What will your retirement cost?

In the first post of this series, we focused on creating a clear and inspiring vision of what your retirement could look like. Now, in Step 2 of our Seven Steps to a Successful Retirement, we tackle one of the biggest – and often most stressful – questions about retirement:

What is it going to cost to live the life you've envisioned?

It’s a tough question, but an essential one. After all, if you don’t know what your dream retirement will cost, how can you confidently prepare for it?

Let’s walk through how to estimate your spending needs in retirement – and how to build a plan around that number.

Forget the rules of thumb

You’ve probably heard common advice like “Plan to spend 70% to 80% of your working income in retirement.” While it’s a quick shortcut, your retirement deserves better than a vague rule of thumb. Every person’s needs and goals are different, and there are better ways to arrive at your spending number.

Two ways to approach the spending question

As a retirement planner, I see people approach this question in two ways:

1. “Here’s what I want to spend – can I afford it?”

   You’ve figured out a lifestyle you want, and now you want to know whether your savings, investments, and income sources (like Social Security) can support it.

   
   

2. “Tell me what I can afford – and I’ll build my lifestyle around that.”

   In this case, we work backward from your available resources to determine a sustainable annual budget.

Both approaches are valid. What matters is that we settle on a spending target – your number – to guide the rest of your retirement plan.

Start with your current take-home pay

A simple “top-down” approach is to use your current monthly take-home pay as a starting point. Then ask yourself:

• Are you saving money now? If so, you’re already living on less than your take-home pay, which is good because it means you might be able to lower your retirement spending estimate a bit.

• Are you relying on credit cards or loans to make ends meet? In that case, your spending number might need to go up – and your retirement timeline may need some adjusting.

This method won’t give you a perfect number, but it gets you close enough to start planning.

Want more precision? Build a budget

If you're a detail-oriented person (or just want more certainty), take time to build a detailed retirement spending plan. Start by organizing your expenses into four categories:

1. Fixed monthly costs – Rent or mortgage, utilities, insurance, car payments.

   
   

2. Variable monthly costs – Groceries, gas, dining out, entertainment.

   
   

3. Recurring but non-monthly costs – Property taxes, insurance premiums, vacations, home repairs.

   
   

4. Temporary expenses – Things you’re paying now (like a mortgage or college tuition) that will go away later.

Be sure to include everything – and think ahead to how your spending might change in different phases of retirement, like when one spouse retires before the other, or when one passes away.

Don’t forget inflation and emergencies

Even a well-crafted budget can fall short if you don’t plan for:

• Inflation – Your spending needs will rise over time. Assuming 2.5% annual inflation is a good starting point.

  
  

• Unexpected expenses – Set aside emergency reserves and consider setting up a home equity line of credit before you retire, just in case.

Up next: Finding income to pay your expenses in retirement

This was Step 2 – figuring out how much your retirement lifestyle will cost. In our next post, we’ll tackle Step 3: finding the income to pay for it all, including how to maximize Social Security, pension benefits, and designing an income-oriented investment portfolio.