Defining 'Enough': How to Estimate Your Core Retirement Spending

Think of retirement spending like a road trip across varied terrain. You don’t budget the same for every mile—mountain passes burn more fuel, flat highways less, and that final stretch through city traffic costs more in tolls than you ever expected. Retirement works the same way: the first decade is full of activity and adventure spending, the middle years often coast, and the final stretch can be financially steep with healthcare demands. Planning for a single flat number is like assuming every mile will be downhill.

The Spending Smile: Why Flat Projections Fail

Researchers at J.P. Morgan Asset Management and others have documented what they call the “retirement spending smile.” When you plot actual retiree spending against age, it doesn’t form a flat line—it dips in the middle and rises at both ends. Here’s what typically happens:

• Go-Go Years (65-74): Newly retired, healthy, and eager. Travel, hobbies, home projects, and dining out peak. Spending often exceeds pre-retirement levels.
• Slow-Go Years (75-84): Activity naturally declines. Travel becomes less frequent, entertainment spending drops. Many retirees see a 10-20% reduction from their early retirement spending.
• No-Go Years (85+): Healthcare and assistance costs surge. While you’re spending less on restaurants and vacations, you may be spending far more on medical care, in-home help, or assisted living.

The 70-80% Replacement Ratio: A Dangerous Shortcut

You’ve probably heard the rule: plan to replace 70-80% of your pre-retirement income. This rule of thumb dates back decades and assumes you’ll no longer pay payroll taxes, won’t save for retirement, and will have lower work-related costs. The problem? It ignores your actual spending patterns and circumstances.

Essential vs. Discretionary: Know Your Baseline

The most useful way to think about retirement spending is to split it into two buckets: essentials (the non-negotiables) and discretionary (the lifestyle choices). Your essential spending is your true floor—what you need to cover no matter what the market does. Discretionary spending is your buffer—the first place you can cut if your portfolio struggles.

For most retirees, essential spending includes housing (even with a paid-off mortgage, you still have taxes, insurance, and maintenance), healthcare premiums and out-of-pocket costs, food, utilities, transportation, and basic insurance. Discretionary spending covers travel, entertainment, dining out, gifts, hobbies, and lifestyle upgrades.

Understanding retirement spending requires moving from rules of thumb to actual data. Let’s look at what retirees really spend, where the money goes, and how to project your own needs with reasonable accuracy.

What Retirees Actually Spend: The Data

The Bureau of Labor Statistics Consumer Expenditure Survey provides the most comprehensive look at real retiree spending. Here’s the breakdown for households headed by someone 65 and older:

Healthcare: The Cost Curve You Can’t Ignore

Healthcare deserves special attention because it behaves differently than other spending categories. While most expenses stay flat or decline with age, healthcare costs accelerate—often dramatically. The Fidelity Retiree Health Care Cost Estimate puts lifetime out-of-pocket healthcare costs for a 65-year-old couple at $315,000 (2023 estimate), and that excludes long-term care.

A Tale of Two Retirements: The Numbers in Action

Let’s make this concrete with two couples, both 65, both with $100,000 in pre-retirement household income. Same starting point, very different spending realities.

Same pre-retirement income, but Jennifer and Michael need 70% more annual spending than Maria and David. The 80% rule would have left Jennifer and Michael $12,000 short annually, while telling Maria and David they needed $26,000 more than necessary—potentially causing them to oversave and under-enjoy their working years.

The Inflation Reality: 3% Compounds Too

Inflation is the silent partner in every retirement plan. At 3% annual inflation—close to the historical average—prices roughly double every 24 years. For a 30-year retirement, here’s what that means:

• $50,000 in today’s spending power requires $67,195 in Year 10
• By Year 20, you need $90,306 to buy the same goods
• By Year 30, that original $50,000 of purchasing power costs $121,363

Taxes: The Forgotten Line Item

Many retirees are surprised to discover they still owe significant taxes. Here are the main sources:

• Social Security: Up to 85% of benefits are taxable if your combined income exceeds $44,000 (married filing jointly).
• Traditional IRA/401(k) withdrawals: Taxed as ordinary income at your marginal rate.
• Required Minimum Distributions: Starting at age 73, you must withdraw from traditional accounts whether you need the money or not—and pay taxes on it.
• Capital gains: Selling appreciated investments in taxable accounts triggers taxes, though at preferential long-term rates.

You can’t control inflation, market returns, or how long you’ll live. But you have significant control over the four biggest factors that determine your retirement spending needs. Here’s how to think about each lever.

The Four Levers You Control

Reality Check: The Spending Assumptions That Backfire

Many retirement plans fail not because of bad math, but because of unrealistic assumptions. Here are the most common ones:

• “I’ll spend less as I age.” You might spend less on travel, but healthcare costs often more than offset those savings. Don’t assume a declining spending trajectory.
• “I’ll just work part-time.” Many retirees plan on part-time income but find opportunities limited, especially after 70. Health issues may also intervene. Don’t build your core plan around income you can’t guarantee.
• “My house is my backup plan.” Home equity is real wealth, but accessing it is complicated. Reverse mortgages have significant costs, selling means you need somewhere else to live, and real estate isn’t always liquid when you need it.
• “Medicare covers everything.” Medicare doesn’t cover dental, vision, hearing aids, most long-term care, or many drugs. Medigap premiums, Part D premiums, and out-of-pocket costs add up quickly.

What If You’re Retiring With a Mortgage?

Conventional wisdom says to pay off your mortgage before retiring, but it’s not always the right move. Here’s how to think about it:

Consider keeping the mortgage if: Your rate is below 4-5%, you have limited liquid savings, or you’d have to raid retirement accounts (and pay taxes/penalties) to pay it off. A low-rate mortgage is cheap debt, and liquidity matters in retirement.

Consider paying it off if: The monthly payment is a significant portion of your required income (meaning you need to withdraw more from savings), you have enough liquid savings remaining for 2+ years of expenses, or the psychological benefit of being debt-free is worth the financial trade-off.

Either way, include your actual housing costs in your spending projection—and note if/when the mortgage payment ends so you can model that shift.

What If You’re Planning to Retire Early?

Retiring before 65 means navigating the healthcare gap. You’re not yet eligible for Medicare, and COBRA only lasts 18 months. Options include:

• ACA Marketplace plans: Subsidies are available based on income, making early retirement planning an exercise in income management. Keep income low enough to qualify for premium tax credits.
• Spouse’s employer coverage: If your spouse is still working and has good benefits, this may be the simplest bridge.
• Health sharing ministries: Not insurance, but some early retirees use these as a lower-cost option. Understand the limitations.

Budget $12,000-$24,000 per year for pre-Medicare healthcare coverage for a couple, depending on your state, plan choice, and whether you qualify for subsidies.

Ready to move from averages to your actual numbers? The calculator below helps you estimate your retirement spending based on your specific housing situation, healthcare expectations, and lifestyle goals. Enter your current expenses, adjust for retirement changes, and see what you’ll actually need.

Quick Start Calculator

What to Look For in the Results

This calculator provides estimates based on the inputs you provide. Actual retirement spending varies based on health events, inflation, housing decisions, and lifestyle changes. The projections assume average healthcare cost growth and do not account for long-term care needs, which can significantly increase late-retirement expenses. Consider these results a starting point for planning, not a guarantee. Consult with a financial advisor for personalized retirement planning.