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How to Estimate Your Expenses in Retirement


Anticipating your retirement expenses is key to saving the right amount in 401(k)s, IRAs and more. Although getting exact figures might not be possible, projecting costs for healthcare, housing and lifestyle can help you create a realistic savings goal during your career. Financial experts say you can expect to spend between 55% and 80% of your annual employment income each year in retirement. Here’s how to calculate expenses. To fully prepare your finances for retirement, consider working with a financial advisor.

Why Is It Important to Estimate Retirement Expenses?

Estimating your expenses in retirement can be as challenging as planning for college for your children. Future costs are likely to be higher, unknown factors and emergencies can increase costs and your investments may perform differently than forecast.

However, calculating approximate costs will help you go into retirement prepared. A solid financial foundation will help make retirement comfortable and affordable, even if you have to adjust your budget once you get there. In addition, estimating your expenses requires setting a retirement goal and age. Your retirement accounts also influence your financial and life circumstances.

For example, let’s say you are single and want to retire at 66. Your working income is $70,820 and your annual expenses during retirement will be about 80% of this ($56,656). You have a 401(k) with 3% matching contributions from your employer. Your account has $75,000 and you just opened a Roth IRA for tax diversification purposes and deposited $5,000 into it. If you save about $400 per month, you’ll have over $500,000 in retirement savings by your target age. These funds, plus Social Security benefits, will net you an estimated post-tax annual income of $73,455.

Rules of Thumb for Estimating How Much Money You’ll Need to Retire

Although retirement planning doesn’t look the same for everyone, you can follow these guiding principles to estimate your financial needs:

  • A suitable savings target is 10 times your employment income: For instance, say your salary is $90,000 before retiring. This number means your retirement savings target should be $900,000. Following this principle gives you a defined goal that motivates you to save for retirement.
  • Save in measured leaps: This concept goes hand-in-hand with the above by breaking down your overall goal into smaller objectives. For example, you can set a goal of saving your salary amount by age 35. Then, you can focus on saving three times your salary by the time you reach 45. Then, you can take the next twenty or so years to save enough to equal ten times your salary.
  • Build up income in proportion to your employment income: Instead of a total savings amount, you can accumulate enough money to sustain a specific monthly income. For example, you could make 65% of your employment income your goal during retirement. So, if you earn $100,000 annually by working, you can aim for a retirement income of $65,000 from sources like your retirement account, Social Security and other assets.
  • Become a millionaire and follow the 4% rule: If you have a million dollars in your retirement account, many experts say you can usually withdraw 4% ($40,000) annually without affecting the principal. In other words, your account’s investment earnings should cover the 4% withdrawal, meaning you’ll consistently have $1 million providing income. The one caveat to keep in mind, though, is what’s called sequence of return risk.

How to Estimate Your Expenses in Retirement

how to estimate your expenses in retirement

Saving for retirement is essential, as is understanding how you’ll use the money in your golden years. Retirement is a distinct phase of life typically involving lower costs than in previous decades. However, your income also is generally lower, so planning out retirement will help you save and spend wisely. While guiding principles are helpful, identifying your expenses in detail can give you a better picture of retirement.

Decide When You Want to Retire

The year you want to retire is a primary influence in estimating expenses. For example, every year you continue working brings a host of advantages. Adding to your investments instead of withdrawing from them, receiving employer-sponsored healthcare and increasing your Social Security benefit is among the perks you receive by retiring later. In addition, if you want to save ten times your annual income, you may need to retire later than you first considered to hit your goal.

Determine the Lifestyle You’ll Have

Your retirement lifestyle might be similar or wildly different from when you worked. For example, you might vacation extensively, spend time with family or sell everything and tour the country in an RV. These choices bring costs influencing your bottom line during your golden years. So, whether you decide to downsize to save on housing costs or want to spend a portion of each year overseas, identifying your desired lifestyle can help you plan and save.

Pinpoint Other Expenses in Retirement

Beyond lifestyle, numerous expenses will determine how expensive retirement is:

  • Travel: A week’s vacation in the U.S. can cost about $1,500 per person, while two weeks in Europe can cost three times as much. So, asking yourself what you want for travel – whether it’s an annual stay in France or a cabin upstate in the summer – will help you itemize travel costs in your budget.
  • Housing and relocation: Questions about where to live will impact your financial circumstances in retirement no matter if you own or rent. For example, staying in your paid-off home can be appealing. However, you might be an empty nester with more houses than you need. As a result, selling your home and buying a significantly cheaper one can give you tens or hundreds of thousands of dollars to pad your retirement account or use for adventures. In addition, you might have a vision for retirement in another state, whether that means living closer to family or getting into warmer weather.
  • Recreation: Activities in retirement run the gamut from pickleball to collecting cars. If your idea of a good time is curling up with a book or having friends over for dinner, you might not need to budget much for hobbies. On the other hand, if you plan on having a decades-long amateur golf career, you’ll have to dole out more cash.
  • Gifts for the family: You might see retirement as a chance to help your relatives. For instance, you might have a child who needs help with a down payment for their first home or a grandchild struggling to afford college. Your generous intentions need the backing of a robust retirement account and that means contributing more to your retirement account during your career.

Estimate Your Taxes in Retirement

Your tax rate in retirement will influence how much income you’ll owe the government. For instance, income from traditional IRAs, 401(k)s, pensions and annuities are taxable. On the other hand, Roth IRA income is tax-free and taxes on Social Security benefits depend on your income level. Therefore, it’s crucial to understand your income streams in retirement and project your taxes.

Say you have an annual Social Security benefit of $20,000 in retirement. You also annually withdraw $25,000 from your Roth IRA and your tax status is married filing jointly. While your Roth IRA income isn’t taxable, your total income means you’ll pay taxes on 85% of your Social Security income. So, $17,000 of your income would be taxable.

Plan for Healthcare Costs

Estimating healthcare costs is challenging because health situations change as you age. However, even if you’re currently healthy and don’t need expensive treatments, saving for medical expenses is a must. For example, Medicare bears a monthly cost regardless of how often you see the doctor or go to the hospital. For example, Medicare Part B will cost $164.90 each month in 2023 – and retirees generally purchase supplemental health coverage

In addition, because new medical treatments emerge to help retirees live longer, healthcare costs increase as you age, then decrease slightly after 75. As a result, experts recommend designating 15% of your income toward medical expenses in retirement. The following table can help you visualize planning for healthcare costs:

Estimated Costs By Age

Age RangeEstimated Annual Healthcare Costs
Under 55$4,269

Questions to Ask Before You Retire

Whether you discuss retirement plans with a financial advisor or contemplate it on your own, the following questions will help you be as thorough as possible:

  • Do you want to spend a lot on travel?
  • Will you carry a mortgage into retirement?
  • Will you move after retiring?
  • Do you have children or grandchildren you want to help financially?
  • Will specific health conditions or tax circumstances affect your finances?
  • Do you know the kind of lifestyle you’d like to have in retirement?

Answering these can help you prioritize your most important wants and establish retirement savings goals.

10 Ways to Boost Your Retirement Savings

Between healthcare, leisure activities and more, retirement can be as expensive as working life. So, a healthy retirement account is necessary to meet your expenses. These tips can help you boost your retirement savings:

1. Start Early (and if You Can’t Start Early, Start Now)

Starting an investment account early in your professional life gives your money more time to grow. On the other hand, if you’re well into your career and haven’t put aside much for retirement, better is late than never. Regardless of your stage in life, the principle is to invest your money for as long as possible, accumulating bigger returns.

2. Gradually Increase Contributions

Contributing to your retirement account is as easy as setting up automatic monthly deposits. If you allocate 2% of your paycheck, you probably won’t notice it’s missing. However, increasing this amount by half a percentage point every couple of months will help you maximize retirement savings and spend the rest efficiently. Of course, living expenses limit this trick, but going from 2% contributions to 5% in a year can help you save without breaking a sweat and spend wisely.

3. Allocate Raises and Bonuses Toward Retirement Accounts

Recognition and rewards at work can boost your retirement as much as your confidence. Instead of letting the cash burn a hole in your pocket, put it towards retirement. The infusion of money will help you reach your savings goal.

4. Work a Second Job

The U.S. economy has side hustles galore for those willing to put in a few extra hours after work or on weekends. A second job can add hundreds of dollars to your retirement account each month and help your savings skyrocket.

5. Take Full Advantage of Your 401(k)

If your employer offers a 401(k), contributing to it is an excellent idea. These accounts are only available to employees whose workplaces offer them and come in traditional and Roth varieties.

Furthermore, your employer likely provides matching contributions for your account. For example, your employer might match contributions up to 5% of your paycheck. So, make sure you’re contributing enough to receive all the free money you can. This strategy will help your retirement account grow as quickly as possible.

6. Contribute to an IRA

Unlike a 401(k), an individual retirement account (IRA) is available to anyone, regardless of their employer. You can open a traditional or Roth IRA, depending on your tax preferences and invest for retirement. Remember, these accounts are easier to max out than 401(k)s. Specifically, the IRA contribution limit is $6,000 for 2023 (or $7,000 if you’re 50 or older). Therefore, your IRA will likely be a supplementary investment vehicle instead of your primary source of retirement income.

7. Avoid High Fees

The trick of investing is to get exposure to profitable parts of the economy at the lowest cost.  Retirement accounts have varying administration fees based on the company managing them and the assets chosen. For example, Vanguard’s index funds have some of the lowest fees on the market because they don’t require active management. In addition, mutual funds and exchange-traded funds (ETFs) are inexpensive investment vehicles that don’t need constant oversight.

8. Use Catch-Up Contributions

If you’re over 50, the law allows you to invest extra cash in various types of retirement accounts. For example, employees over age 50 with a 401(k) can contribute an extra $7,500 to the account in 2023, taking the contribution limit from $22,500 to $30,000. This perk can help older investors make up ground from not investing earlier in their careers.

9. Take Control of Your Finances with a Budget

If you’re struggling to set aside money for retirement, a budget can help. Sitting down and comparing your income to your expenses will help you identify areas to scale back so your money can serve you better. For example, you might discover through the budgeting process that you spend much more than you thought on streaming services or restaurants. Once you understand where your money goes, you can divert the desired amount toward retirement.

10. Wait on Social Security Distributions

This final tip will boost your retirement income and possibly your savings. Your Social Security benefit increases the longer you wait to take it. For example, waiting until age 67 instead of 62 can increase your monthly distribution by 30%. So, if you can get by on your other retirement savings until a later age, you’ll increase your monthly Social Security income.

On the other hand, you could work a few additional years while you wait on Social Security to kick in. This option allows you to contribute more to your retirement account, give your money more time to grow and leave the account untouched.

The Bottom Line

how to estimate your expenses in retirement

Estimating your retirement expenses is an essential step toward retiring well. In addition, getting a handle on your lifestyle, including vacations, housing and medical costs, will help you zero in on a retirement savings goal while you work. Deciding when you want to retire and what income you’d like to have is vital to understanding how you’ll make ends meet during your golden years.

Tips for Estimating Expenses in Retirement

  • When it comes to retirement planning, forgetting one crucial detail, such as Social Security taxation or the ROI of your 401(k), can make your projections inaccurate. Fortunately, working with a financial advisor means you’ll create a thorough retirement plan that accounts for your assets and lifestyle. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goalsget started now.
  • Want to go on a deeper dive on how to afford retirement? This in-depth retirement guide will explain the details and provide helpful calculations for retirement planning.

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