How Much Do I Need to Spend During Retirement?

by Paul Ruedi

In my experience as a retirement planner, I have found that very few people enter retirement completely prepared for what is ahead of them. In addition to all the financial aspects of life without a paycheck, people planning for retirement rarely have any idea of how they will spend their extra time, and often fail to see some of the risks that could impact their retirement down the road.

If you are preparing for retirement, you should ask yourself a handful of questions to envision what to expect and create a plan to live your dream retirement. Today I want to talk about one of the most important questions: how much will I need to spend during retirement?

Most people have no idea how much they will need to spend in retirement to maintain their current lifestyle. People often anchor their retirement spending expectations to their current income, but since taxes and usually savings are taken out of that paycheck before they ever spend a dollar, it actually takes less to replace their current income than they might imagine.

I think a good starting point is to come up with a reasonable estimate of your current spending. It can be fairly simple math. For example, if you know you get a $5,000 monthly check after taxes and withholdings are taken out of it, and you find you usually have around $500 to save at the end of the month, you know you are spending around $4,500 a month. That is approximately how much you will need to maintain your lifestyle in retirement.

You should also factor in that certain expenses will go away during retirement, such as extra gas expense from a commute. I would recommend tracking your expenses on an app or spreadsheet to start to see where you’ll keep spending your money after retirement, versus which expenses may go away once you stop working.

Once you have an idea of your spending needs, you can build a plan to make sure you fund those lifestyle costs and any other financial goals. Understanding your spending needs is an easy first step. But designing a retirement spending plan and pairing it with an investment portfolio that can replace that spending, and increase it with inflation, is much more difficult for most people to do on their own. If you aren’t sure how to build a retirement plan to replace your current spending yourself, you may want to talk to a financial advisor.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.