How Much Should I Be Spending In Retirement?

Establishing a spending plan in retirement will help you stay on track with your finances during your retirement years. Wondering how much to spend each year of your retirement? Here are five tips that will help you determine the right spending amount for you.

1. Make a Spending Plan

Tally up your current expenses to help you get an idea of how much you’ll be spending in retirement. You should make sure to subtract out costs you might not have in retirement—like commuting costs—and add in expenses that you don’t deal with now but might have in the future, like higher medical costs.

“Having a detailed living expense worksheet is the foundation for every retirement plan. Without understanding true expenses, it’s nearly impossible to determine how much income you’ll need to generate,” said Marc Shaffer, a certified financial planner (CFP) at Searcy Financial.

Try to divide up your expenses based on whether they’re fixed or variable, advised Catherine Valega, a CFP at Green Bee Advisory. For example, a fixed expense might be housing or insurance costs while a variable expense might be dining out. Doing this will help you understand where there’s leeway in your budget and what you can cut if necessary.

2. Use the 80% Rule

If you need help figuring out how much you’ll spending in retirement, a helpful guideline is the 80% rule, which assumes that you’ll need 80% of your pre-retirement income annually to cover your expenses in retirement.

“This 80% rule can be a helpful starting point, but it’s rarely precise enough,” Shaffer said. “Some clients actually spend more early in retirement due to travel, hobbies, or home projects, while others spend less because commuting, payroll taxes, and retirement savings contributions have ended.”

3. Use the 4% Rule for Withdrawals

Another rule-of-thumb that may be helpful is the 4% rule, which dictates that you withdraw 4% of your nest egg the first year of retirement, adjusting that rate for inflation every year after that.

“I typically start with the 4% rule as a framework,” Shaffer said. “While it’s a useful benchmark, it is not one-size-fits-all.”

For example, the 4% rule can be overly strict because it doesn’t account for market performance or variations in spending. And when the market performs poorly in the early years of someone’s retirement, they may face sequence of returns risk, which occurs when someone has to sell a greater amount of their assets during a down market, resulting in a potentially smaller nest egg down the line.

4. Apply the Guardrails Strategy for Your Investments

You might consider a more flexible strategy like the guardrails approach. With this strategy, how much you withdraw depends on how well your investment portfolio is doing.

“With guardrails, withdrawals are adjusted based on portfolio performance. If markets are strong, clients can spend more. If markets underperform, spending is reduced slightly to preserve long-term sustainability,” Shaffer says. “This method provides more flexibility and peace of mind, especially for retirees who want to balance enjoying their lifestyle with protecting against longevity risk.”

5. Turn to a Financial Advisor

Stay on track with the help of a financial advisor. If you are worried about overspending in retirement, you may wish to enlist the assistance of a financial advisor.

“Once retirement begins, we track expenses quarterly to ensure clients stay on course, then adjust as necessary. The key is that retirement planning isn’t about following a rule of thumb; it’s about aligning money with the life someone wants to live,” said Juan HernandezAriano, a CFP at WealthCreate.

The Bottom Line

To get started with determining your retirement spending, you’ll want to map out your spending habits before you retire and then consider what expenses you will and will not have in retirement. Doing so will give you a good idea of how much money you’re likely to spend in retirement.

Some good guidelines to follow are the 80% rule, which says retirees will spend 80% of their pre-retirement income annually, and the 4% rule. The 4% rule will help you understand how much of your portfolio to tap in the first year of retirement and every year after that.

However, if you’re seeking a more flexible approach to withdrawal that takes into consideration factors like market performance, consider the guardrails strategy instead. With this strategy, the withdrawals are made based on portfolio performance. But if you need extra help, get in touch with a financial advisor who can give you more personalized advice.