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Understanding Your Retirement Income Needs: How to Calculate Your Retirement Expenses

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Just imagine: you’ve been working hard during your prime of life and now you can finally slow down and live your life. But, unfortunately, 1 in 4 Americans who are 59 or older are nearing retirement with no savings. There can be various reasons, but first of all, such a situation can be caused by a misconception about how much money they need in retirement.

Knowing how much you need is mandatory to set your retirement savings goal and stick to a plan. Therefore, you need to calculate the approximate amount you need to live your golden years comfortably. Keep reading to learn more about how to determine your retirement income needs and expenses as a US citizen.

How Will Your Spending Patterns Change in Retirement?

According to the data from the Bureau of Labor Department for 2013, the older we get, the less we spend. This happens because people of age have other spending habits. By the time of retirement, which is 65+ for most people, we can observe a significant decrease in the average annual expenses for various needs. Below is a chart that shows how spending patterns change over time:

However, taking into account inflation, this amount has increased significantly over the past years. Thus, you can expect your annual retirement spending will be nearly $60,000, which is nearly 75% of what you spend when you’re under 55. And this amount will decrease as you get older.

However, this is the average value. Each individual has a unique lifestyle, needs, and wants that can affect the amount of your retirement expenses. Let’s find out how to calculate them taking into account your unique situation.

How to Determine Your Retirement Expenses?

First of all, let’s determine the categories that you need to consider. Your retirement expenses may include:

  • Housing
  • Life insurance
  • Transportation
  • Clothing
  • Debt payments
  • Medical-related costs
  • Food
  • Real estate taxes
  • Traveling and recreation.

Some of these expense categories, such as housing, transportation, and debt payments, including loans for seniors on Social Security, tend to go down when you get older. This happens because seniors usually borrow money only as a last resort, move to other cheaper areas, or manage to repay their mortgages before they retire.

On the other hand, medical costs will increase significantly. Also, you need to consider inflation when calculating. It’s generally accepted to use a 3% annual inflation rate when you calculate your retirement expenses.

To determine how much money you need for retirement, you should calculate your current annual expenses and multiply this amount by 75%. Then, multiply the result by the number of years that you expect to live on retirement.

If you find it difficult to make calculations yourself, you can also use a retirement expenses calculator. This tool will show you an approximate amount based on your current expenditures.

How to Estimate Your Retirement Income?

Your retirement income may consist of several sources.

Social Security Benefits

The Social Security Retirement benefit is the monthly amount that replaces part of your income when you reduce your working hours or stop working at all. The monthly benefit amount depends on your lifetime earnings and the age when your retirement benefits start.

To be eligible for Social Security benefits, you need to earn at least 40 credits. Credits are based on your total wages and self-employment income for the year. The maximum number of credits that you can earn per year is 4. Thus, you need to work and pay Social Security taxes for at least 10 years to qualify.


Pensions are retirement plans opened by your employer. In most cases, you need to work for a company for a set time to get this form of benefit. This period is also called the vesting period. A typical vesting period lasts 5 years. After this, your employer starts making contributions to your retirement account. An employee can access the total amount after they retire. However, pension plans are rare now. Most companies have replaced them with less expensive retirement benefits, such as 401(k) retirement savings plans.

Passive Income

Passive income refers to regular earnings that you get with minimal labor to earn or maintain. The most popular types of passive income are investment and rent. However, passive income doesn’t happen by itself. It requires prior investment and preparation. For example, you need to have start-up capital and learn the basics of investment or trading. Also, you can find a trusted and reputable stock broker who will invest for you. If you want to be a landlord, you need to purchase real estate that you will rent.


Savings can give you peace of mind and make you feel confident about your golden years. Most people consider savings the most reliable source of retirement income. This is because you have a direct impact on it and can keep the situation under control.

After you determine the amount you need, it’s time to create a savings plan. Suppose that you need $900,000 to live comfortably in retirement. If you’re going to retire at 65 and now you’re 30, you have 35 years left to save the needed amount. Thus, your annual savings should be:

$900,000 / 35 = $25,714

By dividing this amount by 12, we get $2,143 – the sum you need to set aside monthly to succeed. If you don’t know where to start, there are various money-management tips to consider.

Also, if you use a savings account to keep money safe, there will be benefits that increase your savings over some time, provided that you don’t withdraw money from your retirement savings account.

Consider Unexpected Expenses and Contingencies When Creating a Plan

Unfortunately, life is unpredictable. Therefore, you need to take into account potential unexpected expenses that may arise after your retirement. They may include such medical expenses as dental, eye care, and hearing, or variable expenses, such as home improvements and auto repairs.

Experts recommend having at least 3 to 6 months’ worth of living expenses in your emergency fund. When it comes to retirement, this amount can be higher as it should cover a longer period.

Note: Keep in mind that taxes should also be calculated. If your retirement income includes investment, renting, or comes from IRAs or 401(k) retirement plans, you will have to pay taxes. You can even use an estimated tax rate, which equals 25%.

Questions to Ask Yourself Before You Retire

Your current financial behavior and lifestyle can affect your retirement expenses significantly. That is why you need to take care of it in advance by asking yourself several important questions:

  • Where do you want to live in retirement? Are you going to stay at your place or relocate to a cheaper suburb? This decision can affect your retirement expenses significantly.
  • Will you help your grandchildren to pay for their education? If yes, education should also be among your retirement expense categories.
  • Are you going to travel? Traveling the world can be expensive. More than that, when you get older, you start looking for more comfort, which can result in higher costs. All your potential journeys should be carefully calculated and included in your final retirement savings goal.
  • What should you do with your mortgage before retirement? Ask yourself whether it will be better to pay off your mortgage before retirement or set aside higher amounts to feel more comfortable at your 65+.

Bottom Line

Determining your retirement expenses is a starting point for budgeting. By understanding how much money you need, you can create a savings plan and stick to it. To figure out the needed amount, start by calculating your current expenses. Your retirement goal should be at least 80% of your annual household expense multiplied by the number of years you expect to live on retirement. Also, consider some available sources of retirement income to understand what you should expect.

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