5 Ways You Can Expect Spending in Retirement to Change

11.07.22 | Personal Finance

If your retirement is right around the corner, you may find yourself asking a question you’ve never considered before: “How will spending in retirement change for me?” While this may be an overwhelming and somewhat complicated question to ask, it is a question worth investigating. Getting an idea of how much you’ll be spending in the next phase of your life enables you to have a plan to make your hard-earned, diligently-saved nest egg last for decades to come.

The Income Replacement Ratio

Before we can talk about how spending may change, let’s briefly discuss a general rule of thumb for determining how much income a retiree will need to maintain his/her pre-retirement lifestyle: the income replacement ratio. Generally, we advise our clients to plan for 70-80% of their pre-retirement income as a starting point. Once retired, you’ll no longer be dedicating a percentage of your income to investments and savings. You’ll also likely reduce expenses in taxes and transportation. Therefore, you won’t need the full income you received during your career in retirement. Keep in mind, for those with very active lifestyles it could be as high as 100%.

Sources of Retirement Income

Researchers at Vanguard point out that, “When looking at the replacement ratio, it is important to keep in mind that not all of the need has to be funded by one’s savings alone.” Other primary sources of retirement income include social security and pensions.

How much you receive in social security benefits will depend on your earnings history. You can use the Social Security Quick Calculator to figure out your projected social security income. Combine that amount with any possible pensions or annuities you may have, and you’ll get an idea of how much you will need to supplement from your retirement accounts.

Will You Have Enough?

Your retirement income will ultimately determine what you can spend in retirement. Naturally, you will need enough replacement income to live on for possibly three more decades. Now that you know your income replacement ratio and have looked at your sources of retirement income, you can make necessary adjustments to ensure you’ve saved enough for your golden years. If you find that you are not currently on track, you may need to increase your savings rate and/or make other adjustments to help, like reducing your retirement income need or working a few extra years. Let’s take a closer look at some changes in retirement spending to consider.

Key Areas Where Spending in Retirement Changes

There are five notable areas where spending changes in retirement: taxes, health care, housing, transportation, and lifestyle.


“In this world, nothing can be said to be certain, except death and taxes.” This quote from Benjamin Franklin has stood the test of time. Taxes may change in retirement, but they do not disappear.

Taxes are complicated and to take it a step further, different sources of retirement income may be taxed differently. For example, the amount of Social Security benefits one pays tax on varies between 0% and 85%. At a minimum, 15% is tax-free. Other sources like Roth IRA distributions may not be taxable. The taxes you will be subject to in retirement depend on your filing status, sources of income, and your total taxable income. In addition to expecting to pay taxes on social security benefits, you may owe income taxes on distributions from pre-tax investments and pensions.

All this being said, most can expect their taxes in retirement to be lower due to a decrease in annual income and the elimination of payroll taxes.

Health Care

In your retirement years, you can enroll for Medicare. For those who are relatively healthy, Medicare Part B and Medicare Part D provide adequate coverage. You can expect the amount you pay for health care to increase with age as your personal health potentially declines. Don’t let this discourage you, though! Financial expert Michael Kitces makes the important point that even though health care expenses do tend to increase as one ages, “health care expenditures overall are still only a relatively moderate percentage of the retiree’s total spending, falling roughly in the 15 – 20% range, and not even fully replacing the decreases in spending in the other categories.”

Housing & Transportation

Studies have shown that retirees typically reduce spending by about 20%, or $4000 less in housing expenses compared to working households. This is significant. These savings can be attributed to paying off mortgages, downsizing homes, or reducing utilities. Similarly, transportation costs are reduced by 30%, saving retirees approximately $3,000 a year. As you approach retirement, expect to spend less on housing and transportation.


This is the category of spending in which you have the most control. What you spend on your lifestyle is up to your own goals and desires. Do you want to travel? Will you be upgrading your wardrobe regularly? Taking up an expensive new hobby? Making these lifestyle choices will affect your spending and the amount you need to save before retiring. Once you budget for your basic living costs, you can make the call on how much to spend on the retirement lifestyle you choose.

Planning for a Successful Retirement

The frustrating reality is there are too many variables to predict retirement spending with perfect accuracy. During the first several years of retirement, you will get a better idea of what spending looks like for you and you will learn what adjustments to make throughout the years as your unique situation changes. Nevertheless, by investigating your potential spending in retirement ahead of time, you’re putting yourself at an advantage with better planning, fewer surprises, and greater success later.

Still have questions about how your spending will change during retirement? At Midwest Capital Advisors, we build customized retirement plans around each individual and their goals. Contact us anytime to begin planning for a more confident financial future!

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