Estimating Income Needs in Retirement

In the July 2017 Quarterly, we suggested the importance of starting early saving for retirement. But without knowing your retirement financial needs, setting savings targets is difficult. You can pick an arbitrary or aspirational savings goal. You can save as much as you think you can afford. Early on, that may be the best you can do. But by the time you’re in your forties and fifties, you really should be more serious about it.

calculator, coins, financial pageHow much will you need to live on? Or how much would you need if you wanted that grander life? There is no magic crystal ball that will tell you. But there are some handy online calculators that will help. See the section on calculators further down. Unfortunately, few people use them.

From AARP “A recent survey showed that most people don’t use retirement calculators to figure how much money they will need to retire. . . Only 7 percent said they’d used a retirement calculator.

The challenge of using them is that YOU must input the numbers for your future expenditures—all they do is total the expenses and compare them to your projected income. Where do you get those numbers? You begin with your current expenses. Then you adjust them to fit your changing circumstances in retirement. If you already budget and track expenses with financial software or on paper, you already know your current expenses. If you don’t, we’ll offer some basic tips on doing that task later in the article.

Here’s a starting pointExpenses in retirement are quite different than while you are working—many go down, but some go up. Here are some that usually will decline substantially:

  • Commuting cost—whether by public transit or by personal vehicle, carpool, etc.
  • Work clothes—don’t need much in the way of office apparel, uniforms, etc.
  • Payroll Deductions
    • Tax withholding—state and federal
    • FICA (Social Security and Medicare)
    • Retirement plans—both mandatory and optional [NOTE: if one spouse is still working, the non-working spouse can continue contributing to a Roth IRA; otherwise, if you have no income you may not contribute to any tax preferred accounts]
    • Disability insurance
  • Car insurance (most policies base premiums in part on miles driven to work)
  • Meals—if you go out for lunch regularly during the workday (and after work socializing, possibly)
  • Mortgage—if you pay it off
  • Other housing costs (property taxes, insurance, utilities, etc.), if you downsize and don’t relocate to a higher cost area

Man on a bench, seaside, beach house nearby


These expenses are more likely to go up, some of them significantly:

  • Health insurance—assuming your employer no longer subsidizes your coverage
  • Health care costs that are out of pocket
  • Long term care insurance, if you have it
  • Vacation travel to those places you’ve always dreamed of visiting
  • Home projects that you put off until retirement
  • Gifts—For the grandkids that you may be inclined to spoil or other folks
  • Entertainment and dining out—still might be less than the aggregate cost of lunch out while working



The items above will get you started thinking. What you will actually spend in the future depends on a multitude of variables. These are some of them.

  • Stay put or relocate somewhere with a lower (or higher) cost of living
    • Some states and metropolitan areas have higher income, sales or property taxes
    • Some offer discounts or relief to seniors/retired persons
    • Homes or apartments may cost much more or much less
    • Ditto for food, utilities, etc.
    • Fees for retirement communities or condos that you might move to versus maintenance on your current home
  • Your health—out of pocket medical costs can be significant if you have chronic illnesses; they generally don’t go away as you age
  • Your lifestyle choices—modest or extravagant; start with the present and imagine what, if anything, will change
  • New hobbies that you didn’t have time for while working
  • Life span—yes there are calculators for that too; live longer and spend more (happily if you saved enough)

Tracking and projecting expenses

We recommend using financial software to help you budget and keep track of expenditures by category. You’ll find many of them on the web or in brick and mortar stores. Some are free and others cost you money. We’re not endorsing any, but here’s a sample (you can find many more online):

I spent my last ten working years as a budget analyst for a large government agency. I used spreadsheets daily—forecasting revenues and expenditures for several years ahead. I still use financial software, while I also keep a spreadsheet with income and expenditures–projected out 20 years from now. Odd, for a guy that hated math in elementary and high school. 😎 If I can do it, you can too.

Regardless of what you come up, consider it a work-in-progress that needs adjustment as your plans or circumstances change. That’s why software of one sort or another can help. Of course, you can also consult a financial planner if you don’t feel up to all that yourself. You’ll still have to supply the planner with the same information; he or she will just take the place of the software in asking questions and coming up with estimated answers.

monthly budget sheet

Articles and calculators

AARP has their own version of a retirement calculator. It’s OK for the income side, but it has significant shortcomings on expenses. They have three base choices: Modest (less than while working), about the same or extravagant. Once you make those choices, you can then use a slider to change the percentage of what you will be spending. Not much help here.

Vanguard, the financial services and investment company that originated index funds, has a calculator as well. It’s version is a little simpler and easier to use than AARP’s but it too uses a slider for showing expenses as a percentage of your current (working) income. It works well, provided you do your homework beforehand. Thankfully, Vanguard has another link to a worksheet in which you insert the expenditures by category. Then you do the math to figure the percentage of current income. Find the worksheet here.

T Rowe Price also has a calculator, it’s a little more complicated (or sophisticated, if you prefer) than Vanguard’s. It adds a linked worksheet that you can use to input expenses; that will help you see if your plan is working. It doesn’t work quite as well if you’re already retired (many calculators suffer from this, but then you already know what your expenses are).

One more: Kiplinger. It’s a venerable publisher of the eponymous Kiplinger’s Personal Finance magazine. Its calculator is quite simple and works as well as the rest.

Basic tips on identifying expenses– the nutshell version

Track expenditures by category. Why? Because some of those expenses are what will change when you’re retired, as noted above. For now, what categories? Typically, people divide them into non-discretionary (also called fixed, although they may not be uniform) and discretionary. For example, rent or a mortgage is something you must spend—it’s not discretionary. Dining out is a choice, hence discretionary. Here are more examples:

If you’re unsure of the categories, look at that Vanguard worksheet for examples or search the web on making a budget. Then check bank and credit card statements as a start at identifying current expenses. For more accurate results match up cash and credit or debit receipts with statements to record what they were for. Ninety days should give you a clue; longer is better. Look at recurring monthly, quarterly or annual expenses. You will soon see the value of using software or a spreadsheet.

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