Planning your retirement spending

Your FI target is your yearly spending divided by your withdrawal rate. At 4%, every extra £1,000 of yearly spending adds £25,000 to the target. A spending figure that is 10% too low makes your target 10% too low too.

Look at a full year of bank and card statements rather than a typical month, so that annual bills and holidays are included. Group the spending into a few categories you recognise.

Then adjust for life after work. Some costs usually fall, such as commuting, work clothes and pension contributions. Others often rise, such as travel, hobbies, heating and, later, health and care.

1. Essentials: costs you would have to meet whatever happened, such as housing, bills, food, transport and insurance.
2. Lifestyle: the spending that makes retirement what you want it to be, such as travel, leisure and gifts.
3. Irregular costs: large items that come round every few years, averaged into a yearly amount.

Knowing which layer each cost sits in helps later: essentials set a floor you need to fund reliably, while lifestyle spending is where you have room to adjust if markets disappoint.

Large, infrequent costs are the most common gap in a retirement budget. Divide each by how often it recurs to get a yearly figure.

Keep an emergency fund separate from your long-term plan. The UK's MoneyHelper suggests aiming for three to six months of essential outgoings while you are working.

Spending is rarely flat. Many people spend more on travel and activities in the early years, less in the middle years, and may face higher health and care costs later. A mortgage ending or children becoming independent can also change the picture.

A single figure is a sensible place to start. If you expect big changes, it is worth testing a higher figure for the early years, or modelling the change as a separate scenario.

Prices rise over time, so a budget in today's money needs to grow to keep its buying power. In the UK, the Bank of England aims for 2% inflation, but the ONS records much higher rates in some years, and the prices of different things can rise at different speeds.

Planning in today's money keeps the figures easy to relate to your current life. Our guide to calculating your FI number explains how this affects the target.

The Retirement Living Standards describe what minimum, moderate and comfortable lifestyles cost in the UK, for single people and couples, and are updated each year. They are a useful cross-check, but your own spending history is a better guide to your plan.

A spending plan helps set the retirement income your plan works towards. The illustrative plan uses £42,000 a year, the same total as the budget above. On paid plans, you can also import bank statements to record your actual spending alongside the plan.