Anticipating your retirement expenses is key to saving the right amount in 401(k)s, IRAs and more. Although getting exact figures might not be possible, projecting costs for healthcare, housing and lifestyle can help you create a realistic savings goal during your career. Financial experts say you can expect to spend between 55% and 80% of your annual employment income each year in retirement. Here’s how to calculate expenses. To fully prepare your finances for retirement, consider working with a financial advisor.
Estimating your expenses in retirement can be as challenging as planning for college for your children. Future costs are likely to be higher, unknown factors and emergencies can increase costs and your investments may perform differently than forecast.
However, calculating approximate costs will help you go into retirement prepared. A solid financial foundation will help make retirement comfortable and affordable, even if you have to adjust your budget once you get there. In addition, estimating your expenses requires setting a retirement goal and age. Your retirement accounts also influence your financial and life circumstances.
For example, let’s say you are single and want to retire at 66. Your working income is $70,820 and your annual expenses during retirement will be about 80% of this ($56,656). You have a 401(k) with 3% matching contributions from your employer. Your account has $75,000 and you just opened a Roth IRA for tax diversification purposes and deposited $5,000 into it. If you save about $400 per month, you’ll have over $500,000 in retirement savings by your target age. These funds, plus Social Security benefits, will net you an estimated post-tax annual income of $73,455.
Although retirement planning doesn’t look the same for everyone, you can follow these guiding principles to estimate your financial needs:
Saving for retirement is essential, as is understanding how you’ll use the money in your golden years. Retirement is a distinct phase of life typically involving lower costs than in previous decades. However, your income also is generally lower, so planning out retirement will help you save and spend wisely. While guiding principles are helpful, identifying your expenses in detail can give you a better picture of retirement.
The year you want to retire is a primary influence in estimating expenses. For example, every year you continue working brings a host of advantages. Adding to your investments instead of withdrawing from them, receiving employer-sponsored healthcare and increasing your Social Security benefit is among the perks you receive by retiring later. In addition, if you want to save ten times your annual income, you may need to retire later than you first considered to hit your goal.
Your retirement lifestyle might be similar or wildly different from when you worked. For example, you might vacation extensively, spend time with family or sell everything and tour the country in an RV. These choices bring costs influencing your bottom line during your golden years. So, whether you decide to downsize to save on housing costs or want to spend a portion of each year overseas, identifying your desired lifestyle can help you plan and save.
Beyond lifestyle, numerous expenses will determine how expensive retirement is:
Your tax rate in retirement will influence how much income you’ll owe the government. For instance, income from traditional IRAs, 401(k)s, pensions and annuities are taxable. On the other hand, Roth IRA income is tax-free and taxes on Social Security benefits depend on your income level. Therefore, it’s crucial to understand your income streams in retirement and project your taxes.
Say you have an annual Social Security benefit of $20,000 in retirement. You also annually withdraw $25,000 from your Roth IRA and your tax status is married filing jointly. While your Roth IRA income isn’t taxable, your total income means you’ll pay taxes on 85% of your Social Security income. So, $17,000 of your income would be taxable.
Estimating healthcare costs is challenging because health situations change as you age. However, even if you’re currently healthy and don’t need expensive treatments, saving for medical expenses is a must. For example, Medicare bears a monthly cost regardless of how often you see the doctor or go to the hospital. For example, Medicare Part B will cost $164.90 each month in 2023 – and retirees generally purchase supplemental health coverage
In addition, because new medical treatments emerge to help retirees live longer, healthcare costs increase as you age, then decrease slightly after 75. As a result, experts recommend designating 15% of your income toward medical expenses in retirement. The following table can help you visualize planning for healthcare costs:
| Age Range | Estimated Annual Healthcare Costs |
| Under 55 | $4,269 |
| 55-64 | $5,791 |
| 65-74 | $6,750 |
| 75+ | $6,574 |
Whether you discuss retirement plans with a financial advisor or contemplate it on your own, the following questions will help you be as thorough as possible:
Answering these can help you prioritize your most important wants and establish retirement savings goals.
Between healthcare, leisure activities and more, retirement can be as expensive as working life. So, a healthy retirement account is necessary to meet your expenses. These tips can help you boost your retirement savings:
Starting an investment account early in your professional life gives your money more time to grow. On the other hand, if you’re well into your career and haven’t put aside much for retirement, better is late than never. Regardless of your stage in life, the principle is to invest your money for as long as possible, accumulating bigger returns.
Contributing to your retirement account is as easy as setting up automatic monthly deposits. If you allocate 2% of your paycheck, you probably won’t notice it’s missing. However, increasing this amount by half a percentage point every couple of months will help you maximize retirement savings and spend the rest efficiently. Of course, living expenses limit this trick, but going from 2% contributions to 5% in a year can help you save without breaking a sweat and spend wisely.
Recognition and rewards at work can boost your retirement as much as your confidence. Instead of letting the cash burn a hole in your pocket, put it towards retirement. The infusion of money will help you reach your savings goal.
The U.S. economy has side hustles galore for those willing to put in a few extra hours after work or on weekends. A second job can add hundreds of dollars to your retirement account each month and help your savings skyrocket.
If your employer offers a 401(k), contributing to it is an excellent idea. These accounts are only available to employees whose workplaces offer them and come in traditional and Roth varieties.
Furthermore, your employer likely provides matching contributions for your account. For example, your employer might match contributions up to 5% of your paycheck. So, make sure you’re contributing enough to receive all the free money you can. This strategy will help your retirement account grow as quickly as possible.
Unlike a 401(k), an individual retirement account (IRA) is available to anyone, regardless of their employer. You can open a traditional or Roth IRA, depending on your tax preferences and invest for retirement. Remember, these accounts are easier to max out than 401(k)s. Specifically, the IRA contribution limit is $6,000 for 2023 (or $7,000 if you’re 50 or older). Therefore, your IRA will likely be a supplementary investment vehicle instead of your primary source of retirement income.
The trick of investing is to get exposure to profitable parts of the economy at the lowest cost. Retirement accounts have varying administration fees based on the company managing them and the assets chosen. For example, Vanguard’s index funds have some of the lowest fees on the market because they don’t require active management. In addition, mutual funds and exchange-traded funds (ETFs) are inexpensive investment vehicles that don’t need constant oversight.
If you’re over 50, the law allows you to invest extra cash in various types of retirement accounts. For example, employees over age 50 with a 401(k) can contribute an extra $7,500 to the account in 2023, taking the contribution limit from $22,500 to $30,000. This perk can help older investors make up ground from not investing earlier in their careers.
If you’re struggling to set aside money for retirement, a budget can help. Sitting down and comparing your income to your expenses will help you identify areas to scale back so your money can serve you better. For example, you might discover through the budgeting process that you spend much more than you thought on streaming services or restaurants. Once you understand where your money goes, you can divert the desired amount toward retirement.
This final tip will boost your retirement income and possibly your savings. Your Social Security benefit increases the longer you wait to take it. For example, waiting until age 67 instead of 62 can increase your monthly distribution by 30%. So, if you can get by on your other retirement savings until a later age, you’ll increase your monthly Social Security income.
On the other hand, you could work a few additional years while you wait on Social Security to kick in. This option allows you to contribute more to your retirement account, give your money more time to grow and leave the account untouched.
Estimating your retirement expenses is an essential step toward retiring well. In addition, getting a handle on your lifestyle, including vacations, housing and medical costs, will help you zero in on a retirement savings goal while you work. Deciding when you want to retire and what income you’d like to have is vital to understanding how you’ll make ends meet during your golden years.
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Ashley KilroyAshley Kilroy is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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