The Retirement Budget Nobody Talks About

Frank and Deborah entered retirement with $1.2 million in savings, a paid-off house, and a plan. They had done the math. Social Security would provide $42,000 per year. They would withdraw $60,000 from savings, a 5 percent rate they knew was slightly aggressive but manageable. Total income: $102,000. More than enough.

Year one, they spent $124,000.

The Medicare premiums were higher than expected: $14,200 for both of them, including Part B, Part D, and a Medigap supplement. Dental work, no longer covered by employer insurance, cost $6,400 when Frank needed a crown and Deborah needed two implants. The furnace died in January: $8,300 to replace. The car needed new brakes and tires: $1,800. Their daughter asked for help with a down payment: $15,000 they had not budgeted but could not refuse. Property taxes went up. So did homeowners insurance.

They were not spending extravagantly. They were not traveling the world or buying boats. They were learning what retirement actually costs.

The Major Categories

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Retirement planning tools often project income needs as a percentage of pre-retirement earnings, typically 70 to 80 percent. The assumption is that expenses drop: no more commuting costs, no more professional wardrobe, no more payroll taxes. This is true as far as it goes. It does not go far enough.

Healthcare is the category most consistently underestimated. Medicare is not free. Part B premiums in 2024 are $174.70 per month per person, more for higher-income retirees. Part D prescription coverage adds another $30 to $100 per month depending on the plan. A Medigap supplemental policy to cover deductibles and copays runs $150 to $300 per month for popular plans. Alternatively, Medicare Advantage plans may have lower premiums but impose network restrictions and cost-sharing. Add dental, vision, and hearing, which Medicare largely does not cover, and a healthy couple easily spends $12,000 to $18,000 per year on healthcare before any significant medical events.

Prescriptions vary enormously by individual need. Someone taking no regular medications pays little beyond the Part D premium. Someone managing multiple chronic conditions can face costs of $5,000 to $10,000 per year or more, even with insurance. The Inflation Reduction Act capped Medicare out-of-pocket drug costs at $2,000 starting in 2025, which helps, but the cap applies only to Medicare Part D, not to drugs administered in clinical settings.

Dental deserves its own line. Medicare does not cover routine dental care. A cleaning costs $100 to $200. A filling costs $150 to $300. A crown costs $1,000 to $1,500. An implant costs $3,000 to $5,000. Teeth that received adequate care for sixty years often need significant work in the sixties and seventies. Budget $2,000 to $5,000 per year for a couple, more in years when major work is needed.

Housing remains substantial even without a mortgage. Property taxes continue, and in many markets they rise faster than general inflation due to reassessments. Homeowners insurance has increased sharply in recent years, particularly in coastal and fire-prone areas. Utilities, repairs, and maintenance add up. A reasonable estimate for a paid-off home is 25 to 35 percent of total budget, depending on location and property characteristics.

Taxes do not disappear in retirement. Social Security benefits may be partially taxable depending on total income. Withdrawals from traditional 401(k) and IRA accounts are taxed as ordinary income. Only Roth withdrawals and the basis portion of non-retirement accounts escape taxation. State income taxes vary; some states exempt retirement income, others do not. A couple withdrawing $60,000 from traditional accounts while receiving $40,000 in Social Security may owe $8,000 to $12,000 in combined federal and state taxes.

Transportation costs persist. AAA estimates the average cost of owning and operating a vehicle at $10,000 to $12,000 per year including depreciation, insurance, fuel, and maintenance. For a two-car household, that is $20,000 or more. When driving is no longer possible, replacement options like rideshare services, taxis, or paratransit have their own costs.

Food, utilities, personal expenses, and insurance continue much as before. Some costs drop slightly; others rise. The net change is modest for most households.

Inflation erodes purchasing power over time. Social Security includes cost-of-living adjustments, though these often lag actual inflation experienced by seniors, who spend disproportionately on healthcare. Other income sources, fixed pensions or annuity payments, may not adjust at all. Over a 25-year retirement, even modest inflation compounds significantly: 3 percent annual inflation cuts purchasing power nearly in half.

The Phases of Retirement

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Spending patterns change across retirement, and the changes are not linear.

The early years, sometimes called the “go-go years,” often feature higher discretionary spending. Travel, hobbies, home projects, helping grandchildren: the things you waited to do while working. Many retirees spend more in their first five years of retirement than they did while employed.

The middle years, the “slow-go years,” typically see reduced activity and lower discretionary spending. Travel becomes less frequent. Energy for projects diminishes. Overall spending often drops, though not dramatically.

The late years, the “no-go years,” bring rising healthcare costs and potentially long-term care expenses. A relatively healthy 85-year-old may spend less than a 65-year-old. An 85-year-old requiring home health aides or assisted living spends far more.

The result is often a U-shaped spending curve: higher in early retirement, lower in middle retirement, higher again in late retirement if significant care is needed. Planning that assumes flat spending throughout misses this pattern.

The Hidden Costs

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Beyond the predictable categories, several expenses catch retirees by surprise.

Home maintenance often increases. Deferred maintenance from busy working years comes due. Roofs, HVAC systems, appliances, plumbing, and electrical systems age along with their owners. A reasonable rule of thumb: budget 1 to 3 percent of home value annually for maintenance and repairs. For a $350,000 home, that is $3,500 to $10,500 per year.

Helping family is rarely budgeted and frequently occurs. Adult children need help with down payments. Grandchildren need help with tuition. A family member faces a medical crisis. These requests are impossible to predict and difficult to refuse. Many retirees provide substantial financial support to family without ever planning for it.

One-time events continue. Cars need replacement every eight to twelve years. Major travel, a trip to see family overseas, a bucket-list destination, costs thousands. The emergency fund that provided security during working years must survive into retirement.

Long-term care, covered in an earlier installment, dwarfs everything else if it arrives. A year in a nursing home can consume what a decade of normal retirement spending would require.

Building a Realistic Budget

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A realistic retirement budget starts with actual current spending, not assumptions. Track expenses for three to six months. Categorize them. Identify what will change in retirement: commuting costs disappear, but Medicare premiums appear.

Add healthcare costs explicitly. Estimate Medicare Part B and Part D premiums, Medigap or Medicare Advantage costs, dental, vision, and hearing. Use the Medicare Plan Finder at medicare.gov to estimate drug costs based on your current prescriptions.

Add a tax estimate. Use projected income, including Social Security and retirement account withdrawals, to estimate federal and state tax liability. Tax software or a brief consultation with a tax professional can provide this estimate.

Add a contingency. A budget that works only if nothing unexpected happens is not a budget. A 10 to 15 percent buffer for unplanned expenses provides margin.

Test the number. Can projected income, Social Security plus pension plus sustainable withdrawals from savings, cover projected expenses? If not, what adjusts: the expenses, the income, or the retirement date?

The 4% Rule and Its Limits

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The 4 percent rule, developed by financial planner William Bengen in the 1990s, suggests withdrawing 4 percent of your portfolio in year one of retirement, then adjusting that amount for inflation each subsequent year. Historically, this approach sustained portfolios for 30 years across most market conditions.

The rule has limitations. It is based on historical returns that may not repeat. A 30-year horizon may be too short for someone retiring at 55 or 60. And it assumes consistent withdrawals regardless of market performance, which can be devastating if the market drops sharply in early retirement, the sequence-of-returns risk covered in this series’ final installment.

Flexibility is the best protection. The ability to reduce spending in bad years, to postpone discretionary expenses when the market drops, provides a cushion that rigid withdrawal rules cannot. A budget with built-in flexibility survives surprises better than a budget optimized for normal conditions.

What Frank and Deborah Learned

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By year three, Frank and Deborah had recalibrated. They built a realistic budget that included healthcare at actual cost, a home maintenance reserve, and a line item for family help they knew would probably be needed. They reduced their withdrawal rate to 4 percent and cut discretionary spending modestly. The $1.2 million, they realized, was enough if managed carefully. It was not enough to ignore the details.

The fantasy retirement budget fits neatly on a spreadsheet. The real one has $6,400 dental bills and $8,300 furnaces and a daughter who needs help that you cannot refuse. Planning for the fantasy is better than not planning at all. Planning for the real is what keeps you solvent.