Retirement plans

The Vanguard Group, Inc.

Retirement plans

What will your retirement lifestyle cost?

Throughout your career, retirement may have seemed a distant dream. Now, as it approaches, you'll want to make a dollars-and-cents calculation of retirement costs.

You can start with a quick-and-dirty approach: Take what you spend today and multiply it by 85% or 90%. Think of that as your first-year retirement budget.

Why might you live on less in retirement? Here are three common reasons:

  • You no longer have to save for retirement.
  • Work clothes and commuting costs are things of the past.
  • You may have paid off your mortgage before retiring.

Of course, if you have considerable continuing expenses or health issues, or if you plan to travel extensively, your retirement can cost as much as—or more than—your current lifestyle. And don't forget that you will still owe income taxes, including on any retirement plan withdrawals (unless they qualify for the Roth exemption).

Some people draw up detailed budgets to plan with more certainty how much money they will need in retirement. You can record today's expenses by reviewing your bank and credit card statements. Then estimate which expenses might rise or fall in retirement.

You can estimate your expenses using our worksheet.

Your taxes may go up

Even though some taxes will disappear when you retire, remember that:

  • Your taxes may actually go up. If you own your home, property taxes will likely rise.
  • Your income taxes could rise when you start withdrawing money from your retirement accounts. That means your withdrawals must be large enough to cover your regular expenses and your taxes.
  • You may owe taxes on Social Security. Generally, if your total income—whether from a part-time job, pension, annuity, or other source—exceeds certain levels, you may owe federal income tax on up to 85% of your Social Security benefits. About one-third of people who receive Social Security pay income tax on their benefits.

You may wish to consult a tax advisor to determine whether you'll owe taxes on your Social Security benefits.

Prepare for the unexpected

While you were working you may have kept an emergency fund to cover three to six months of day-to-day expenses. But in retirement you'll need a larger emergency fund. You may need a new car. Your home may require major repairs. You and your spouse could face serious health problems.

Review your medical coverage

One of the largest expenses for most retirees is health care. Generally, you're no longer covered under your employer's health insurance after you leave your job.

You've probably heard of Medicare. Generally, you are eligible for Medicare if you or your spouse worked for at least 10 years in Medicare-covered employment and you are 65 years or older and a citizen or permanent resident of the United States.

Medicare comes in two main parts (A and B) and has certain supplements, such as Part D, which provides prescription drug coverage. Part A is free and helps pay for hospital stays and services.

Part B helps pay for doctor visits, outpatient care, and other services not covered under Part A (such as physical therapy). You'll pay a monthly premium for Part B, which is typically automatically deducted from your Social Security retirement check.

To learn more, read the Medicare & You guide.*

Action steps

  • Estimate how much money you will spend each month in retirement using our worksheet.
  • Estimate how much you'll owe each year in taxes. Consult a tax advisor if necessary.
  • Establish a rainy day fund for unexpected expenses.
  • Research how your healthcare costs may increase in retirement.

*When you access this website, you will be leaving our site. Vanguard is not responsible for the accuracy of information on third-party sites.

Withdrawals from a Roth 401(k) or IRA are tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.