blueberies £1.09 per 2 weeks, onions £0.95 per 8 weeks, spaghetti £0.75 per 4 weeks, carrots £0.79 per 4 weeks, leeks  £1.39 per 8 weeks, bread rolls £0.75, squash drink £0.99 per 4 weeks, tuna £0.65 per 2 weeks, mayonnaise £0.95 per 8 weeks, ketchup £3.39 per 8 weeks, lettuce £0.89 per 2 weeks, tomatoes £0.99 per 2 weeks, cucumber £0.89 per 2 weeks, beetroot   £0.75 per 2 weeks, lamb mince £5.49 per 4 weeks, flour £1.09 per 4 weeks,  mixed herbs £0.59 per 8 weeks, potatoes  £1.19 per 2 weeks, tomato puree £0.59 per 4 weeks, frozen peas £1.09 per 4 weeks, frozen sweetcorn £1.49 per 4 weeks, salmon £6.99 per 4 weeks, rice pouch £0.65 x 2, single cream £1.09 per 2  weeks, custard £0.59 per 2 weeks, ham £1.69 per 4 weeks, pickled onions  £0.79 per 4 weeks, coleslaw   £0.75 per 4 weeks, beef mince   £3.09 per 4 weeks, bonognese sauce £1.49 per 4 weeks, baked beans  £0.41, cod  £3.39 per 4 weeks, cheese  £2.79 per 2 weeks, frozen chips £1.99 per 4 weeks, tinned peaches £0.99 per 4 weeks, chicken  £6.49 per 2 weeks, curry sauce £1.69 per 2 weeks, mixed peppers £1.69 per 4 weeks, gravy granules £1.09 per 8 weeks, ice cream £2.29 per 2 weeks, soup £0.65 x 3

                        

Eating out    £52pw

                        Pub meal    £20 weekly

                        Coffee and cake £7 twice per week

                        Breakfast     £10 weekly

                        Dinner with friends at restaurant £35 once per month = £8pw

Takeaway    £6pw

                Chinese takeaway £12 twice per month

Alcohol at home    £10pw

beer 6pk lager £4.99, wine bottle rioja £4.99                   

Clothing   £5pw    £260 per year for clothes and footwear

Household £42pw

    Water rates    £5pw

    Council tax    £15pw

    Household insurances    £2pw

    Fuel            £15pw

    Decorating            £4

    Boiler servicing    £1

Household goods    £20pw

The RLS go into minute detail such as working out the lifespan of your doorbell. I'm just going to go with their figures on this category!

Household services £4pw

Mobile sim deal     £6pm

Broadband            £11pm

Personal goods and services     £4.40pw

    Hand soap    £1.39 per 8 weeks

    Suncream    £2.99 per year

    Toilet roll    £2.79 per 2 weeks

    Shower gel    £0.99 per 8 weeks

    Razor blades    £1.49 per 8 weeks

    Shaving foam    £0.95 per 8 weeks

    Mouthwash    £0.89 per 4 weeks

    Toothpaste        £2.49 per 4 weeks

    Floss            £0.99 per 4 weeks

    Deodorant    £1.99 per 4 weeks

    Shampoo/conditioner    £0.99 per 4 weeks

    Hand and body lotion    £1.99 per 4 weeks

    

Health    £5.3pw

    Glasses                £1

    Dental checkup    £1

    Dental work        £2

    Podiatry                £0.6

    Paracetamol    £0.37

    Cold & flu        £0.99 per 4 weeks

    Germoline    £1 per 8 weeks

Motoring    £3750 shared = £36pw

    Car - 4 year old EV replaced every 4 years £15k, trade-in £3k = £3k per year depreciation

    Tyres                £150

    Insurance        £250

    MOT                £40

    Breakdown cover  £50

    Misc repair     £140

    Public charging    £120

Leisure goods    £3pw

    tv / laptop / printer / ink    £3pw - £150pp per year on devices

Leisure services     £78pw

    Netflix or alternative    £2pw

    Activities                        £16pw    eg pub quiz / clubs / days out / admissions

    Holiday: 1 week cruise £1500 = £29pw

    Holiday: 1 week cottage in UK £400 = £8pw

    Holiday: Budapest city break 5 days £350 = £7pw

        £100 flight + £150accom + food/misc £200 = £350 = £7pw

    Holiday: Spa break in UK 3 nights £300 = £6pw

    Holiday spending money £500  = £10pw

  Total £307.70pw = £16,000

What does this retirement look like? A couple sharing one car, eating out 2-3 times a week, going on 4 trips per year. Does that strike you as "comfortable" whilst keeping an eye on their spending? You could easily expand that spending, with more exotic travel, or not watching the day-to-day spending.

For me this establishes £16k (in terms of 2025 spending power) as the minimum retirement I want to aim for. I'd like more travel. Other than that, I don't think there's any category that I would want to expand.

I previously wrote about how to reach a £16k retirement at State Pension age, for those who haven't pursued early retirement, and this article is intended to partner that one.

Want to read more of my ideas? I have a new book out - Build Your Retirement, 5 ways to improve your wealth in retirement. Or other books here. 

Or you may prefer my FIRE series for beginners.

If you only do one thing...

This is a short post for those who are not interested in pensions, or investing, or financial freedom. The ones who go through life spending their earnings and not giving any thought to retirement.

If you would like to retire with a bit more comfort that just your State Pension, follow these steps:

• Open a SIPP account at InvestEngine.
• Set up a monthly direct debit in there.
• Set it to buy a fund. (Here I must tread carefully. I must not tell you what to buy, but I can point out that the FI community likes passive global equities funds where you simply try to own the whole stock market, such as Invesco FTSE All-World FWRG.)
• The monthly amount depends on your age now, see table below:

Age  Amount per month

40    £92

41    £100

42    £108

43    £118

44    £128

45    £140

46    £153

47    £167

48    £183

49    £201

50    £222

51    £244

52    £270

53    £301

54    £335

55    £376

56    £424

57    £481

58    £550

59    £636

60    £743

61    £882

62    £1,068

63    £1,332

64    £1,725

65    £2,388

66    £3,708

67    £7,682*

* this is above the contribution limit.

For clarity, these are the amounts to contribute based upon when you're starting. You just give that figure a little uplift each year to account for inflation. So if you're starting at 40, pay in £92pm and next year nudge it up to £95 or so. You don't have to increase it by going down this list - that would be brutal. These later figures are for the late starters who must catch up.

This isn't guaranteed, it may fall short, but it is your best chance.

That's it, you can go.

Oh, you want to know why? Oh okay then. I'll explain. But if you really are bored with this stuff you can skip this bit.

This is based on you having spending of £16k per year in retirement, meaning an after-tax top-up of £4k over your State Pension.

(These figures are in today's spending power. The actual numbers may change with inflation but this plan should give you the same spending power as £16k in 2025 money.)

Why £16k? Well, a full State Pension is about £12k, and that gives a bit of a meagre existence. Assuming that you are living slightly more cheaply as a couple, £16k should be the boost needed to give you a reasonable standard of living. It is probably enough to add a car to your lifestyle, plus the odd holiday and some meals out.

I've done a separate post about what a £16k retirement looks like.

The calculations

Figuring out the income tax on the pension withdrawal for the annual top-up:

£16,000 - £12,030 State Pension = £3,970 to top up.

Taxfree personal allowance is £12,570. Anything above that will be taxed at 20%, excepting 25% of any personal pension withdrawal which is taxfree. 

If you draw £4,550 from your personal pension, 25% is taxfree: £1,137.50.

The 75% taxable portion of the withdrawal is £3,412.50.

£12,570 - £12,030 = £540 remaining personal allowance.

3,412.50 - 540 = £2,872.50 to be taxed at 20% = £574.50 tax. 

4550 + 12030 = £16,580 - £574.50 tax = £16,005.50. Close enough!

Scaling this up to get a target

I went onto FIREcalc.com and put in a spending figure of £4550, 32 years (ie from age 68 to 100) and by trial and error found that a pot of £119,000 gives a 95% chance of success. 

I figure a 95% success rate is about right to strike for. It would take another £17k to reach a 100% success rate, and I figured that this is pretty unlikely, given that few of us will live to 100, and by that point we're likely to have released equity from our home or reduced our leisure spending.

Then I worked backwards to see how much you'd need to invest monthly, from a variety of start ages, to reach this target. I did this using a Compound interest calculator, and some trial-and-error.

Notes

• This assumes you get your State Pension on your 68th birthday. I know they're using a sliding scale of birth dates and adjusting pension dates upwards, so this is a rough guide for everyone rather than exact for you.
• The monthly amount is net - it gets scaled up with some government money.
• I'm assuming you have no other personal pension. If you do, you'll be able to reduce these figures somewhat, but look at your funds and fees to make sure it's performing.
• You may get a shortfall, you may get an excess. 
• You need "relevant earnings" to match these pension contributions, such as salary, but excluding rents.
• That InvestEngine link is a referral link. If you use it, you apparently get a freebie and so do I. 

Want to read more of my ideas? I have a new book out - Build Your Retirement, 5 ways to improve your wealth in retirement. Or other books here. 

Or you may prefer my FIRE series for beginners.

Paying into an employee's SIPP

Often the best option for an employee is for their employer to contribute to their SIPP rather than the more usual workplace pensions such as Nest or People's Pension. Fees are lower, and they'll have a wider choice of funds. This change can easily double someone's personal pension.

The barrier to this is often the admin. Employers are often concerned that doing this will be difficult or time-consuming and thus costly.

Looking at the online help for the various popular payroll packages, all seem to suggest that setting up a SIPP contribution is straightforward. It is simply set up as a new pension scheme on the system.

What are the requirements of the popular platforms?

AJBell accept employer contributions and have a guide article on their website on how to set them up. Contributions can be made by bank transfer or direct debit, and on a one-off or regular basis. They also accept cheques. To set up regular contributions they have a PDF which can be emailed or posted to them once completed by the employee and employer.

Hargreaves Lansdown accept employer contributions and have a guide page on their website on how to set them up. This can be done by bank transfer using details listed on the guide page, or by direct debit which needs a PDF to be printed, completed and posted in. They also accept contributions by debit card over the phone.

Interactive Investor accept employer contributions and have a guide article on how to set them up. They have a PDF which can be completed online or printed, which allows you to fill in the details and can be submitted by their secure messaging or by post. The employee can fill in most details, they'll just need to get the employer to complete the direct debit instruction.

InvestEngine don't yet accept employer contributions but say they it is one of their top priorities to add. 

Vanguard don't accept employer contributions. The only exception is for directors of the company, with payment made by a business debit card.

Want to read more of my ideas? I have a new book out - Build Your Retirement, 5 ways to improve your wealth in retirement. Or other books here. 

Or you may prefer my FIRE series for beginners.

Having A Wobble

This "financial independence" lark is a new idea that we all have to absorb, and this happens on different levels. We can understand it logically, intellectually, and still take some time to catch up emotionally.

After all, we're not all that many generations removed from being hunter-gatherers, so it is a challenge to really grasp at an emotional level concepts like "you can stop working and it'll be okay." We can just about cope with "you'll get a monthly pension for life", so it's not surprising that we find it harder to deal with "a 4% drawdown from this investment pot won't let you down. Probably."

A friend recently gave me a shout. "I'm having a wobble."  Now, this friend knows his stuff. And he's been doing this long enough to be at the point of hitting FI and leaving his job. That means he has had plenty of time to get to grips with the different aspects of it, but at the same time his imminent retirement is probably what is causing him to think about the whole thing a bit deeper.

This just goes to show that none of us are immune to a case of the wobbles.

My first response to him was, "Well, you know that you're not going to run out of money." And from there we chewed it over a bit more, mostly with me listing the backups and contingencies that he has in place. 

So I thought you may appreciate the same pep talk.

Yes you have your portfolio built. You have a sensible withdrawal rate planned. We've stress-tested it against historical data using tools like FIREcalc, and plotted out the trajectory of your wealth using fireplanner. There is lots of reassurance that you're going to be okay.

As for backups and contingencies, you probably have some of the following:

• State Pension will kick in, giving a certain income for the later part of your retirement.
• You have an element of "fun" spending which you can cut during a stock market crash, to further protect your portfolio.
• You may have a holiday home to sell, or other assets that you can liquidate - a boat, a motorhome, your precious collection of vintage Star Wars toys or Aunt Nellie's jewellery which she left to you but you're not actually all that bothered about. (Sorry, Auntie!)
• You may get inheritances.
• You could downsize your house, and probably should before you get too old to face the upheaval of moving.
• You could use equity release on your home. From the age of 55 you can cash in up to 70% of the value of your house.
• You could earn some money. Even if you found your career job tedious (or worse), even taking on some part-time minimum-wage work would ease the pressure on your portfolio if things are going badly wrong. And a lot of low-paid work can be quite fun. The fun stuff tends not to pay well.
• You could relocate somewhere cheaper, even to a cheaper country. You could live in Thailand, India, Colombia or Romania for perhaps a third of the cost of living in the UK. (If you are running out of money, this is more likely to be later on in your retirement, in which case there may be fewer family ties like older relatives to stop you from considering this.)

If all of these backups aren't enough to reassure you, the other alternative is to look at your withdrawal rate in a different way. By treating your "core" spending separately to your "fun" spending, you may be better able to see how low your core spending needs are. I wrote about this more in the Two Pot Stratagem.

Want to read more of my ideas? I have a new book out - Build Your Retirement, 5 ways to improve your wealth in retirement. Or other books here. 

Or you may prefer my FIRE series for beginners.