How Much Will I Need in Retirement?

Written by: TIAA | TIAA

A checklist of what retirement expenses to expect—and how you may be able to meet them

If forecasting your retirement expenses feels so daunting that you haven’t even tried, you’re in good company. According to a recent survey 1 by the Employee Benefit Research Institute, only 42 percent of workers have tried to calculate how much money they will need down the road—and many of them could only guess.

Clearly, having your finances squared away before retirement can give you confidence now, and improve your quality of life when you get there. But trying to do so can be more difficult than it’s ever been before, for a few reasons.

For example, thanks to gains made by modern medicine, people are living longer—meaning more time spent in retirement than previous generations. If you retire at age 65, that time could add up to three decades or more—longer than you actually worked—and long after you’ve earned your last paycheck.

Predicting your cost of retirement, especially with so many unknowns ahead, may leave you wishing for a crystal ball. But below are some basic common considerations for how to plan for retirement expenses—as well as some tips and strategies for addressing them.

1. You don’t have to do it alone.

Part of the inertia you may feel in attempting to estimate your retirement expenses is not knowing where to start. The good news? You don’t have to do it by yourself. One option is using an online retirement tool, like a retirement expenses worksheet or calculator. Both can help you identify essential versus discretionary expenses, and give you a realistic picture of where you could cut costs. Eliminating expenses like dinners out, club memberships, even dry cleaning can mean significant savings.

Meeting with a financial advisor is another step you can take to begin the estimating process. By talking through your retirement goals with you, an advisor can help you develop your retirement budget, as well as help you determine how your retirement savings, Social Security and any other sources of income will cover it.

Keep in mind that while your expense/income ratio may appear eye-popping at first, roughly 30 percent of that amount is generally discretionary spending you can control. A few less extravagances for the grandchildren could quickly get you back on track.

2. Create a retirement “vision”—and potential budget.

A more precise approach to estimating for then is to start with what you spend now. Make a list of your monthly expenses: rent or mortgage (including property taxes), utilities, groceries, health insurance and entertainment. Don’t forget miscellaneous expenses like your gym membership, haircuts and vet bills. Leave no stone unturned.

If you have a spouse or partner, it’s important to plan together for your retirement, including expenses. Some questions to consider:

  • How will your roles and responsibilities change?
  • How much “togetherness” does each of you want and need—and how might that impact the amount of physical space in a future home?
  • What health and medical considerations need to be factored into your decisions?
  • What responsibilities and obligations do or will you have for adult children, aging parents or grandchildren?
  • Where do you want to live? Geographic location, proximity to family, climate and cost of living should all be considerations, as well as ideas about social life, friends, and community.

Consider any impact to expenses your answers might pose as you plan, and revisit your “shared vision” once a year so it’s always in sync with your current situation.

3. How do your estimated expenses and income affect your decision to retire?

Based on the figures you arrive at in your planning, you may find you’re happily closer to retirement than you first thought. However, a healthy retirement account balance is not the only factor in ensuring a financially sound future. For example, if you decide to retire early, you may need to pay for your own health insurance until Medicare kicks in at age 65. Even if you’re covered under a spouse’s policy, costs like deductibles, increased premiums and non-covered services can pose significant expense. And other unforeseen demands on your savings may come into play, like short-term financial support for an adult child or helping to cover an aging parent’s bills. The possibility of being unable to offer financial help to a loved one could keep you on the job a bit longer, but you’ll rest easier knowing you can provide the support.

4. Take inflation into account.

Inflation is a real concern when trying to plan for future expenses. While inflation rates have been low in recent years, they’ve varied widely over time, and higher prices mean reduced spending power. It’s impossible to predict future inflation, but planning for a 3 percent rise annually for the next 10 to 15 years will provide a workable estimate you can factor into your expenses.

5. Know that how much you spend in retirement probably won’t change, but what you spend on will.

It’s true that when you first retire, your spending may temporarily spike as you take that dream vacation or start a long awaited home renovation. You may also spend more money on travel, hobbies and other activities than you did when you were working. That type of spending may subside a bit over the years, but the amount you spend typically will not. New expenses like household help, in-home care, or transportation may take their place. Healthcare costs for retirees are typically higher, too, and you may find out-of-pocket medical bills gradually increase. So, it’s best not to bank on a meaningful drop in spending in the later decades of retirement.

6. Estimate your retirement income.

Now that you’ve identified your basic retirement expenses, begin reviewing potential income sources to cover them.

Social Security and pension plans are considered guaranteed sources of income, and it’s important to develop a plan to get the most from them. Start with Social Security, which is your foundational income. Look at your most recent estimate—available on the Social Security website —to determine your approximate benefit, and have your spouse or partner do the same. Keep in mind the amount of your monthly payout will depend heavily on when you start claiming your benefit—in general, the longer you wait, the larger your monthly payment. Additionally, Social Security is one of the few resources that provides regular cost-of-living adjustments. As the cost of living in retirement rises over time, your benefit should increase as well, meaning it’s smart to delay your payments as long as possible to maximize their overall value.

While defined benefit retirement accounts—also known as pensions—are largely a thing of the past, they also fall under the heading of guaranteed retirement income. If you are fortunate enough to have a pension fund with your employer, be sure to include that in your calculations. Your plan administrator can provide you with an estimated benefit analysis—similar to that provided by Social Security—to give you a better idea of what your payments might look like.

In an ideal world, your guaranteed retirement income would be enough to cover your essential expenses each month—an “income floor,” so to speak, that will always support you. Realistically, however, if Social Security is the only regular income you expect to receive, you’ll need to come up with ideas for cutting expenses or creating additional guaranteed income.

7. What about your retirement savings?

IRAs and 401(k) and 403(b) accounts are considered retirement savings accounts. Because their balances depend on the performance of their underlying investments, they can fluctuate in value, making them less dependable than Social Security or pension payments, but nonetheless important building blocks for retirement income with growth potential. You'll most likely need to use withdrawals from these accounts during retirement, but by using them to pay for basic expenses, you could run the risk of eroding your savings faster than you anticipated. Most financial experts advise withdrawing no more than 4 percent of your investments’ value each year in retirement—and some recommend less during a market downturn.

8. Consider turning your savings into lifetime income.2

There’s no question that having a source of guaranteed income in retirement creates confidence. While few people are fortunate enough to have pensions these days, there is a similar vehicle, available to everyone, offering a guaranteed income. With this retirement product, you can convert a lump sum of money—such as IRA, 401(k) or 403(b) balances—into a steady stream of regular payments. Annuities also offer you a choice of distribution methods, including a lifetime income option, meaning you will never have to worry about outliving your money, or answering the question, “How long will my retirement savings last?”

This calculator  can give you an idea of what lifetime income might look like. Add that estimated income to your guaranteed “income floor” to see if it brings you closer to creating the retirement you really want.

9. Closing the gap

After your estimating, cutting and calculating you still find yourself with a gap between expenses and income for retirement, there are a number of steps you can take.

Reduce retirement expenses. From big things like relocating to a less expensive area or smaller home, to smaller actions like selling your second car or paring back discretionary expenses, you can make your retirement dollars go further simply by cutting potential costs.

Consider “gradual” retirement. Rather than retiring “cold turkey,” consider the possibility of working a reduced schedule, or even trying a second career in consulting or another area of interest. In addition to its financial benefit, keeping some work structure in your life can keep you engaged mentally and socially, as well as continue to provide you with purpose and personal satisfaction.

The perfect retirement begins with a plan

Everyone’s vision for retirement is unique. Whether you see yourself traveling the world, pursuing your dreams in a second career, or settled in a cozy home with grandchildren nearby, one thing is certain: Planning ahead can help you figure out how to pay for it. The sooner you get a sense of your retirement expenses—and have a strategy for meeting them comfortably— the more likely you’ll be to look forward to the future with confidence.

Related: Withdrawal Strategies: How to Withdraw Retirement Funds