How retirement spending actually changes
BLS Consumer Expenditure data shows retirees aged 65+ spend roughly 20–25% less than working households on average, but the composition shifts. Housing and transportation drop. Healthcare and Medicare premiums climb to 12–18% of spending. Travel, gifts and discretionary spending rise in the first decade of retirement, then taper.
A retirement budget that simply scales the pre-retirement budget down by 25% misses the recomposition entirely.
The 4% safe-withdrawal rule and its limits
The 4% rule (Bengen, 1994; Trinity Study, 1998) suggests retirees can withdraw 4% of their initial portfolio in year one, adjust for inflation each year, and have a high probability of the portfolio lasting 30 years across historical market scenarios.
It is a planning anchor, not a guarantee. Modern updates suggest 3.5% for a 35–40-year horizon (early retirees) and up to 4.5% for a 25-year horizon (retiring at 70). A $1M portfolio under the 4% rule produces $40,000 in year one, combine with Social Security and pensions for total income.
The tax-smart drawdown order
- First: required minimum distributions (RMDs) starting at age 73 (rising to 75 for those born 1960+).
- Then: taxable brokerage accounts, long-term capital-gains rates often 0% or 15%.
- Then: tax-deferred accounts (Traditional 401(k), Traditional IRA), taxed at ordinary income.
- Last: Roth accounts, tax-free, no RMDs, leave them growing for late-life and heirs.
- Layer in Roth conversions during low-income years (typically the first 5–10 of retirement before Social Security and RMDs start) to reduce future tax bills.
Healthcare: the budget line that surprises everyone
Medicare starts at 65 but is not free. Part B premiums (~$185/month in 2025), Part D drug premiums, Medigap or Advantage premiums, and out-of-pocket costs together commonly run $7,000–$13,000/year per person.
Long-term care is the wildcard. The median annual cost of a private nursing-home room in the US exceeds $116,000. Long-term-care insurance is expensive and underwritten strictly; self-funding through a Roth IRA or HSA is increasingly common.
A worked retirement budget at 67
Couple with $1.2M portfolio, $42,000/year combined Social Security at 67. Safe withdrawal: 4% of $1.2M = $48,000. Total gross income: $90,000. After federal and state tax (effective ~12%): roughly $79,000 spendable.
Spending: housing $24,000, healthcare $13,000, food $8,000, transportation $6,000, travel $9,000, hobbies $4,000, gifts/charity $5,000, discretionary $5,000, sinking funds (home repairs, car replacement) $5,000. Total $79,000. Budget holds, and the portfolio is structured for inflation adjustments.
Common retirement-budgeting mistakes
- Underestimating healthcare. Plan for $13,000/year per person at 65+, rising 5% annually.
- Filing Social Security at 62 by default. Delay if health and other income permit.
- Skipping Roth conversions in low-income years. The first 5–10 years of retirement are the cheapest time to do them.
- No cash bucket. Build 2 years of expenses in cash + short bonds before retirement to weather market drops.
- Ignoring long-term care. Even a modest plan beats no plan.
Social Security claiming strategy
Filing at 62 reduces benefits by ~30% vs full retirement age (67 for most current retirees). Delaying past 67 adds ~8% per year up to age 70. For most healthy retirees with longevity in the family, delaying to 70 is the highest-EV decision.
For couples, the higher-earning spouse often delays to 70 to maximise the survivor benefit; the lower-earning spouse may file earlier. Run the numbers at ssa.gov before deciding.