How to Estimate Your Retirement Expenses in 7 Steps?
Do you actually know what your retirement will cost? It's the question I hear more than any other, and the answer matters more than most people realize. Underestimate your spending, and you put the safety of your entire retirement plan at risk. Overestimate it, and you could end up working years longer than you need to.
Most people fall back on the generic "80% of your pre-retirement income" rule of thumb. Let's do better than that. Here are seven simple steps to predict your retirement spending with real numbers, so you can retire with confidence.
To accurately estimate retirement expenses, start by tracking your current spending baseline and subtracting costs that will disappear, like 401(k) contributions. Next, project future healthcare premiums, define your discretionary lifestyle goals, factor in estimated taxes, and map out a long-term withdrawal strategy.
1. Find Your Baseline to Estimate Retirement Expenses
Before you can plan what you'll spend in retirement, you need to know what you spend today. If you already keep a detailed, categorized budget, fantastic. If not, pull your bank and credit card statements from the past 12 to 36 months and total up every outflow. Just be careful not to double count credit card payments when they hit your checking account. This number is your starting line.
2. Subtract What Goes Away
Next, remove the money you're currently saving: 401(k) contributions, Roth IRA deposits and taxable brokerage investments. None of these continue once you retire. If you saved $20,000 last year, deduct it.
Then subtract any other expenses that will disappear. A mortgage you'll have paid off, kids still living at home or tuition for a child in college may all drop off your budget. What remains is a clear view of what you actually need to live on.
3. Estimate Healthcare Costs and Medicare Premiums
Health care is one of the biggest unknowns for retirees, so break it down:
Age 65 or older: Medicare Part A is typically premium-free, but Part B is not. For 2026, the standard Part B premium is $202.90 per month, or about $2,435 per person each year ($4,870 for a married couple). You'll also need to buy a separate Part D prescription drug plan, and budget for its premium on top of Part B. The average base premium is about $34.50 per month in 2026, though costs vary by plan. Don't skip it if you have no other creditable drug coverage: enrolling late can trigger a permanent penalty.
High-income surcharges (IRMAA): If your modified adjusted gross income (MAGI) from two years earlier crosses certain thresholds, Social Security adds an Income-Related Monthly Adjustment Amount (IRMAA) to your Part B bill. For 2026, it's based on your 2024 income. At $109,000 or less ($218,000 or less for joint filers), there's no surcharge and you pay the standard $202.90. Above those levels, surcharges climb from $81.20 to $487.00 per month, putting your total Part B premium between $284.10 and $689.90 per person. The same income thresholds also trigger a Part D surcharge, added on top of your drug plan premium, ranging from $14.50 to $91.00 per month. (2026 IRMAA brackets)
Medigap: A supplement policy to cover deductibles and coinsurance typically runs about $114 to $249 per month at age 65, depending on the plan and your health. Many policies use attained-age pricing, so premiums rise as you get older, often reaching $174 to $390 or more per month by age 80. Budget for that increase rather than assuming today's rate.
Retiring before 65: You'll need an Affordable Care Act marketplace plan until Medicare kicks in. Visit healthcare.gov, enter your details and use a middle-of-the-road Silver plan as your benchmark.
Add these projected premiums to your baseline.
4. Define Your Discretionary Budget
Discretionary spending is what makes retirement enjoyable: travel, dining out, hobbies and charitable giving. Tag each current expense as essential or discretionary. Keep in mind that "essential" is personal; internet may be optional in theory, but if you love streaming movies, it's essential to you.
Then sit down with your spouse or partner and identify your "money dials," the things that bring you the most joy. Maybe you take one trip a year now and want two in retirement. Decide where to dial spending up and where to dial it back.
5. Create Three Target Spending Levels for Your Budget
Rather than one target, build three:
Minimum target: Your bare-bones budget covering housing, food, basic health care and other necessities.
Goal target: Your ideal but realistic budget, including the discretionary spending you identified in step 4.
Dream target: The most you'd want to spend, even if you could spend more. Beyond this point, extra spending stops meaningfully adding to your happiness.
These three numbers show how close you are to your dream lifestyle, and whether you should work a few more years for extra cushion or are already safe to retire.
6. Factor In Taxes and Your Retirement Withdrawal Strategy
Your spending targets are after-tax numbers, so you need to know the gross income required to support them. This is where withdrawal strategy comes in: should you draw from pre-tax, taxable or tax-free accounts first, and in what order?
Use financial planning software that models taxes on withdrawals, before and after Social Security begins. At Capital Wealth Group, we use RightCapital and Holistiplan. Estimate your annual tax bill for each year of retirement and add it to your spending targets.
7. Project Future Spending: Retirement Spending Smile
Retirement spending rarely stays flat. Inflation pushes costs up, but research shows real spending tends to follow a "retirement spending smile." Retirees typically spend more in the early, active years, less in the middle years, and more again later as health care costs rise.
Of course, every journey is unique. My parents are 76 and 79, and they're spending as much on travel now as they ever have. My mom just returned from a two-week mission trip to Uganda, and they're already headed to Mexico for another. Projecting your own spending curve over a 30-year horizon gives you a far more realistic picture than a single flat number.
Summary
Follow these seven steps and you'll have a detailed, realistic estimate of what you need each year in retirement, built on your own data rather than a rule of thumb. Remember: you may not need more money. You may just need a better plan.
Next Steps for Your Retirement
Ready to take the next step? I'd love to help you build a retirement plan, investment plan and tax strategy.
Visit us at CapitalWealthGroupSC.com to schedule a 30-minute Introductory Call. Let's make sure you're on the right track for the retirement you want.
The information in this post is for general education only and is not tax, legal or investment advice. Consult your tax, legal or investment advisor before acting on it.
About the Author
George Jameson, CFP®, RICP®, is the founder of Capital Wealth Group, a fee-only advisory firm in Columbia, South Carolina, and host of the Your Retirement Guide podcast. He helps people nearing or already in retirement plan for and live a confident retirement.
Full Podcast Transcript
Welcome to the Retirement Guide Podcast. I'm your host, George Jameson, the owner of Capital Wealth Group, a fee -only advisory firm. Whether you're nearing retirement or already retired, join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.
Hi, I'm George Jameson, certified financial planner and founder of Capital Wealth Group, located in Columbia, South Carolina. Today, we're diving into a question I hear all the time. How do you know how much you're going to spend in retirement each year before you actually retire? If you underestimate your spending, you can put the safety of your retirement plan at risk. However, if you overestimate, you might be working longer than you actually need to be. In this episode, I'm going to walk you through seven simple steps to help you accurately predict your retirement spending so you can retire with confidence.
So step one, find your baseline. Before you plan for retirement spending, you need to understand what you spend today. Ideally, you have a detailed budget where every transaction is categorized, from groceries, utility bills, entertainment, you name it. If you already do this, fantastic. However, for most of us, we probably don't keep that detailed of a budget. So if this is not you, Grab your bank and credit card statements for the past 12 to 36 months total up all outflows Just be careful not to double count your credit card payments when they hit your checking account This gives you a solid baseline of your current lifestyles cost Think of this as your starting line in your retirement budget
So step 2 subtract out retirement savings and any other expenses you will not have in retirement. You want to remove the money you're currently saving. Those 401k contributions, Roth IRA deposits, taxable brokerage account investments. None of these will continue once you retire. So if you saved $20 ,000 in retirement account last year, deduct that from your baseline. You also may have other expenses that you'll not have in retirement. For instance, if your house will be paid off, you won't have a mortgage payment. Maybe you still have dependents at the house or kids in college. You may not have those expenses in retirement, so subtract those as well. Now you have a clear view of what you actually need to live on once you stop working.
Now step three, estimate health care cost. Health care is one of the biggest unknowns for retirees. So let's break it down. If you're already 65 or older, you will obviously enroll in Medicare. Part A is typically premium free, but Parts B and D carry annual costs. Roughly $2 ,200 per person for Part B, and about $666 for Part D today. If you're married, that's about $5 ,775 a year for just the premiums alone. Then you add a Medigap policy premium to cover deductibles and co -insurance. Depending on your plan that could be anywhere from $1 ,500 to $4 ,000 per person annually. If you're retiring before 65, you'll need to estimate your Affordable Care Act marketplace premium instead until you hit age 65. I did a whole podcast last week on the ACA and the changes that are going forward starting in 2025. So please check it out. You can also visit healthcare .gov and enter in your details and choose a middle -of -the -road silver plan as a benchmark. Then add those projected premiums to your baseline budget.
So step four, define your discretionary fund budget. Discretionary spending is what makes retirement enjoyable. Travel, dining out, hobbies, charitable giving. But your baseline likely already includes some of these. That's why it helps to categorize your budget. Which expenses do you consider essential and which are discretionary? Remember, essential here is very subjective. Internet might be non -essential in theory, but if you love streaming movies, it's essential for you. Once you've tagged current expenses as either essential or discretionary, sit down with your partner and think about how these categories will change. Maybe you've only taken one annual trip but want to double that in retirement or perhaps you love culinary experiences identify the money dials things you derive the most joy from and decide where to dial it up or dial back the spending
and then step five create three spending levels rather than one single spending target think in terms of three First, you have your minimum target, your bare bones essential spending. This is the level you need to cover necessities such as housing, food, basic health care and so on. And then number two would be what I call goal target, your ideal realistic budget based on the discretionary spending you identified. This is the number you've been building toward. Then number three, I like to call it dream target. An upper limit budget representing the most you'd want to spend, even if you could spend more. There's usually a point of diminishing returns. Spending beyond this wouldn't meaningfully increase your happiness. Having these three targets helps you see how close you are to your dream lifestyle. And whether you should work a few more years for that extra cushion, or if you're already safe to retire now.
Step 6. Factor in taxes. Now let's consider taxes. Before and after Social Security. You'll need a tool or software that can model tax liability on withdrawals. I use a financial planning software called Right Capital that includes tax planning. I also use another one called HolistaPlan that goes into more detail. If you're doing this yourself, there are a couple good ones online as well. This is where distribution or withdrawal tax strategies comes into play Should you take money from your pre -tax account or taxable account or your tax -free account? When and in what order? This is very important and using some type of financial planning software that incorporates taxes will help you decide Where to start taking distributions from and how it will affect your taxes over time You'll want to run this through your tax tool to estimate your annual tax liability each year in retirement. Add that to your pre -tax spending targets to get an accurate view of how much gross income you'll need.
So let's move on to step seven. Step seven, project income into the future. Finally, retirement spending doesn't always stay flat. While inflation does push cost up, Research shows that retirees' real spending is more like what we call the retirement spending smile. Most people tend to spend more in the early years of retirement, less during the middle phase, and then more again later in retirement due to health -related expenses. Projecting your spending like this can give you a more nuanced, realistic picture of your financial needs over a 30 -year retirement horizon. Everyone's retirement journey is unique. Take my parents for example. They are 76 and 79 and are spending as much or more on travel now than they ever did before. My mom just returned from a two -week mission trip to Uganda. Then they joined my family for a mountain getaway and spent a week at the beach and now they're on the way to Mexico for another week -long mission trip.
So let's now wrap it up. So there you have it. 7 steps to craft a personalized retirement spending plan that goes well beyond the generic 80 % rule of thumb. So let's recap. First, find your baseline. Think of this as your starting line in your retirement planning budget. Step 2. Subtract out retirement savings or any other expenses you will not have in retirement. Step 3. Estimate health care costs. Step four, define your discretionary fun budget, the discretionary spending that makes retirement enjoyable. And then step five, create three spending levels. Having these three targets helps you see how close you are to your dream lifestyle and whether you should work a few more years for that extra cushion or if it's already safe for you to retire now. And then step six, factor in taxes. And step seven, project income into the future. If you follow these steps, you'll have a detailed, realistic estimate of what you need each year in retirement. And it'll give you a peace of mind knowing your plan is built on solid data, not just a rule of thumb.
If you found this episode helpful, please share it with a friend, leave a comment, or reach out to me directly. I'm George Jameson of Capital Wealth Group. And remember, you may not need more money, you may just need a better plan. Thanks for listening, and I'll catch you in the next episode. Have a great day.
Thank you for tuning in to this episode of The Retirement Guide. If you enjoyed this episode, please subscribe and leave a five -star review to help others discover the show. For questions, ideas, or discuss your retirement plan, reach out to me, George Jameson at Capital Wealth Group. If you'd like a free retirement review, visit our website at capitalwealthplan .com to learn more. Thank you for listening. Stay tuned for more insightful retirement planning in future episodes.
And now for the disclaimer. The information discussed in this podcast is for general explanations and education only. It is not tax, legal, or investment advice. Before considering acting on any information heard here, first consult with your tax legal or investment advisor. Thank you and have a great day.
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