How to Budget for Retirement Expenses

A good place to begin is examining your current cash flow and itemizing your regular spending. This can help you understand the costs you may encounter in retirement and form budgeting goals to work toward in the meantime.

How Much Does It Cost to Retire?

According to the latest data from the Bureau of Labor Statistics (BLS), a typical American age 65 and older will spend $60,844 each year.¹ That's about $20,000 less than those in the 55-64 age bracket and more than $33,000 less than individuals in the 45-54 age bracket.

Rules of Thumb for Retirement Saving & Spending

It's difficult to know exactly what assumptions to make about your retirement — how much income you'll need or what a good withdrawal pace is so you don't deplete your assets. But some general rules can help you sketch out your retirement budget:

The 80% Rule for How Much Money You'll Need

Financial planners commonly forecast retirement spending by assuming you'll need 80% of your pre-retirement income. It's important to realize this is just a general rule. Your spending could be higher or lower depending upon other factors, such as your health status, travel plans and personalized lifestyle costs.

To get a more individualized estimate, you can use our retirement calculator  with your exact numbers and assumptions to see how long your retirement savings will last.

The 4% Rule for How Much to Withdraw

The 4% rule for retirement withdrawals can help you estimate how much income to take from your retirement savings each year so that it lasts.² It's based on historic average rates of return and calculates what annual withdrawals you could make, including adjustments for inflation, for 30 years without running out of money. While its effectiveness has been debated in recent years — and numbers may need to be adjusted on individual situations — the rule provides a good strategy to abide by.

Example

Let's say you expect to have $1 million in your retirement accounts by the time you decide to stop working. Based on the 4% rule, you might withdraw $40,000 (4% of $1 million) in your first year of retirement.

The next year, you might again take out 4% but also factor in a small increase for annual inflation. If you were to take out $40,000 again plus an additional 3% of that $40,000 for inflation ($1,200), your total withdrawal would be $41,200 in year two.

The idea is that you can continue to take out a 4% withdrawal amount plus a bit extra for inflation every year. Based on historic averages, the money should last at least 30 years using this rule. You may need to set your sights on a different number, based on your personal preferences and individual situation, so give this rule ample thought before implementing.

The Rule of 72 for Forecasting Investment Growth

The sooner you start saving and investing for retirement, the more your investments have time to compound and reach their growth potential. A simple rule for envisioning what this investment growth will be is the Rule of 72 for compound interest.³ It can give you an estimate of the number of years it will take to double your original investment.

To find that number of years easily, divide 72 by the expected annual rate of return on your investment. If that rate were 8%, then it would take about nine years (72 divided by 8) before the original investment amount would double. Using a $10,000 investment as an example, the rule would predict an 8% compound interest rate and bring that account to about $20,000 in nine years (the actual figure is about $19,990, so it's a pretty close estimate).

You can also use this rule another way — to calculate the rate of return needed to double your investment over a specified number of years. For this, divide 72 by the number of years in which you want the investment to double. So if you wanted to double your money in 10 years, you'd need an annual rate of return of 7.2%.

One note: Calculating with the Rule of 72 does not include any additional contributions you might make to the account over time. To get a closer estimate using periodic deposits, try our compound interest calculator .

Typical Retirement Expenses to Plan For

Fortunately, some elements of retirement budgeting are personal factors and essential expenses that you may be able to control. Here are some of the common expenses in retirement to consider:

Housing and Utilities

Housing is by far the biggest expense category for those over the age of 65, with the median adult allocating $20,362 a year toward this, according to the BLS. The cost of utilities such as electricity and natural gas tack on an extra $4,236 for a typical American in that segment.

If you're on track to have your mortgage paid off before or shortly after you retire, you may be able to shrink this portion of your budget. But if you still have a long way to go on your home loan, you'll likely want to set aside the appropriate amount when forecasting expenses. Renters may also want to account for potential increases over time.

Transportation

This is the second-largest expense category for those who are around the age of retirement, costing even more than food or medical health care expenses.

In 2022, the average retirement-age American spent $8,172 on cumulative transportation costs, according to the BLS data. That includes paying the cost of new cars every few years, as well as maintenance, gas and insurance costs.

Your monthly expenses may go down if you're married and choose to scale back the number of cars you own. But it's important to have a good idea of how much you may need to depend on vehicles and other sources of transportation, especially if your loved ones don't live nearby.

Health Care

For the majority of adults, health care costs will represent a substantial portion of your overall retirement budget. In addition to premiums, there's a good chance you'll have to pay for supplemental insurance, out-of-pocket costs, prescription drugs and medical devices — all of which add up.

Though individuals with a clean bill of health may pay less per year, living longer typically means spending substantially more on medical needs over the long haul. According to 2023 data from HealthView Services, a cost-projection software firm, a healthy 65-year-old couple can expect to spend $780,361 on health care over the rest of their lives.⁴

Food

In general, the amount of money spent on food tends to go down slightly when adults quit the workforce, but this cost can still impact your savings.

According to the BLS, a typical American over the age of 65 will spend $7,306 a year on food and beverages. Of that total, groceries account for $4,797, while eating out represents a $2,509 expense for the average older adult.

Living Expenses & Lifestyle

Lifestyle costs can greatly affect a retiree's bottom line. If you love to travel and dine out frequently, you can expect your retirement spending to be high. Or if you opt for a simple life in retirement, your income needs may be significantly lower.

On average, you can expect living costs in your 60s and beyond to be lower compared to your 50s. The Bureau of Labor Statistics reports that people in their 50s have living expenses of nearly $71,000. But that number is halved to about $35,200 for people age 65 and older.

Some other expenses you can probably count on having are these:

• Property taxes
• Debts
• Utilities
• Insurance premiums

Long-Term Care

Many adults will require a stay at a long-term care facility at some point of their life. The median cost of assisted living is $4,917 per month, which equates to $59,000 per year, according to Senior Living.⁵ Depending on where you live, these costs may be higher or lower than the national average.

Unfortunately, Medicare only pays for those costs under limited circumstances. And while Medicaid may cover longer stays, it's only an option for those who are income-qualified and go to facilities that accept its recipients. That means many retirees will have to save up to pay those costs out-of-pocket should they need care within a facility. Purchasing long-term care insurance may help alleviate some of those expenses later on.

Emergency Funds

Emergencies can still happen after you've retired, so it's important to continue to factor in unforeseen costs as a part of your retirement spending. Not factoring for surprise expenses has the potential to derail your plans.

Financial professionals generally advise setting aside three to six months of living expenses. If your basic monthly living expenses — food, housing, utilities and insurance premiums — are $5,000 per month in retirement, then it's a good idea to have $15,000 to $30,000 in emergency funds . Whether you're closer to three months or to six months of living expenses depends on multiple factors, such as your health or how dependable your income sources are.

External Forces on Your Retirement Spending

Unfortunately, you can't control every aspect of retirement planning with simple accounting formulas. The costs of things can change, and you can't know how long you'll live. But if you keep external factors like these at the top of your mind, you can build some flexibility into your retirement plan:

Inflation Rates

A reasonable average long-term rate of inflation to plan for is between 3% and 3.5%. While the annual inflation rate has recently turned higher, it's important to look at a longer range of time for retirement calculations. Retirement can last several years, if not decades. Historically, the rise and fall in the costs of goods and services smooth out in the long run. For example, the current U.S. inflation rate is 3.1% (as of January 2024), while the average long-term inflation rate was 3.3%.⁶

If you are years or decades away from retirement, you'll want to adjust your retirement income needs to reflect the long-term inflation rate. With an average rate of 3.3% inflation, for example, your income need would double in 22 years. So, if you're about 40 years old now and your annual income is $50,000, you would want to have $100,000 to maintain the lifestyle you have now in your 60s.

Affordability & Location

Knowing the best and worst states for retirement is useful for planning.⁷ A significant factor that can place your retirement spending above or below the average retirement budget is the state you plan to live in after you've retired. Some states have a higher cost of living — the cost of housing, food and health care — as well as higher income tax and property taxes than other states.

The most affordable states for retirement in 2024 include New Hampshire, Utah, Minnesota, and Connecticut while the worst — strictly in terms of costs — include Louisiana, Kansas and Washington.

Life Expectancy

According to the Social Security Administration's life expectancy calculator, the average number of additional years a 65-year-old male can expect to live is about 18 years; for a female of the same age, it's 21 years.⁸ This means the average life expectancy for people who are just reaching retirement age right now is roughly 85 years.

However, regardless of expectancy, there's no calculating if a person will live in retirement for five years or 40 years. Life expectancy averages don't account for a wide number of factors that influence longevity, such as your health, lifestyle and family history.

7 Steps to Building a Retirement Budget

A retirement budget may help you stay more financially stable. Here are some steps to consider as you get started.

1. Examine Your Expenses

When devising a retirement budget, it's good to be realistic about how much you may need for your day-to-day life. You might be most active during the first few years of retirement. Consider setting aside some money to cover the costs of travel, new hobbies and social activities.

Health care and medical bills tend to be big expenses after retirement. Try to account for these potential changes in your expenses when devising a new spending plan.

2. Find Small Ways to Save

Since retirees generally live on a fixed income, consider reducing your cost of living as much as you can without radically diminishing your quality of life.

The areas where you choose to cut back largely depend on your personal needs and preferences. If your kids are grown and have left the nest, you might want to downsize. When you no longer work, you may choose to have one car for the household instead of two. You could also save money on food by eating out less, or you could reduce monthly bills by canceling subscriptions you no longer use.

3. Create a Retirement Paycheck

Giving yourself a "retirement paycheck" simply means allotting yourself a regular amount of money each month. Factors that could affect your retirement paycheck include any continuing work, Social Security, mortgage payments and other bills, debt, retirement accounts, savings and investments, and insurance.

To supplement your retirement paycheck, you could purchase an annuity, which provides regular payments on a fixed schedule. An annuity has an accumulation phase as well as a payout phase. The type of annuity — fixed, variable, deferred or immediate — that might work for you depends on whether you're saving for retirement or already retired. As you determine which type is best, you may want to be mindful of any potential surrender charges. Immediate annuities and annuities that have been annuitized generally don't come with surrender charges, but funds are often not accessible outside of the guaranteed income stream.

4. Bucket Your Savings

When planning your retirement budget, you'll generally also need to determine how long you'll accumulate assets and when you'll start taking money out of each of these funds.

To help make this determination, consider the "three-bucket approach" to savings. This approach separates your money into three different pools, or "buckets," to help provide income from different sources at different points during your retirement.

• The first bucket contains cash reserves that you may need to tap into in the next few years. Generally, it consists of guaranteed, liquid income as well as Social Security and pension funds.
• The second bucket is for money you may need within the next 10 years.
• The third bucket is for the distant future. This may contain longer-term investments. By keeping these higher-risk investments in the third bucket, you'll allow them more time to potentially net a higher return. Just keep in mind that these investments do not guarantee growth and have the potential for both gains and losses.

5. Earn Some Side Income

Could you use extra cash to boost your retirement income? If so, you might want to take on some side jobs. Or you could capitalize on your experience as a seasoned pro in your field and offer consulting services. By working, you could boost your retirement income and also create an avenue to explore your passions and meet new people.

6. Assess Your Tax Strategy

How and when you'll be taxed affects your retirement budget. Traditional IRAs are tax-deferred. However, you'll be taxed when you start withdrawing funds. Roth IRAs are taxed the year you make contributions, so you can enjoy tax-free distributions on earnings as long as certain requirements are met. Pension payments are taxable. Examine your accounts and consider speaking with a tax professional to understand your tax obligations.

7. Review Your Spending Plan Regularly

A good budget reflects changes in needs and lifestyle. Consider sitting down, reviewing your spending plan, and making adjustments as needed on a regular basis. With so many moving parts and considerations, it might be useful to meet with a financial professional to discuss your concerns, assess your needs and develop a budget.

Income Sources to Pay Your Retirement Expenses

You may have any number of different income sources to help cover the cost of retirement, including a pension, Social Security or part-time work. However, the money from these sources may fall short of your total financial needs.

401(k)s or similar savings accounts that are offered through your employer can be an effective way to save for retirement. If your place of work offers matching funds, it may be even easier to jump-start your savings. But what if your employer doesn't offer a retirement plan? You may consider opening an individual retirement account. As of 2024, you can contribute up to $7,000 to an IRA, or $8,000 if you're age 50 or older.⁹

Those who are worried about outliving their assets sometimes choose to purchase an annuity that pays a fixed monthly amount for as long as they live. If you're curious whether converting some of your assets to a lifetime income stream is right for you, consider talking with a financial professional who can discuss the potential advantages and disadvantages of doing so.

Regardless of how you fund your retirement, it's important to first have a good sense of what you'll need to live on during your later years. By doing a little planning now, you can help minimize the threat of running into financial hardship down the road.

Bottom Line

While it can seem easy to project living expenses in retirement, there are often multiple factors to consider, including life expectancy, health care needs, inflation, living expenses and lifestyle. General guidelines, such as an average retirement budget, can be a good start for planning, but working with a financial professional can prove valuable, especially as you get closer to retirement.

Sources

1. Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and relative standard errors, Consumer Expenditure Surveys, 2022. https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/reference-person-age-ranges-2022.pdf
2. The 4% Rule Gets a Closer Look. https://kiplinger.com/retirement/retirement-planning/603831/the-4-rule-faces-new-problems-today
3. What is compound interest? https://www.investor.gov/additional-resources/information/youth/teachers-classroom-resources/what-compound-interest
4. HealthView Services Insights. https://hvsfinancial.com/wp-content/uploads/2023/09/HealthView-Insights-Medicare-and-Demographics.pdf
5. How Much Does Assisted Living Cost? https://www.seniorliving.org/assisted-living/costs/
6. United States Inflation Rate. https://tradingeconomics.com/united-states/inflation-cpi
7. The Best States to Retire, Based on What People Really Want. https://www.fool.com/research/best-states-to-retire/
8. Retirement & Survivors Benefits: Life Expectancy Calculator. https://www.ssa.gov/cgi-bin/longevity.cgi
9. COLA increases for dollar limitations on benefits and contributions. https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions