The retirement spending assumption that quietly breaks most plans

Your retirement projection assumes spending drops when you stop working. Some does. The parts you forgot about tend to spike. Here's what the real spending curve looks like.

The single most dangerous number in a retirement projection isn’t the return assumption. It’s the spending assumption. Most projections assume spending drops meaningfully when you stop working. Some spending does drop. But the categories that matter most in early retirement, the ones you’ve been deferring for 30 years, tend to spike. Building a retirement plan on the wrong spending assumption is how people run short on money while technically doing everything right.

Does Spending Actually Drop When You Retire?

It drops in some categories and rises in others. The Bureau of Labor Statistics Consumer Expenditure Survey shows that households age 65 to 74 spent an average of $65,354 in 2024, the most recent year available, down from $86,440 for households aged 55 to 64.

But read the categories carefully. The spending that drops is largely work-related: commuting costs, professional clothing, payroll taxes on earned income, and pension contributions. Those were real expenses, and losing them is real savings. What doesn’t drop, and in some cases rises significantly, is everything else.

Per the Bureau of Labor Statistics, the entertainment budget share is actually highest for the 65-74 age group, at 5.3% of total household spending, compared to lower shares for older cohorts. Healthcare spending increases steadily with age. Home maintenance spending on a paid-off house that’s been deferred through two decades of raising children and building a career tends to surface in the first five years of retirement in ways the projection didn’t model.

What Does the Spending Curve Actually Look Like in Retirement?

Retirement spending doesn’t glide down on a smooth curve. For most people it follows a rough three-phase pattern.

Phase one: the active years (roughly 60 to 75). This is when discretionary spending is highest. Travel, home projects, helping adult children, hobbies that cost money. The people who have saved diligently for decades tend to spend more freely in this window than their projections assumed, because they finally can.

Phase two: the slower years (roughly 75 to 85). Travel and entertainment decline. Healthcare spending rises. Net spending in this phase may be lower in total, but healthcare inflation runs significantly higher than general inflation and catches a lot of projections off guard.

Phase three: the late years (85+). Long-term care costs can dwarf anything in the earlier phases. A nursing home stay or multi-year home care need introduces expenses that are categorically different from anything in the pre-retirement budget.

The projection that models steady spending declining gradually every year is a mathematical convenience that rarely matches real life.

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The Three Expenses That Consistently Surprise Retirees

Home maintenance. A paid-off house sounds like a financial asset. And it is, until the HVAC system that was 15 years old when you retired fails, the roof needs replacing, and the kitchen remodel you’ve been putting off for a decade moves from optional to urgent. These aren’t unexpected expenses for someone paying attention. They’re deferred expenses that arrive on their own schedule, not yours.

Adult children. The projection assumes the kids are financially independent by the time you retire. Many aren’t. Down payment help, a wedding, a divorce, a grandchild’s needs, a grown child who loses a job. These expenses aren’t in the spreadsheet. They happen anyway.

Healthcare before Medicare. If you retire before 65, you pay for health insurance out of pocket. Per the Bureau of Labor Statistics, out-of-pocket healthcare spending increases consistently with the age of the reference person. But the gap between retirement and Medicare eligibility, if you retire at 60 or 62, can mean three to five years of full-cost health insurance premiums that are two to three times what the projection assumed.

How to Build a More Honest Spending Assumption

Jeff runs a different exercise with clients than the standard “take your current spending and subtract your work-related expenses.” That math produces a number that feels right and is usually low.

The better approach: build the retirement budget from the bottom up in three phases. What does active retirement actually cost? Walk through each category without assuming it mirrors your working-life spending. Travel more than you do now? Price it. Home projects you’ve been deferring? List them. Help you expect to give the kids? Write it down.

Then build the healthcare bridge explicitly. What does insurance cost from retirement to Medicare? What’s your deductible exposure? What does a long-term care need cost in your area?

Then test the projection against your actual spending in the two to three years before retirement. Spending data from real life is more accurate than any assumption. If you’ve been tracking what you actually spend, you have better data than the projection tool.

The Question Most Retirement Projections Don’t Ask

Most retirement projections answer “do you have enough?” based on an assumed spending level. The question they should ask first is: “Is that spending level what you’re actually going to spend?”

Jeff has seen more retirement stress caused by undershooting the spending assumption than by poor investment returns. You saved well, the math looked fine, and then real life arrived with a kitchen remodel and a daughter’s wedding in the same year.

The fix isn’t to spend less. The fix is to plan honestly. Run the projection with the spending level that reflects what you actually intend to do in retirement, not a number that makes the math look comfortable.

Schedule a no-obligation call with Jeff to build a retirement spending estimate that matches the retirement you’re actually planning.

The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn’t guarantee future results. Consult with qualified financial professionals regarding your specific situation.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor and separate entity from LPL Financial.