What’s Your Retirement Number? Estimating Retirement Expenses

What’s Your Retirement Number? Estimating Retirement Expenses

Planning for retirement can sometimes feel like taking a shot in the dark. How do you know if you’re saving enough? Will the market, inflation, or tax law changes derail my plans? How can I be sure that I won’t outlive my assets?

One of the biggest misconceptions retirees make is estimating how much income they will need to live comfortably. Many end up overspending or drawing down on their portfolios too quickly because they didn’t properly estimate their retirement expectations early on. In this case, they then run the risk of running out of money when they need it most. Some retirees have saved so well and have lived so conservatively that they feel timid when it comes to taking income off of their investments to enjoy.

Fortunately, this can all be avoided by setting clear retirement expectations and estimating how much the lifestyle you envision will cost. You’ll want to be as thorough as possible without overcomplicating it. Taken one step at a time, estimating your expenses can be relatively painless.

Identify Retirement Expectations

In order to build a plan that will support you for the remainder of your lifetime, you must begin by identifying what a successful retirement looks like for you. Take a bird’s eye view of your life and the way you see yourself spending your retirement years.

  • What is important to you?
  • What do you hope to accomplish in these years?
  • How will you design your life to accomplish the things that are important to you?

For some, this could involve extensive travel. For others, spending more time with children and grandchildren is most important. Naturally, some choices will be more budget-friendly than others, so it’s important to identify where you will live and how you will spend your time in order to get a clear idea of how much income you’ll need to generate.

Inventory Your Current Expenses: How Will They Change in Retirement?

Understanding your current expenses will help you extrapolate your retirement expenses by identifying which expenses will change and which will remain the same. With your current budget in hand, you can add and subtract necessary and unnecessary expenses from the list.

Begin by eliminating the expenses you don’t anticipate carrying into retirement. Once you retire, for example, you will no longer be making contributions to your retirement plans. This will likely be a sizeable sum you can now allocate toward living expenses. You may also anticipate paying off your mortgage or other debts which can be removed from the budget. And for retirees leaving the workforce completely, work-related expenses such as transportation costs, dry cleaning, and wardrobe may also be reduced or cut out altogether.

However, leaving the workforce also means (1) you will no longer qualify for employer benefits such as healthcare and (2) you will have a lot of extra time on your hands. Health care costs and lifestyle choices will both significantly influence your estimated need.

Health Care Costs in Retirement

Healthcare expenses can add up quickly, especially If you are retiring before Medicare age. Not only will you be responsible for obtaining your own private health insurance policy in the interim, but also for paying any out of pocket expenses that could arise. Having a robust Health Savings Account (HSA) can help to offset these costs, but how long will that resource realistically last?

And even if you are of Medicare age, there are a number of surprising costs retirees are shocked to learn. For instance, Medicare doesn’t cover things like dental insurance, hearing tests, and vision screenings, just to name a few. They also do not cover the cost of any long-term care. And with more than 52% of adults over age 65 needing some form of long-term care assistance in their lifetime, planning for these expenses must be a priority.

Lifestyle Changes

Once you have a clear idea about how you will spend your time in retirement—whether it be working part-time, volunteering locally, touring the US in an airstream, or moving closer to family—you can begin to piece together the extra expenses these lifestyle changes will cost. Will you be moving? Downsizing your home? Will you be adding or subtracting any vehicles or insurance coverages? If you are planning to travel, what will it cost to maintain your home in your absence? There are myriad possibilities. Lean on the help of your financial advisor to help you comb through potential cost so as not to miss any important details.

What’s Your Retirement Number?

With monthly and annual numbers in hand, you can then multiply that need by the number of years you expect to rely on it (not neglecting to factor in inflation). This will give you a pretty clear picture of the amount you will need to raise before throwing that highly anticipated retirement party.

Always overestimate your timeline to err on the side of caution. Your time horizon could be longer than you think. You don’t want to find yourself facing undue financial stress late in life because you didn’t anticipate living that long.

Of course, once you estimate (1) your desired lifestyle needs, (2) the accompanying savings rate you will need to accomplish that goal, and (3) your time horizon, your perspective could change. You may find you want to live on less so you can retire sooner or work longer in order to be able to save more. This is perfectly alright. One of the purposes of this exercise is to evaluate your outcomes against the commitment it takes to get there and decide if you want to alter your plans in exchange for a more attractive alternative.

Hitting the Target

With an estimate of how much you’ll spend each year, you can move to the next step in the retirement planning process: generating a predictable  “retirement paycheck” from your sources of income and your personal savings .

Overall, it’s important to remain flexible. Retirement planning is an ongoing process that lasts even into your retirement years. What is important to you today, may not carry as much weight ten or fifteen years from now, and your plans could change. When they do, be sure to meet with you advisor to discuss those changes.


Do you need help calculating your retirement number? The advisors at Uncommon Cents Investing are here to help.

Call us today to schedule an introductory phone call. We can help you aim for the right target.


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More About the Author: Sheena Hanson

Sheena is a highly regarded financial expert known for her clear explanations and practical advice on complex financial matters. She earned her CERTIFIED FINANCIAL PLANNER™️ designation in 2010 and holds a Bachelor of Science degree in Finance from the University of Wisconsin LaCrosse.