Making Retirement Math Add Up
When many people plan for retirement, they typically start with a number derived by asking what percent of their current salary they want to spend each year of retirement and then determining how much they need to save to fund that spending, i.e., a person with a $100,000 salary who concluded that they need to spend 75% of that would determine what savings amount could dependably yield $75,000/year to them during retirement. It’s a clean, understandable but incomplete formula.
The approach is incomplete first because it does not entail thoroughly contemplating all expenses incurred during retirement. And when families discover this gap five years into retirement, it’s much harder to fix. This underestimation represents one of the most underrated—and costly—mistakes savers make. Too many successful people focus on replacing their paycheck without accounting for the actual, comprehensive costs of retirement.
What expenses typically get overlooked?
- Healthcare and long-term care: a couple retiring at 65 might expect Medicare to handle everything, but Medicare has significant gaps. Long-term care—whether it’s in-home assistance, assisted living, or nursing care—can cost $4,000 to $8,000+ monthly. Families can spend down their retirement savings far faster than planned because they underestimated healthcare inflation and uncovered care needs.
- Taxes: often retirees do not consider how their tax bracket changes when they shift from earning a salary to tapping tax-deferred retirement accounts. A retiree might pay 25% on W-2 income but suddenly face 35% or higher tax rates when withdrawing from IRAs and 401(k)s. Social Security taxation, Medicare premium calculations tied to income, state income taxes—these compound in ways most people don’t anticipate until it’s too late.
- Inflation: sometimes called the “invisible tax,” inflation erodes purchasing power over decades. A 2.5% annual inflation rate compounds ruthlessly over 20-30 years – purchasing power will decline around 39% over a 20-year period at that rate. Retirement plans that use a static number without inflation adjustment are seriously flawed.
- Housing costs: even after the mortgage is paid off, property taxes keep rising, homeowner’s insurance climbs, roof replacement happens, HVAC systems fail, and maintenance needs accelerate with age.
A better way to plan is to engage in more honest budgeting. Start by mapping your actual, comprehensive retirement lifestyle, the real picture. What will your housing situation look like? How often will you travel, and what will that actually cost? Will you help grandchildren with education? Support aging parents? Fund charitable interests? These are not small questions—they’re the foundation of accurate retirement budgeting.
Explicitly contemplate the hidden categories identified above. Layer them into your projections. How much will Medicare premiums be? What’s your realistic long-term care need? What inflation rate should be used, and does it affect each category differently?
A second flaw with the approach outlined in the first paragraph is that it does not contemplate an optimum withdrawal strategy. In addition to planning for all expenses, also plan to optimize a distribution strategy. This means determining the best way to fund your spending using Social Security, taxable accounts, tax-deferred accounts, and tax-free accounts. A strategic withdrawal sequence can result in significant tax savings.
Finally, plan for longevity. If you are 60 today with reasonable health, you might reasonably live to 90 or 95. A 30-year retirement horizon is not conservative—it’s increasingly realistic. Your plan needs to account for spending over that duration.
It is also never too early to begin this planning process. Starting early gives you time to plan and to engage in the hard conversations about lifestyle and priorities and make meaningful adjustments well in advance of retirement.
Real retirement planning demands more than a calculator and a benchmark percentage. It requires: a detailed understanding of your lifestyle and values—what does retirement actually look like for you; integration across investments, taxes, healthcare, and estate planning so that each element supports the others rather than working in silos; professional guidance from advisors who think comprehensively about how everything interconnects; and regular review and adjustment as circumstances change, because the plan you build at 50 will need refinement by 60 and again by 70.
We believe that the way to retire with confidence is not to hit some magic savings number, but to understand, in detail, what retirement will actually cost and to have built a comprehensive strategy to fund those costs. We firmly believe this approach translates to better financial decisions and a greater sense of control over your retirement future.
