How Much Should I Spend in Retirement?

One of the most important questions in retirement planning is also one of the hardest to answer: How much should I spend in retirement?

Your retirement spending target can have a larger effect on your financial independence timeline than many other decisions. Spending more may require a larger retirement portfolio. Spending less may allow you to retire earlier or create a greater financial cushion.

But the answer is not simply to spend as little as possible.

Retirement is the stage of life when your money is supposed to support the lifestyle you worked and saved to create. A retirement plan that looks financially strong only because it assumes an unrealistically low level of spending is not a very useful plan.

The goal is to create a retirement spending estimate that is realistic, sustainable and aligned with the life you actually want to live.

There Is No Universal Retirement Spending Number

You may hear general recommendations suggesting that retirees should spend a certain percentage of their pre-retirement income.

These guidelines can be useful as starting points, but they should not replace an actual retirement budget.

Two people with the same income can have dramatically different retirement spending needs.

One person may have a paid-off home, modest travel plans and low transportation costs. Another may have a mortgage, expensive hobbies, frequent international travel and significant family support obligations.

Both can be financially successful retirees while having completely different spending requirements.

Your retirement budget should therefore be based on your expected lifestyle, not an arbitrary percentage.

Start With What You Spend Today

A good place to begin is your current spending.

Review your actual expenses rather than trying to remember approximately where your money goes.

Look at several months or, ideally, a full year of spending so that irregular expenses are included.

Organize your spending into categories such as:

• Housing
• Food
• Transportation
• Insurance
• Healthcare
• Utilities
• Entertainment
• Travel
• Clothing
• Subscriptions
• Debt payments
• Gifts
• Taxes
• Home maintenance
• Other discretionary expenses

Once you understand where your money currently goes, it becomes much easier to estimate what might change after retirement.

Which Expenses Will Disappear When You Retire?

Some expenses may decrease significantly when you stop working.

For example, you may no longer have:

• Daily commuting costs
• Work clothing expenses
• Work-related meals
• Professional expenses
• Employment-related travel
• Retirement contributions from employment income

If you are currently saving a significant percentage of your income for retirement, those contributions should generally not be treated as a retirement expense in the same way they are treated during your working years.

This is one reason why simply assuming you will need exactly the same amount of money in retirement may produce an inaccurate result.

Which Expenses Could Increase?

Retirement can also introduce new expenses or increase existing ones.

You may have more time for:

• Travel
• Dining out
• Hobbies
• Entertainment
• Home projects
• Recreation
• Visiting family

Healthcare and insurance costs may also become increasingly important depending on where you live and your circumstances.

A realistic retirement budget should therefore account for both expenses that disappear and expenses that may increase.

Separate Essential and Discretionary Spending

One of the most useful ways to build a retirement budget is to divide spending into two broad categories: essential spending and discretionary spending.

Essential Retirement Expenses

Essential expenses are the costs you would generally need to cover regardless of market conditions.

These might include:

• Housing
• Food
• Utilities
• Basic transportation
• Insurance
• Healthcare
• Taxes
• Other necessary household expenses

Understanding this number is important because it tells you how much reliable income your retirement plan may need to generate.

Discretionary Retirement Expenses

Discretionary spending is more flexible.

It may include:

• Travel
• Entertainment
• Restaurants
• Hobbies
• Luxury purchases
• Gifts
• Additional recreation

The distinction matters because discretionary expenses may be easier to adjust if investment markets perform poorly or an unexpected financial event occurs.

Think About Your Retirement in Phases

Retirement spending does not necessarily remain constant throughout your entire retirement.

Your lifestyle at age 60 may look very different from your lifestyle at age 80 or 90.

Many retirees naturally experience different phases.

The Active Years

The early years of retirement may be some of your most active.

You may want to travel, pursue hobbies, visit family, renovate your home or spend more time on activities that were difficult to fit into your working life.

Spending may therefore be relatively high during the early retirement years.

The Middle Years

As your lifestyle changes, some discretionary spending may naturally decline.

You may travel less frequently or spend more time at home.

Your spending may become more predictable.

The Later Years

Later retirement can bring a different set of expenses.

Travel and entertainment may decline, while healthcare, assistance and other support costs could become more important.

Not everyone follows this pattern, but planning for changing spending can make a retirement projection more realistic.

How Retirement Spending Affects Your Financial Freedom Number

Your retirement spending target is directly connected to how much money you may need to achieve financial independence.

Consider two hypothetical households.

Household A expects to spend $50,000 per year in retirement.

Household B expects to spend $80,000 per year.

If all other assumptions were identical, Household B would generally need more financial resources to support its lifestyle.

This relationship is why spending is one of the most important numbers in retirement planning.

For more on determining the amount of money you may need, read How Much Money Do I Need to Retire? and How to Calculate Your Financial Freedom Number.

The 4% Rule Is Not a Retirement Budget

A common retirement planning shortcut is to estimate a portfolio by multiplying annual retirement spending by 25, based on an initial 4% withdrawal rate.

This can be a useful starting point for thinking about retirement savings.

But it does not tell you how much you should actually spend.

It also does not fully account for your specific combination of investment accounts, taxes, pensions, government benefits, housing, spending changes and other circumstances.

A retirement budget should be built from your expected lifestyle first. Then your overall financial plan can determine whether your resources appear capable of supporting that spending.

Consider Reliable Retirement Income

Retirement spending should also be considered alongside income that you expect to receive.

Depending on your circumstances and country, this could include:

• Employer pensions
• Social Security
• CPP
• OAS
• Other government benefits
• Rental income
• Part-time employment
• Other recurring income

The difference between your spending target and reliable income is the amount that may need to come from your investment portfolio and other assets.

This is why a retirement plan should not look only at your savings balance.

Two people with identical investment portfolios can have very different retirement outlooks if one has substantially more reliable income.

Taxes Are Part of Retirement Spending

One common mistake is to create a retirement budget without considering taxes.

If you need $70,000 available for your lifestyle, the amount of gross income required to produce that spending may be higher depending on your tax situation.

The relationship can become more complicated when retirement income comes from different account types.

Withdrawals from some accounts may be taxable, while withdrawals from other accounts may receive different tax treatment.

Government benefits and other income can also interact with taxes.

This is why your retirement spending target should be evaluated on an after-tax basis whenever possible.

For more information, see How Taxes Affect Your Retirement Plan.

Do Not Forget Irregular Expenses

Monthly budgets can make retirement spending look deceptively simple.

Some of the largest expenses do not happen every month.

Consider:

• Replacing a vehicle
• Major home repairs
• Roof replacement
• Appliance replacement
• Major travel
• Family events
• Gifts
• Emergency expenses
• Long-term care or additional support

These expenses can be incorporated into an annual retirement budget or modeled separately as future events.

The important thing is not to assume that your monthly expenses are the complete picture.

Housing Can Have a Major Effect on Retirement Spending

Housing is often one of the largest components of a household budget.

Your retirement plan should consider whether you expect to:

• Remain in your current home
• Pay off your mortgage
• Downsize
• Move to a lower-cost location
• Rent instead of own
• Generate rental income
• Eventually sell your home

Housing decisions can change both your spending and your available assets.

For some households, housing equity may eventually become an important part of their financial independence strategy. For others, the home is primarily a lifestyle asset that they never intend to sell.

Neither approach is automatically right or wrong.

The important thing is to include the decision in your retirement plan.

What About Inflation?

Retirement can last decades, so inflation matters.

If your spending is $60,000 today, you should not assume that the same dollar amount will purchase the same lifestyle decades from now.

A retirement projection should account for the possibility that the cost of goods and services will rise over time.

This does not necessarily mean every expense will increase at exactly the same rate.

Housing, healthcare, energy, food and other categories can experience different changes in cost.

The purpose of including inflation is to avoid treating today's dollars as if they will have exactly the same purchasing power throughout retirement.

What If Your Spending Changes?

One of the most useful retirement planning exercises is to test different spending assumptions.

What happens if you spend $60,000 per year?

What happens if you spend $70,000?

What happens if your spending is higher during the first ten years and then gradually declines?

What happens if you need to increase spending later because of healthcare or support costs?

These questions can reveal how sensitive your retirement plan is to spending.

Flexible Spending Can Be a Powerful Strategy

Some retirees prefer a fixed annual spending target.

Others are comfortable adjusting discretionary spending based on investment performance and changing circumstances.

A flexible approach can provide additional options.

For example, you might continue essential spending regardless of market conditions while postponing an expensive vacation or major discretionary purchase after a significant market decline.

This does not eliminate investment risk, but it can give your retirement plan another lever to work with.

The more flexibility you have, the more options you may have when circumstances change.

How Retirementize Can Help You Test Retirement Spending

Retirementize is designed to help you see how retirement spending interacts with the rest of your financial plan.

You can build a plan that includes income, spending, investments, pensions, government benefits, taxes, housing and other important financial information.

You can then test different retirement income targets and see how changing your assumptions affects your projected results.

For example, you can explore:

• A lower retirement income target
• A higher retirement income target
• Higher spending during early retirement
• Different retirement ages
• Different investment assumptions
• Different pension or government benefit timing
• Housing changes
• Unexpected financial events
• Other What-If scenarios

This can help answer a much more useful question than "How much should I spend?"

The better question is: "How much can I reasonably spend while still achieving the retirement goals that matter to me?"

Use Spending to Improve Your Retirement Plan

Spending should not only be something you enter into a retirement calculator.

It can also be one of the most useful levers for improving your plan.

If your retirement projection is weaker than you would like, you could potentially:

• Save more
• Retire later
• Increase income
• Reduce retirement spending
• Change your housing strategy
• Adjust investment assumptions
• Change the timing of retirement income

The best solution may involve several small changes rather than one dramatic sacrifice.

This is one reason spending should be tested alongside the rest of your retirement plan.

Do Not Build a Retirement You Cannot Enjoy

There is a danger in becoming too focused on maximizing financial security.

You could create a retirement plan that looks extremely safe because it assumes very little spending.

But if that means you never travel, rarely enjoy hobbies or constantly worry about spending money, the plan may not be serving its purpose.

The objective of retirement planning is not simply to maximize your account balance.

It is to help you use your financial resources to support the life you want while maintaining a reasonable level of financial security.

Retirement Spending Is a Planning Decision

Your retirement budget should not be treated as a number you calculate once and never change.

Your spending priorities can change.

Your housing can change.

Your health can change.

Your family circumstances can change.

Your investment portfolio can change.

Your income sources can change.

Your retirement goals can change.

Your spending plan should be able to change with them.

PLAN. IMPROVE. TEST. CONFIRM. REPEAT.

Retirement spending fits directly into the Retirementize approach:

1. PLAN. Estimate what you realistically want and need to spend in retirement.
2. IMPROVE. Identify spending that can be reduced without sacrificing the lifestyle that matters to you.
3. TEST. Compare different spending levels, retirement ages, investment assumptions and income strategies.
4. CONFIRM. Identify a spending level that appears sustainable while supporting your retirement goals.
5. REPEAT. Revisit your spending assumptions as your circumstances and priorities change.

This approach is much more useful than trying to find one universal retirement spending percentage.

Fun Facts About Retirement Spending

Continue Exploring Retirement Spending and Planning

This article is part of the Retirementize financial freedom and retirement planning series.

To understand how much you may need to support retirement, read How Much Money Do I Need to Retire? and How to Calculate Your Financial Freedom Number.

You can also learn how to build your overall plan in How to Create a Financial Freedom Plan and explore ways to strengthen it in 10 Ways to Improve Your Retirement Plan and Retire With More Confidence.

If you are trying to reach financial independence sooner, read How to Reach Financial Freedom Faster.

Once your spending assumptions are established, test your plan with How to Test Your Retirement Plan and explore Retirement What-If Scenarios.

Retirement planning is an ongoing process. Learn more about keeping your plan current in How to Monitor Your Retirement Plan.

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