Also of interest
Still a few years away from retirement? See if you're on track by using our Retirement Income Calculator.
About ready to retire? Log on to see how much you can withdraw from your retirement plan each month with our Retirement Income Modeler.
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:
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.
Even though some taxes will disappear when you retire, remember that:
You may wish to consult a tax advisor to determine whether you'll owe taxes on your Social Security benefits.
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.
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.*
*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.