9 Tips for Estimating Retirement Expenses: You Need to Get this Right!

Estimating retirement expenses can feel like an overwhelming task. However, if you want a secure retirement, you need to predict how much you are going to spend. Some might say that trying to predict your costs for every month for the next 15–30 years is preposterously impossible. However, it is probably no surprise to tell you that the closer you can get to predicting the future, the better off you will be.

retirement expenses

Budgeting is useful when you are working, but it is completely necessary for retirement and retirement planning. When you have a job, you can kind of get by month to month making ends meet. However, accurately projecting your retirement expenses will determine how much you need for retirement and, if you overspend, you face a real risk of running out of money.

Getting your retirement budget right is hard. Even budgeting for next month is difficult. Predicting what you will spend for your entire future retirement can feel overwhelming.

So, how do you tackle the seemingly impossible job of estimating your retirement expenses? Here are 9 tips to make this monumental task more manageable:

1. Think in Yearly or Even 5 Year Increments

When you think of a budget, you probably think about a monthly budget. However, documenting monthly expenses for 360 months (the number of months in a 30-year retirement) seems daunting.

The trick to any hard task is to break it down into smaller pieces. For your retirement budget, try thinking in 1-, 3-, or 5-year increments.

What will you be doing for the first 5 years of retirement and what will that cost? What will be different in the next 5? And so on…

To see how this type of budgeting impacts your retirement plan, you might want to use the NewRetirement Retirement Planner. This tool lets you document different levels of spending for as many different time periods as you like. This detailed and personalized approach will give you more reliable results about how much you will need for retirement.

2. Budget Based on the Phases of Retirement

Another idea is to just budget for different phases of retirement.

Stage 1 — The Transition to Retirement:

For many people, the first stage of retirement is not retirement at all it is the transition to retirement. In this phase, you may work part-time or have a retirement job and your spending will likely stay as it has been.

Stage 2 Early Retirement:

The second phase of retirement is when your focus is primarily on leisure. During this stage, your spending might increase as you suddenly have a lot of extra time and your time is spent spending money instead of earning it.

The Employee Benefit Research Institute (EBRI) found that more than 30% of households actually spent more once retired than they did before retirement. The increase in spending was seen in most income brackets.

Stage 3 Late Retirement:

As you get older, your health might decline and you may find that you want to slow down. Spending may really decrease during this phase.

Stage 4 End of Life:

For many people, the last two years of life are the most expensive. Long-term care and medical costs spike for most people at the very end. The fact is that dying is very expensive. Some researchers suggest that if you need long-term care at the end of your life, your healthcare costs might be in the hundreds of thousands of dollars.

Again, use the NewRetirement Planner to budget for these different phases of retirement. (The system actually estimates end of life expenses, so you just need to set levels for earlier phases.)

3. Tackle the Big 3 Retirement Budget Categories Separately from Everything Else

Housing, transportation, and medical are the big 3 retirement budget items. If you are anywhere near average, most of your money is spent on these categories.

According to the Bureau of Labor Statistics’ Consumer Expenditure Survey, for adults age 65 and older:

Housing Represents 33.9% and Transportation 16% of Spending

You should probably budget housing and transportation on a yearly basis — you may be able to predict how spending on these categories might ebb and flow. The Budgeter in the NewRetirement Planner enables you to predict expenses by category and vary your expenditure overtime.

Health Care Represents 13.4% of Spending

It is more difficult to predict how and when medical costs will be incurred, but you need to estimate as these costs are sizable. According to Fidelity‘s Retiree Health Care Cost Estimate, the average retired couple age 65 in 2023 may need approximately $315,000 saved to cover out-of-pocket health care and medical expenses throughout retirement.

The NewRetirement Planner helps you create a customized estimate of your medical expenses based on where you live, the type of coverage and any medical conditions you have. It uses industry averages to estimate the expense and when the costs will occur.

4. Predict Big One-Time Retirement Expenses

Most retirement spending will fall into categories and be spent evenly each month — rising or falling over the years.

Other retirement spending will be on big one time costs. It is important to predict these expenditures. Will you be spending on:

  • Education for children or grandchildren
  • Travel
  • A second home, a boat, RV or other recreational pursuit
  • Contributing to help fund care for aging parents

In the Retirement Planner, you can put in as many big one time financial events as you might have.

5. Know When Your Mortgage Will be Paid Off – and Consider Retirement Housing Options

It is a big deal to pay off a debt and it can have a tremendous impact on your retirement security.

Paying off your mortgage, in particular, is a big financial milestone that should positively impact your cash flow. The NewRetirement Retirement Planner does this calculation for you. You can even run scenarios to see what happens if you pay down your debt faster.

You may also want to consider how your home might help fund retirement. Downsizing is a popular choice for retirees. Getting a reverse mortgage or moving to a retirement home are other common scenarios that will have a profound impact on your retirement expenses. Model these and other housing options in the NewRetirement Planner.

6. Don’t Forget to Budget for the Unexpected

As much as you want to get your retirement expenses right, there are bound to be unforeseen costs. After all, as someone once said that the only thing you can predict is that something unpredictable will happen.

One way to deal with this is to set aside 3–6 months’ worth of living expenses into an emergency fund. Have an emergency? Explore the best and worst sources of emergency funding.

7. Find the Right Level of Detail for Estimating Retirement Expenses

Some experts recommend that you create budgets with nearly 100 different categories. Others say that you can estimate expenses with just 5 buckets.

Play around with different options and customize a list that works for you. Consider the following categories — you will notice that some things could be categorized in different ways. There is no one “right” way.

And, use your spending history as a basis for predicting the future.

  • Housing (Mortgage/rent, maintenance, property tax and insurance, home improvement)
  • Utilities (water, gas, electric, garbage, etc…)
  • Food (groceries, dining out, take out)
  • Personal (clothing, products, gym memberships, credit card debt)
  • Healthcare (out of pocket payments, dental, eye exams and glasses, hearing, supplemental insurance)
  • Entertainment (travel, cable, internet, books, memberships, classes)
  • Insurance (auto, life, liability, etc…)
  • Vehicle (insurance, maintenance, debt, fuel)
  • Family (gifts, education, medical)
  • Other…

8. Think About Needs vs Wants

When budgeting, it can be useful to break out your spending into needs and wants.

  • Your needs are things that you must spend money on to get by: groceries, utilities, transportation, health care, and housing.
  • Your wants are things that are nice-to-haves — but not necessary to survival — travel, hobbies, entertainment, etc…

The Budgeter in the NewRetirement Planner allows you to set mandatory and discretionary spending for each category. By analyzing the difference between the two expense types, you can create a bucket strategy for your investments that can allow you to guarantee the income you really need and take some risks with the income you would like to have.

Learn more about bucket strategies for investments or take a deep dive into Glen Nabobuko’s retirement income strategy that uses the needs vs wants spending categories.

9. However You Do it, Create a Retirement Plan

You have a lot of options for how to tackle one of the most important aspects of retirement planning — predicting retirement expenses. It doesn’t matter too much which option you choose. What matters is that you create a plan that is detailed and personalized.

The Retirement Planner is perhaps the most comprehensive online tool available. Forbes Magazine calls it a “new approach to retirement planning” and the tool was named a best retirement calculator by the American Association of Individual Investors (AAII).

NewRetirement Planner

Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

Share this post:

Keep Reading

All Posts