How Much Money Do You Need to Live Comfortably in the UK?

The UK is not a cheap place to live, and the cost of living is increasing significantly. Inflation is on the rise across the world for many reasons, including the ongoing supply chain issues related to Covid. With this in mind, the cost of living and how much you need to be comfortable, is more of a hot topic than it has been in a very long time.

Particularly for young people looking to enter the workforce or people from abroad looking to move to the UK, a common question that gets asked, is how much money do you need to live comfortably in the UK?

The answer is that you need an after tax (net) income of £49,700 in order to live comfortably in the UK as a couple, or £67,554 for a family with 2 parents and 2 children. This figure is based on studies conducted by the Pensions & Lifetime Savings Association and the Child Poverty Action Group.

Any type of generalisation like this can be problematic. In this article we’re going to break down exactly what “comfortable” means and how much income or investments you need to generate this level of after tax income. 

What Constitutes a “Comfortable Lifestyle”

The first thing to consider with this type of question is what comfortable actually means. The likelihood is that a comfortable lifestyle will mean different things to different people. Depending on your background or your own upbringing, you’ll have a different definition to people who have grown up in different areas or with a different lifestyle.

Luckily, the Pensions and Lifetime Savings Association have done some work on this exact question. Every year, they look at what it would cost a retiree to live a Basic, Moderate and Comfortable lifestyle. In this annual study, they look at every cost an individual or a couple is likely to incur, from groceries to alcohol to vehicles to holidays. Let's take a look at some examples of the types of costs that make up a comfortable lifestyle. 

• Two cars for the household, average 2 years old and replaced every 5 years.

• Holidays of 3 weeks in Europe each year.

• £1,500 per person for new clothes and shoes each year.

• £94 on the weekly food shop

• New kitchen and bathroom every 10 to 15 years

• 2 nice bottles of wine each week
  
  

As you can see, this isn’t extravagant but it does fit nicely into the definition of comfortable. A reasonable budget for clothing and personal care, nice holidays each year, a couple of near new cars. The weekly food shop may look a little on the low side, but the most recent figures don't take into account the full impact of the inflation from the Covid pandemic. With that said, for some people, this will look extravagant!

Now keep in mind that these figures are for a retired couple. That means they’re still going to be pretty accurate for the basics, but there is a pretty big part of the puzzle missing for a lot of people. If you have kids, you’ve probably already started rolling your eyes at the fact that we’ve not yet covered the cost of them! 

Let’s be honest, that’s a pretty big piece of the puzzle, because kids are expensive! But don’t worry, we’ve looked into the data to pull together what a comfortable lifestyle looks like for you as well.

How Much Does it Cost to Raise Children?

According to the Child Poverty Action Group, the latest costs to raise a child from birth until age 18, is an eye watering £160,692. Now obviously children cost different amounts at different stages of their lives. They also don’t all cost the same. Some get into more expensive hobbies than others, some need additional assistance with school and some just eat more than others! 

What we can gather from this data though, is that each child will cost their parents, on average, £8,927 per year. For a family with 2 children, this figure would obviously increase to £17,854.

With this data, we can now gain some clarity on how much money is needed for a comfortable standard of living for a couple, and then the added cost of raising a child in that household. These 2 studies allow us to come to the conclusion that a family with 2 adults and 2 children needs to spend £67,554 to maintain a comfortable lifestyle.

What Salary Do You Need to Live Comfortably?

Now the trap that many people fall into is looking at figures like this and thinking “Right, we need to earn £70,000 then and we’ll be able to live comfortably.” Unfortunately not. It’s important to keep in mind that this is how much a couple or a family needs to spend in order to achieve a comfortable lifestyle. Because of things like tax, National Insurance and pension contributions, you actually need to earn a lot more than £67,554 in order to have that amount to spend.

So how much do you need to earn? This isn’t a straightforward question to answer, because of the way our tax system works. A couple with one income is going to pay more tax than a couple with 2 equal incomes. With that in mind, let’s look at a couple of examples.

• A family with a sole breadwinner is going to need a salary of £105,320 to generate £67,554 in after tax income.

• A family with 2 equal incomes is going to need each person to earn £44,875 (£89,750 total) in order to generate £33,777 each (£67,554 total).

How Much Do You Need to Have in Investments to Live Comfortably Without Working?

The final part of the puzzle to look at is how much you need to have in investments to live comfortably from passive income. If you’ve heard of the Financial Independence, Retire Early (FIRE) movement, this is all about building up sufficient assets to meet your living costs without having to work.

There are many different ways to look at this question. The proper way to do it is through proper cash flow projections which look at your long term financial position.This is the type of thing that a Financial Advisor can help you with, working out exactly when you can afford to finish work and how long your money is likely to last.

For a much more quick and dirty method, we can consider the 4% rule. This is an old investment rule of thumb that states that a properly diversified investment portfolio should be able to sustain a 4% withdrawal rate without eating into the original investment amount. Theoretically, this means that the portfolio should last forever, though of course inflation will eat away at the capital sum over time.

Working this backwards then, to generate £67,554 from an investment portfolio using the 4% rule, you would need to have an initial portfolio value of £1,688,850. This level of portfolio would give your family a comfortable lifestyle for a very, very long time. For a couple with financial dependents, this figure is obviously lower. To generate an income of £49,700 using the 4% rule, you would need a portfolio of £1,242,500.

Summary

In order to live comfortably in the UK, a couple is likely to need £49,700 in net income, and a family with 2 adults and 2 children is likely to need £67,554. In order to achieve this level of net income after tax and National Insurance, a family would need to have a household salary between £89,750 and £105,320 depending on the structure of the incomes.

When it comes to investments, a portfolio of £1,688,850 is needed to maintain this comfortable standard of living for a family based on the 4% rule, with this reducing to £1,242,500 for a couple with no financial dependents. 

This definition of comfortable probably leans more towards ‘luxury’ for some people, and it doesn’t mean you need to earn this month to have all of your basic needs met and some money left over for fun stuff. The best way to work out what a comfortable lifestyle looks like for you is to run the numbers for your own life. This article will help!