Ask T. Rowe Price

How do I determine what I might spend in retirement?

Judith Ward, CFP, a senior financial planner with T. Rowe Price
Judith Ward, CPF®, a senior financial planner with
T. Rowe Price

Understanding your spending is important at any age, but it can become especially significant as you prepare to leave your career and stop drawing a steady paycheck.

You may want to think of your strategy as a road map. Knowing where you are now and where you want to go can help you understand your future income needs and how to get there. Begin by documenting your current expenses, both essential and discretionary. Then add a projected column to get a sense for what you may spend in retirement.

A Closer Look at Retirement Spending

Your spending patterns will change as you move through retirement. The chart illustrates how, in general, they may evolve. A few specific things to keep in mind include the following:

  1. Some expenses in retirement will be lower because of lifestyle changes—for example, commuting and clothing costs may decline, and you may choose to relocate to a less expensive area. Other expenses, such as your payroll tax, including payments into Social Security and Medicare, may be eliminated altogether.
  1. On the other hand, there are expenses that may increase significantly. One of the greatest concerns for many individuals is the cost of health care, which is projected to rise at a rate beyond average annual inflation. Individuals age 55 to 64 pay an average of $4,000 a year, while the amount is close to $5,000 or more in retirement.*
  1. Consider the lifestyle you want to lead: Will you travel extensively or participate in expensive hobbies? For any expense, you can estimate its future cost using a simple inflation calculator at an average inflation rate of 3%.

Taking Action at Any Age

Our research shows that you can build a sound retirement income plan if you follow some standard guidelines. The rule of thumb is to plan on replacing 75% of your preretirement income to maintain your current lifestyle in retirement. As much as 50% of this amount may come from investments, 20% from Social Security benefits, and the rest from other sources such as a pension or part-time work. Most individuals need to save at least 15% of their annual income, including any employer contributions, to have enough savings to draw from throughout their retirement. Creating a spending and savings plan will set you on a path to achieving your goals.

spending chart

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1 The new T. Rowe Price Personal App for iPhone® enables you to conduct mutual fund transactions, check daily prices, and more, while you're on the go.
2 Judith Ward, CFP®, explains how your expenses may evolve in retirement and what you can do to prepare.
3David Giroux, portfolio manager of the T. Rowe Price Capital Appreciation Fund (PRWCX), employs a flexible value strategy.
4Investors interested in the expansion of communications technology might consider the T. Rowe Price Media & Telecommunications Fund (PRMTX).
5 A four-step checklist to help you move your financial plan forward as you start a new job.
6The effect of rising prices combined with increasing life spans exposes you to the chance of outliving your savings.
7A new way to experience Investor; Emerging Markets Corporate Bond Fund; Washington, D.C. Investor Center is moving; save with our Brokerage commissions.
8Moving some or all of the assets from your Traditional IRA into a Roth IRA may provide you with greater financial flexibility in retirement.
9Mr. Price's employment history helped to shape his investment philosophy and desire to start his own "investment counsel" business.
10A guide to financial and estate planning actions
Preserving Assets for Your Heirs