Wondering how much you need to retire is a common question, but have you considered how much you’ll actually spend once you’re retired? Knowing your anticipated expenses can significantly impact how you prepare for retirement. In this post, we’ll explore various methods to estimate your future spending needs.

Strategies to Estimate Your Future Expenses

Average Retirement Spending
A simple way to get started is to look at national averages. According to the Bureau of Labor Statistics (BLS), the average American household headed by someone 65 or older spends around $4,345 per month, or $52,140 per year. To provide another level of perspective, here is a look at how much households with a net worth of between $1 and $3 million spend.:

Average Annual Household Spending

Understanding these averages offers a valuable starting point for your own retirement planning.
However, it’s important to remember that your actual expenses will vary based on your unique lifestyle, health, and other factors.

Income Replacement Rate
Another common guideline is to aim for an income replacement rate of 55-80% of your pre-retirement income. This may sound like a wide range, but it gives you a rough outline to work within. Typically, the higher your income, the lower the percentage you’ll need to maintain your standard of living.

For instance, if your household is currently earning $200,000 a year, you might expect to spend $130,000 each year during retirement. Use this chart to help identify your specific income replacement ratio, based on how much you earn.

income replacement ratio

Detailed Budget
While averages and income replacement rates offer good starting points, building a detailed budget can give you the most accurate estimate. This approach is the most time consuming, but it can help you pinpoint your spending and even find areas you may be able to cut back on.

To get started, make a list of your anticipated monthly and yearly expenses in retirement. Think of everything, from groceries and utilities to healthcare and leisure activities. Next, identify which of these expenses are fixed, such as a mortgage or rent, and which are variable, such as dining out or travel. This will give you a better understanding of where your money will go and where you have some flexibility.

We recommend that our clients complete our budget template well before retirement, allowing us ample time to review and make any necessary adjustments.

Bottom Line
At PMG Wealth Management, we understand that retirement planning isn’t a “set it and forget it” endeavor. Rather, it’s an evolving roadmap that requires consistent monitoring and fine-tuning.

The methods outlined here are intended to help you establish a foundational plan, or what we might call your “base case.” From this foundation, we’ll work closely with you to develop customized strategies, ensuring that you’re on the right track to live out your retirement years as you’ve always envisioned.

George Maroudas, CFP®

George Maroudas, CFP®

Twitter @ChicagoAdvisor

Disclaimer / Sources: 

Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. 

Average household spending from JP Morgan’s Guide to Retirement