Knowing how much you will spend in retirement is critical when financially planning for this next phase of life. As you get closer to your retirement date, it can be helpful to get a more accurate sense of expected expenses. But how much will you actually need?
We can help refine your expense estimates and incorporate them into your retirement income strategy.
Here are seven steps to better understand how much you’ll spend in retirement.
In this article:
- Start from your current income
- Track your current spending
- Think about the lifestyle you want
- Evaluate your housing situation
- Plan for higher health care costs
- Think about your impact
- Prepare for the unexpected
- Questions to discuss with us
1. Start from your current income
A common guideline is to expect to spend 70% to 80% of your current income in retirement, so a good first step is to calculate that number. If your pre-retirement income is $200,000, for example, you can expect your retirement spending to fall somewhere around $140,000 to $160,000 a year. However, this number may not be as helpful if you plan to change your lifestyle significantly during retirement.
Learn more: Preparing for retirement
2. Track your current spending
To estimate your future expenses more accurately, it can be helpful to track your spending habits in the year or two before retirement. Reviewing your bank and credit card statements before you retire can give you a good sense of where you’re spending your money and how much income you’ll actually need.
For example, you may discover that you are spending a considerable amount of money on commuting costs — an expense that could potentially disappear in retirement. Ask yourself: How might your current spending differ from your future spending?
Learn more: Personal budgeting strategies to help reach your goals
3. Think about the lifestyle you want
Think about the life you’d like to lead in retirement and how it may impact your bottom line. Spending much of your time gardening or volunteering will have a much different impact on your finances than starting a new business, collecting cars or traveling extensively.
One way to help clarify how your lifestyle will affect your financial situation is by dividing your anticipated costs into essentials and lifestyle spending. Essentials include the recurring costs that cover your basic needs — food, housing, transportation, utilities — while lifestyle expenses include discretionary spending that enhances your life: hobbies, travel, entertainment and family. Overall, you’ll want to determine how much you may need to pursue your passions and leisure.
Learn more: Planning your ideal retirement lifestyle
How to plan travel in retirement
Plan for your next trip with more confidence and enjoy your retirement.
Learn more4. Evaluate your housing situation
Where to live is among the biggest questions to think about when approaching retirement. It’s also a decision that can have a big impact on your expenses.
Staying in a home you own outright may limit your housing costs, but it may also be more house than you need. Downsizing could potentially provide you with income you could use for other activities or investments, but there are financial considerations such as moving expenses, real estate transaction costs and more. Moving to another state may mean a higher cost of living — but also lower taxes.
Whatever you decide, remember to factor in costs that go beyond rent or a mortgage. Inflation may be an issue if you’re planning on renting, while upkeep and taxes are often significant expenses for homeowners.
Learn more: Downsizing your home in retirement
5. Plan for higher health care costs
Health care costs in retirement can be substantial, even with Medicare. Everyday medical expenses such as prescription drug costs and routine medical services can add up over time. The costs can be even more significant for those with more complicated needs. Additional expenses, such as long-term care, aren’t covered by Medicare and can be particularly costly. As you consider your retirement, it’s important to be clear-eyed about the costs — now and in the future — so you can plan for rising medical expenses.
Learn more: Planning for health care costs in retirement
6. Think about your impact
In retirement, people often have the time to help others and give back to their community. That can mean volunteering for an organization you care about, or it can mean financially supporting causes or helping a grandchild or loved one to pursue their dreams. Whatever the case may be, you’ll want to make sure to account for any of these “giving while living” expenses you may have in retirement.
Learn more: Estate planning and charitable giving: Strategies to make an impact with your estate
7. Prepare for the unexpected
No matter your income or lifestyle, there will be a time when you need to pay for an unanticipated expense. To provide a buffer against unanticipated expenses in retirement, especially health care costs, it’s critical to have a cash reserve, as it may allow you to avoid dipping into other savings or selling investments before you want to.
One guideline for retirees is to have a cash reserve to cover as much as 12 to 24 months of essential expenses.
Learn more: Establishing a cash reserve: How much should you have?
Build a retirement that lasts
We can help you create a retirement plan designed to provide income for your expenses, while also leaving a legacy for the people or causes you care about.