How to Calculate an Accurate Retirement Budget
During the first year of working with a new client, one of the most critical aspects of the planning process for pre-retirees is stress-testing the retirement budget. I've learned from trial and error that the budget shifts, sometimes dramatically, in retirement.
Sometimes expenses go up. For example, I had a client who went from having no grandchildren to five in just a few years. Suddenly, the “Grandkids 529” line item became a significant expense.
Sometimes expenses go down. Many of my clients who retired and relocated outside the DMV area (where housing costs are exceptionally high) found that their spending decreased substantially.
Each person’s situation is unique. That’s why broad rules of thumb, like “you’ll spend 70–80% of your pre-retirement income,” can be misleading. Instead, here’s a practical framework for estimating your retirement budget:
1) Calculate your net take-home
Look at what actually hits your bank account after taxes, 401(k) contributions, health insurance, and other deductions.
Example: Gross pay is $18,000/month, net take-home is $13,000.
2) Subtract any after-tax savings
If you’re transferring money into investment accounts after payday, remove that from your spending baseline.
Example: $2,000/month goes into a brokerage account after your paycheck clears.
3) Adjust for housing costs
If you have a mortgage, factor in how long you’ll be paying it.
Example: $3,000/month mortgage ($2,000 principal & interest + $1,000 taxes & insurance). If the mortgage will be paid off in a few years, don’t base your entire retirement plan on that $3,000.
** This matters because if you think you’ll need $12,000/month in retirement, but that number drops to $10,000 once the mortgage is gone, your retirement readiness changes dramatically. That difference could mean retiring years earlier.
4) Reduce or add big changes in lifestyle
Add or subtract major expenses you expect.
Examples: College tuition, home renovations, new cars, or supporting family members.
Note: I don’t worry too much about smaller shifting expenses. In my experience, when one small bill goes away, another tends to take its place. But the big-ticket items can change your retirement math.
5) Add healthcare back in
Since we stripped out health insurance in Step 1, we need to add it back.
For Medicare, here’s a reasonable working estimate:
Medicare Part B premium: $175/month per person (2025)
Medigap or Advantage plan: $150–$250/month per person
Part D drug coverage: $50/month per person
Out-of-pocket: varies
For a couple, budgeting $800–$1,200/month is usually a good starting point.
Many retirees mistakenly assume their current take-home pay equals their retirement budget. But by making these adjustments, you can often reduce the amount you actually need to retire.
Example:
Take-home pay = $13,000/month
Minus savings and mortgage payoff adjustments = $9,000/month retirement budget
If we use the 4% rule (not perfect by any means), the difference needed to retire is drastic.
$13,000/month requires $3.9M saved
$9,000/month requires $2.7M saved
That $1.2M difference could easily represent five or more years of extra work and savings. Knowing your true number matters.
These five steps provide a solid foundation for estimating retirement expenses. If your spending doesn’t match your take-home pay (for instance, your checking account balance steadily grows because you spend less), then using a budget-tracking tool may give you an even clearer picture.
And remember, this is just your “core” monthly budget. You’ll also want to plan for large one-time purchases, long-term care, relocations, or other major life events to fully understand your retirement needs.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.