Making plans to retire is not something that can — or should — be done on a whim. It takes years of prioritizing, calculating, and saving to ensure financial stability. Before you clock out for the last time, one of the most important numbers you need to have on hand is an estimate of your yearly expenses.
Why Estimating Your Retirement Expenses Matters
It can be hard to predict exactly what your finances will look like while collecting Social Security in retirement, as many external factors influence the calculations. However, creating a plan that considers whether you intend to spend more, spend less, or maintain your current spending level is a solid starting point.
When making a list of expected expenditures, take into account your unique lifestyle and priorities. Ask yourself questions like:
- Do I want to travel extensively?
- Will I be financially supporting my children or grandchildren?
- Am I planning to purchase a new home or vehicle?
Every retirement plan will differ based on individual priorities and commitments.
Jean Chatzky’s Retirement Spending Formula
Once you determine your baseline annual expenses, financial expert Jean Chatzky offers a simple calculation to estimate your retirement savings needs:
- If you plan to spend less in retirement, multiply your annual expenses by 0.75.
- If you expect to maintain your current spending level, multiply your expenses by 0.85.
- If you plan to increase spending, multiply your expenses by 0.95.
Once you calculate the adjusted annual expenses, multiply that figure by the number of years you expect to be retired. According to Guardian Life, the average length of retirement in the U.S. is 18 years.
Example Calculation:
Suppose you currently spend $5,000 per month on essentials such as housing, insurance, food, medical care, entertainment, utilities, and transportation. That adds up to $60,000 per year.
- If you plan to spend less, multiply by 0.75 → $45,000 per year
- If you plan to maintain current spending, multiply by 0.85 → $51,000 per year
- If you expect to spend more, multiply by 0.95 → $57,000 per year
For an 18-year retirement, you would need:
- $810,000 (spending less)
- $918,000 (spending the same)
- $1,026,000 (spending more)
Factoring in Inflation and Medical Costs
While some expenses, such as mortgages, may decrease or disappear over time, others—especially healthcare costs—are likely to rise. Planning for these future increases is essential.
Jean Chatzky, a bestselling personal finance author, emphasizes, “Knowing where your money could come from to cover your retirement is critical.” This understanding not only prepares you financially but also provides confidence in your long-term security.
The Three Primary Sources of Retirement Income
Chatzky identifies three main sources of retirement income that can help cover your monthly expenses:
- Paid Work: Many retirees continue working, either out of financial necessity or for social engagement and personal fulfillment.
- Social Security: Retirement benefits earned through years of contributions to the Social Security system.
- Savings and Investments: Money accumulated in retirement accounts (e.g., 401(k), IRAs, stocks, bonds) over the years.
Pre-Retirement Checklist for Financial Readiness
To ensure a secure retirement, Chatzky and AARP recommend following this actionable checklist:
✅ Calculate Your Estimated Retirement Expenses – Determine how much money you’ll need annually and multiply it by your expected years of retirement.
✅ Assess Your Current Retirement Savings – Take stock of your 401(k), IRA, pension funds, and other investments.
✅ Set Up or Review Your Social Security Account – Create an account at mySSA.gov to estimate your Social Security benefits.
✅ Maximize Your 401(k) Contributions – Contribute enough to receive your employer’s full matching benefits.
✅ Invest in IRAs and Other Accounts – Supplement your savings through diversified investments.
Final Thoughts: How to Bridge the Gap
Even if your retirement savings are not where they need to be, there is still time to make adjustments. Chatzky advises, “There’s still time to grow your money and close the gap between what you have and what you’ll likely need.”
By taking proactive financial steps today, you can retire with confidence, knowing you have planned for a comfortable and secure future.
Disclaimer – Our editorial team has thoroughly fact-checked this article to ensure its accuracy and eliminate any potential misinformation. We are dedicated to upholding the highest standards of integrity in our content.