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 $60,087 each year.1 That's about $23,000 less than those in the 55-64 age bracket and more than $37,000 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 helps estimate how much income to take from your retirement savings each year so your money lasts. It’s based on historic average returns and outlines what you could withdraw annually - with inflation adjustments - for 30 years without running out of funds. While its reliability is debated and many people adjust the numbers to fit their own situation, it still offers a helpful starting strategy.
How the 4% Rule Works
- Calculate your total retirement savings at the time you stop working.
- Withdraw 4% of that amount in your first year of retirement.
- In each following year, withdraw the same dollar amount as year one, plus an increase for inflation.
- Continue this pattern for up to 30 years.
For example, the projected retirement savings is $1,000,000. Here is how it is calculated:
| Year | Withdrawal Calculation | Total Withdrawal |
|---|---|---|
| 1 | 4% of $1,000,000 | $40,000 |
| 2 | $40,000 + 3% inflation adjustment ($1,200) |
$41,200 |
The idea is to repeat this pattern - using the initial 4% amount and adding a small inflation increase each year. Based on historical averages, this approach could help your savings last for at least 30 years. Still, you may need a different percentage depending on your preferences and financial goals, so it’s worth considering carefully before applying this rule..
The Rule of 72 for Forecasting Investment Growth
Saving and investing for retirement early gives your money more time to compound. One way to picture how this growth may play out is with the Rule of 72.3 This shortcut offers an estimate of how many years it may take for an investment to double.
How to Use the Rule of 72
To estimate the number of years needed for your investment to double:
- Divide 72 by your expected annual rate of return.
- The result is the approximate number of years required for your original amount to double.
For example:
- Expected annual return: 8%
- Calculation: 72 ÷ 8 = 9 years
- A $10,000 investment growing at 8% compound interest would reach about $20,000 in nine years (actual value: about $19,990).
Using the Rule in Reverse: You can also work backward to estimate the rate of return needed to double your investment within a set time frame.
Formula: 72 ÷ desired number of years = required annual rate of return
The Rule of 72 does not factor in any additional contributions you may make over time. For a more detailed 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
Americans age 65 and older spend about $21,445 per year on housing, according to the latest BLS Consumer Expenditure Survey, making it their largest expense.1
If your mortgage will be paid off before or soon after retirement, this part of your budget may shrink. If not, include ongoing payments when forecasting costs. Renters should also plan for possible increases over time.
Transportation
Transportation is the second-largest expense for people near retirement, costing more than food or medical care. According to BLS data, the average person in this age group spends $9,033 per year on transportation, including car purchases, maintenance, gas, and insurance.1
Your costs may drop if you’re married and reduce the number of vehicles you own. Still, it helps to estimate how much you’ll rely on cars or other transportation, especially if family members live far away.
Health Care
For most adults, health care costs makes up a significant share of retirement spending. Beyond premiums, you may also pay for supplemental insurance, out-of-pocket costs, prescriptions, and medical devices - expenses that can add up quickly.
Even those in good health may face higher long-term costs simply by living longer. According to 2025 Milliman data, a healthy 65-year-old couple may spend over $388,000 on health care for 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 $7,714 a year on food and beverages. Of that total, groceries account for $4,973, while eating out represents a $2,741 expense for the average older adult.1
Living Expenses & Lifestyle
Lifestyle choices play a major role in what you’ll spend in retirement. Frequent travel and dining out can raise your costs, while a simpler routine may lower how much income you need.
Average living expenses also tend to drop with age. The Bureau of Labor Statistics notes that people in their 50s spend nearly $83,000 a year, compared with about $30,000 for those 65 and older.1
Common expenses you’ll likely continue to budget for include:
- Property taxes
- Debts
- Utilities
- Insurance premiums
Long-Term Care
Many adults will need long-term care at some point. The median cost of assisted living is $6,129 per month (about $73,548 per year) according to Senior Living.5 Costs vary by location and may be higher or lower than the national average.
Medicare provides limited coverage for this type of care, and Medicaid only applies if you meet income requirements and use approved facilities. As a result, many retirees will need to plan for these expenses themselves. Long-term care insurance may help cover some of the cost if care is needed later in life.
Emergency Funds
Emergencies can still arise in retirement, so it helps to budget for unexpected costs. Overlooking these expenses may disrupt your plans.
Many financial professionals suggest keeping three to six months of living expenses in emergency funds . For example, if your basic monthly costs are $5,000, you’d aim for $15,000 to $30,000 in reserves. The right amount for you depends on factors like your health and the reliability of your income sources.
Quick Summary of Expenses
| Category | Average Costs |
|---|---|
| Housing & Utilities | $21,445/year |
| Transportation | $9,033/year |
| Health Care | $388,000+ lifetime cost |
| Food | $7,714/year ($4,973 groceries, $2,741 dining out) |
| Living Expenses & Lifestyle | People in their 50s: ~$83,000/year People 65+: ~$30,000/year |
| Emergency Funds | Recommended: 3–6 months of expenses |
Anticipate typical expenses to maintain your lifestyle in retirement. Start Your Free Plan
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 long-term inflation rate to use for retirement planning is 3% to 3.5%. Although inflation has recently declined, retirement planning works best when you look at trends over many years. Because retirement can last several decades, short-term rises and drops in prices tend to even out over time.6
Long-Term vs. Current Inflation
| Inflation measure | Rate | Notes |
|---|---|---|
| Current U.S. inflation rate (Dec. 2025)6 | 3% | Reflects recent conditions |
| Average long-term inflation rate | 3.3% | Better for retirement projections |
If you’re still years - or even decades - from retiring, adjusting your future income needs for long-term inflation helps you get a clearer picture of what it may take to support your lifestyle.
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 can help with planning.7 One factor that may push your spending above or below the average retirement budget is where you choose to live after you stop working. Some states come with a higher cost of living - including housing, food, and health care - along with higher income and property taxes.
Lowest Cost of Living for Retirement in 2025
- Tennessee
- Kansas
- Oklahoma
- Missouri
Highest Cost of Living for Retirement in 2025
- Hawaii
- Alaska
- California
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” means setting aside a consistent amount of money each month. Several factors can influence how much you allot, including 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 several ways to help cover your retirement expenses, such as:
- A pension
- Social Security
- Part-time work
These sources can help, but they may not fully cover your long-term needs.
Workplace Retirement Plans
401(k)s or similar employer-sponsored accounts can be a helpful way to build savings for retirement. If your employer offers matching contributions, it can make growing your retirement fund even easier.
If your employer does not offer a plan: You may consider opening an individual retirement account (IRA).
| IRA Contribution Limits | 2026 Limit |
|---|---|
| Standard contribution | $7,500 |
| Age 50+ catch-up contribution | $8,600 |
Creating Lifetime Income
Some people worry about outliving their savings. To help manage this concern, they may purchase an annuity that provides a fixed monthly amount for life. If you’re unsure whether converting part of your assets into lifetime income is right for you, a financial professional can outline the possible pros and cons.
Knowing What You’ll Need
No matter how you plan to fund retirement, it helps to start with a clear picture of your expected living expenses. A bit of planning today may help reduce the risk of financial strain later on.
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.
Adapt your retirement budget to evolving needs and external factors. Start Your Free Plan
Sources
- Consumer Expenditure Surveys. https://www.bls.gov/cex/notices/2024/annual-data-release-2023.htm.
- What is the 4% rule for retirement withdrawals? https://www.bankrate.com/retirement/what-is-the-4-percent-rule/.
- What is compound interest? https://www.investor.gov/additional-resources/information/youth/teachers-classroom-resources/what-compound-interest.
- 2025 Milliman Retiree Health Cost Index. https://www.milliman.com/en/insight/retiree-health-cost-index-2025.
- How Much Does Assisted Living Cost? https://www.seniorliving.org/assisted-living/costs/.
- United States Inflation Rate. https://tradingeconomics.com/united-states/inflation-cpi.
- The Best and Worst States to Retire to in 2025. https://www.fool.com/research/best-states-to-retire/.
- Retirement & Survivors Benefits: Life Expectancy Calculator. https://www.ssa.gov/cgi-bin/longevity.cgi.
- 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500. https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
