A Simple Way to Estimate Your Yearly Spending in Retirement
Okay. Last lesson was about why a sunday-best guess beats a perfect number you never calculate. This lesson is where we actually build the guess.
Here's the thing. Most people trying to figure out "how much do I need in retirement" start by googling some big scary total number, like a million and a half dollars, and then they close the tab because it feels like a made-up amount from another planet. I want you to start smaller than that. Start with a year.
Step one: figure out what a year actually costs you now
Not what you think you spend. What you actually spend. Pull up a few months of bank or credit card statements, or use your ledger if you keep one, and add up the real numbers. Housing, food, insurance, gas, the Costco run that somehow is never under $200, all of it.
If you don't have a few months tracked yet, ballpark it from a single recent month and multiply. It won't be exact. That's fine. We're building a sunday-best guess, not a legal document.
Step two: sort it into "keeps going" and "changes"
Once you have a rough yearly number, split it into two piles.
Keeps going in retirement: groceries, utilities, health insurance (this one often goes up, not down), property tax, hobbies, the dog.
Changes in retirement: you probably won't be commuting anymore, so gas and car wear might drop. If your mortgage will be paid off by then, that whole line disappears. Retirement contributions stop, obviously, because you're not earning a paycheck to contribute from anymore.
Adjust your yearly total based on what you expect to change. Most people land somewhere between 70 and 90 percent of their current spending. Some land higher because they finally have time to travel or help grandkids, and that's a real thing to plan for, not a mistake.
Step three: multiply by 25
This is the part that surprises people. Take your estimated yearly retirement spending and multiply it by 25. That gives you a rough total savings target.
Why 25? It comes from the idea that you can withdraw about 4% of your savings each year and have it last a long time without running out too fast. It's not a guarantee, and it's not perfect for every situation, but as a starting point for a beginner it does the job.
So if you figure you'll need $50,000 a year, that's a target of $1,250,000. I know. It looks big written out. But now it's a number built from your actual life instead of a number you saw in a headline.
Write it down by hand once
I'll say what I always say: do this part with a pen at least once, even if you keep everything else digital. A spreadsheet lets you skim past a number. Writing it out by hand makes you sit with it for a second. That second matters. It's usually where people either panic a little or relax a little, and either reaction is useful information about where you actually stand.
The mistake I bring up the most
I've told you before that I'm a bookkeeper, not an advisor. But I'll tell you where my own math went wrong for a few years, because it's relevant here.
When I started at Rockwell, I didn't max out my employer match. Not because I was choosing not to. I just didn't understand the plan document, so I contributed some vague number that felt reasonable and left it alone for three years. When I finally sat down and read the plan the way I read everything now, all the way through, I realized I'd been leaving free money on the table the whole time. That's money that would have been growing this whole time.
Here's why I bring it up in an estimating lesson specifically: your yearly spending target is only half the equation. The other half is whether your current contributions are actually going to get you there on schedule. A sunday-best guess of your target is worthless if you're not also checking, at least once a year, that your contribution rate lines up with it. I didn't check for three years. Don't be me.
A quick caution on the number itself
Don't treat the 25x number as gospel. Inflation, health costs, how long you actually live, whether you retire early or late, all of that moves the number around. This is an estimate to give you direction, not a countdown clock. Hold it loosely. Recalculate it once a year, maybe every time you do taxes, and let it shift as your life shifts.
Before next time
Pull together a rough year of your actual spending, even if it's messy, and bring your 25x number to next class. We'll use it to check whether your current savings rate is actually pointed at that target. 💛