It’s easy to wildly miscalculate how much money you’ll need in retirement—even if you are already retired. And that can have major consequences. Underestimate what you will need, and you might retire too soon…and/or run out of money in your retirement years. Overestimate, and you might keep working longer than is necessary…and/or unnecessarily deprive yourself of trips, restaurant meals and other enjoyable endeavors.

Bottom Line Personal asked ­retirement-planning professor Michael Finke, PhD, CFP, how we all can do a better job calculating our own personalized retirement-spending needs…


Many financial advisers suggest that in ­retirement, you will need to replace 80% of the gross income you earned in your final years of work. That means, for example, that if your work earned you $100,000 a year before taxes, you would need annual income of $80,000 in retirement to avoid cutting back on your lifestyle.

But after looking at thousands of retirees’ spending patterns, my research suggests that retirees are able to maintain the same lifestyle as in their working years with even less than 80%. In fact, they actually spend an average of 60% of their last working year’s gross income in the first few years of retirement, although that percentage varies widely depending on income, ranging from 40% for people with very high incomes to 100% for those with very low incomes.

What’s more, traditional guidelines assume that overall retirement expenses ­remain fixed every year or even rise due to increasing medical expenses. They don’t necessarily do that. Typically the percentage of preretirement income that is spent each year in retirement starts to decline steadily by about one percentage point each year. In fact, by the time most retirees hit their mid-70s, increasing physical limitations cause average spending to start falling by two percentage points a year. My research found that by age 85, overall expenses tend to be nearly one-third less than when people first retired.

Important: Medical expenses can ruin the above scenario. For relatively healthy people, medical expenses do rise, but they are naturally offset by lower spending in the rest of the budget. For most retirees, average annual health-care ­expenses aren’t more than their health insurance costs before retirement. A small percentage of Americans, however, will pay exorbitant costs for extended nursing-home care (see below).


The best way to estimate your future retirement spending is not to look at your income, but at how much you actually spend in the year or two before you retire. This sounds straightforward, but my research has shown that many people actually have a poor idea of how much they spend and what they spend it on. A detailed spending analysis isn’t that hard to do…

Step 1: Add up your essential spending. This includes “must-haves” that you have to pay monthly or on a regular basis, such as groceries, insurance premiums, housing, transportation, property taxes and utilities. Also include essential ­expenses that may not occur on a regular schedule, such as clothing…medical deductibles and co-pays…and home- and car-repair bills.

Step 2: Total your discretionary spending. These include nonessential expenses ranging from cable-TV bills and gym memberships to restaurant meals, gifts and vacations.

Helpful: Technology can make it easier to monitor all expenses. For example, I try to make all my purchases with a single credit card that provides a tally of annual spending by category at the end of each year. You also can use a free online service such as to track and aggregate your credit card and bank transactions automatically.

Step 3: Adjust estimates of future expenses that are likely to decrease or disappear in retirement. These may include business clothing…mortgage payments if your house is paid off…educational costs for children…changes in lifestyle such as downsizing to just one automobile or moving to a state with no income tax. Talk to your ­accountant to check whether you will be in a lower tax bracket when you stop working. If you elect to start taking Social ­Security benefits, no more than 85% of those benefits are taxable. You also get a higher standard deduction on your tax return starting at age 65.

Step 4: Adjust estimates of ­expenses likely to rise in retirement. These include additional travel and entertainment costs in your initial years of retirement and health-care expenses.

For more help with retirement planning, see “Retirement-Planning Calculators.”


On average, a 65-year-old woman is likely to live until 87 and spend $130,000 on health care. That figure includes premiums, co-pays, deductibles and out-of-pocket expenses that Medicare doesn’t cover. A 65-year-old man is likely to live to 85 and spend $115,000 on health care. But medical costs are unpredictable. The best way I have found to work around this unpredictability is to start with what you currently spend on health care annually. Or if that figure has fluctuated greatly, take the average you have spent over the past five years. If you already have complex medical problems, consider reviewing your future health-care expenses with a financial planner. Common mistakes I see individuals make…

Mistake: Overestimating how much will be covered by Medicare. You might assume that when you turn 65, your health-care costs are covered. But Medicare pays for only 62% of recipients’ total health-care costs, on average. Out-of-pocket expenses include Medicare co-payments and deductibles, premiums on supplemental policies such as drug coverage and items not covered, such as dentures, hearing aids and eyeglasses. Also, if you plan to retire early, you will have to pay for private health-care insurance until you reach age 65 and become eligible for Medicare.

Mistake: Underestimating health-care inflation. Medical costs are rising more quickly than the cost of most other consumer goods. Plan on 4.5% annual inflation.

Mistake: Not factoring in the possibility of long-term care, which Medicare generally does not pay for. The average stay in a nursing home is three years at a median annual cost today of $91,250 for a private room. It’s important to see how the costs might affect your retirement spending and whether you should consider long-term-care insurance.