When people discuss retirement planning, they often focus on saving consistently and building a portfolio that will one day replace their paycheck. But to understand if you’re doing enough, you need to understand how much you’ll actually need when you’re retired.
Many people assume their expenses will drop once they retire, or think that using a general rule of thumb as a guide will be enough for their planning. In reality, estimating retirement spending is one of the most important steps in building a durable financial plan. When this number is wrong, everything downstream becomes harder. You risk overspending and creating unnecessary pressure on your investments or underspending and holding back from experiences you could have afforded.
In this blog, we break down how you can estimate retirement spending into practical steps to help you build a plan with confidence.
Understand Why Retirement Spending Is Different
Retirement does not simply mirror your working years. Some costs shrink, while others rise sharply.
For example, you might save on commuting, work-related expenses, and payroll taxes. At the same time, you take on new costs, like healthcare, that can be significant. In a 2022 Healthcare cost study, Fidelity estimates that a 65-year-old couple retiring today may need around $315,000 dollars to cover healthcare expenses throughout retirement. Travel, home maintenance, family support and hobbies can also add meaningful spending.
Another factor is how spending changes over time. Most retirees spend more in their early years when they are healthy, active, and excited to travel. Spending tends to level out in the middle years and may rise again later with medical needs. This pattern is normal and should be built into your long term plan.
Start With the Life You Want
The best way to estimate spending is not to jump straight into spreadsheets. It starts with your lifestyle. Your retirement spending should reflect the life you want to lead, not a generic percentage of your pre-retirement income.
Ask yourself questions that focus on how you envision your time.
Will you travel several times a year?
Do you want to maintain your current home or downsize?
Will you live in one state or split time between multiple places?
Are you hoping to support children or grandchildren?
Would you like to pursue philanthropy, hobbies or new business ventures?
People often underestimate how different life feels when every day is yours to fill. You have more time for experiences that cost money, whether that means golf, dining out, family trips or simply enjoying more frequent leisure activities. By defining your lifestyle with intention, you give your financial plan a solid foundation.
Build a Baseline Budget From Today’s Spending
Once you have a sense of your lifestyle, the next step is to look at your current spending. This is often the best place to start because your habits tend to follow you into retirement.
Take your existing expenses and sort them into categories that will decrease, stay the same, or increase once you retire.
Categories that often decrease:
- Work-related costs,
- Professional clothing
- Commuting and parking
- Payroll taxes
Categories that often remain similar:
- Groceries
- Utilities
- Insurance
- Property taxes
- Charitable giving
- Gifts to family
Categories that often increase:
- Healthcare premiums and out-of-pocket spending
- Travel
- Home maintenance
- Long-term care costs
This exercise helps you avoid the common mistake of assuming all expenses will drop. Many retirees are surprised to learn that their spending stays relatively stable or even increases in the first decade of retirement. Your baseline budget becomes the starting point for your long-term projections.
Address Healthcare and Long-Term Care Separately
Healthcare spending deserves its own category because it behaves differently from most other expenses. Medicare provides valuable coverage, but it does not eliminate out-of-pocket costs. Premiums, deductibles, dental care, and hearing care can add up quickly. HealthView Services research shows that medical costs continue to outpace general inflation, which means they need to be modelled carefully.
Long-term care is another significant variable. The Department of Health and Human Services estimates that roughly 70% percent of people will need some form of long-term care during their lifetime. Whether that is in home care, assisted living, or skilled nursing, the costs can be substantial.
You can plan for these expenses in several ways. Insuring for long-term care can prove very costly, so many earmark a dedicated portion of their portfolio. Many high-income recipients would likely spend the same or less if entering a long-term care facility, while others prefer to remain at home with in-house care. What matters most is acknowledging that these costs exist and preparing for them early.
Apply a Realistic Inflation Rate
Inflation can be one of the biggest threats to your long-term financial security. Even modest increases in prices add up significantly over a 20-30 year retirement. Many people default to a flat assumption, but different categories inflate at different rates. Healthcare costs rise faster, while other categories, such as apparel may remain stable.
The best approach is to use blended assumptions. Incorporate general inflation for day-to-day expenses and a higher rate for healthcare and long-term care. This keeps your projections grounded in reality and helps protect your purchasing power.
Use Conservative Return Assumptions for Stress Testing
Your retirement spending is not just about expenses. It is also about how your portfolio behaves during withdrawal years. Retirees face an added risk called sequence of returns risk. A few poor market years early in retirement can have long-lasting effects if you are withdrawing from your accounts at the same time.
This is why Keen Capital encourages clients to make conservative return assumptions when planning spending. Historical averages can paint an overly optimistic picture. It is often safer to use real return estimates in the range of 3-4% above inflation, depending on your portfolio mix and risk tolerance. This creates a margin of safety that helps you maintain stability even through down markets. However, on the flipside, being too conservative in your assumptions could leave a lot on the table in terms of income during your lifetime.
It is incredibly helpful to adopt flexible spending guidelines. Small adjustments during market downturns, such as reducing discretionary expenses or drawing from cash reserves, can significantly increase the sustainability of your plan. Running a specific Income Distribution Portfolio that plans for downturns also leads to real results that are often not captured in simulations.
Build Buffers for the Unexpected
Even the most detailed retirement plan needs space for surprises. Large home repairs, medical events, family support, new hobbies, or simply wanting more freedom during the early active years can create expenses that were not part of the initial projection.
A healthy way to prepare is to build a buffer into your spending plan. This could be a contingency percentage added to your annual budget or a separate reserve of cash or short-term bonds. We often recommend starting with a monthly distribution that is comfortable but leaves room for extra “unexpected” withdrawals. Having this cushion reduces stress and minimizes the likelihood of pulling funds from your portfolio at inopportune times.
Revisit Your Plan Regularly
Retirement planning is not a one-time exercise – it is an active exercise. Your needs change, the markets change, and tax laws evolve. Spending patterns shift as people move from the active years into the slower years and then into higher healthcare needs later in life.
A strong retirement plan is reviewed consistently. An annual check-in is ideal. If you experience major changes such as selling a property, inheriting assets or facing a health event, it is important to revisit your plan right away. These adjustments ensure your spending estimates remain aligned with your goals and your financial resources.
Plan Your Retirement With Keen Capital
Estimating your retirement spending is one of the most powerful steps you can take to secure your long-term financial future. When you understand your lifestyle, anticipate risks, manage taxes carefully, and plan with realistic assumptions, you give yourself the freedom to enjoy the life you worked so hard to build.
At Keen Capital, we are fee-only fiduciary advisors. We help clients create retirement strategies that evolve with them at every stage of life. Our focus is on tax-efficient income planning, thoughtful withdrawal strategies, and portfolio construction that balances growth with protection. Your goals guide the plan, and we are here to make sure every part of it works together.
If you would like to see how your retirement spending projections align with your financial resources, schedule an introductory call with our team.
We would be happy to help you build a plan that supports your lifestyle and protects your legacy.
