The 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 decades, tend to spike. Building a retirement plan around the wrong spending assumption is how people run short of money while technically doing everything right.
Does Spending Actually Drop When You Retire?
It drops in some categories and rises sharply in others. Per the Bureau of Labor Statistics Consumer Expenditure Survey, households aged 65 to 74 spent an average of $65,354 in 2024, down from $86,440 for households aged 55 to 64. That looks like a meaningful decline until you break out what’s driving it.
The spending that falls is largely work-related: commuting costs, professional clothing, payroll taxes on earned income, and pension contributions. Those are real savings. What doesn’t drop, and in some cases rises substantially, 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. And home maintenance 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.
The real question isn’t “do you spend less?” It’s “what do you spend less on?” The answer to the first is often yes. The answer to the second usually reveals that the expenses still on the list are the expensive ones.
What the Three-Phase Retirement Spending Curve Actually Looks Like
Retirement spending doesn’t glide down on a smooth curve. For most people it follows a three-phase pattern with different spending drivers in each phase.
| Phase | Approximate ages | Primary spending drivers | Typical direction vs. projection |
|---|---|---|---|
| Active | 60-75 | Travel, home projects, adult children, hobbies | Often higher than projected |
| Slower | 75-85 | Reduced discretionary; rising healthcare costs | Usually lower in total, but healthcare inflation runs ahead of general CPI |
| Late | 85+ | Long-term care, home modification, medical | Can dwarf all earlier phases if extended care is needed |
Phase one: the active years. This is when discretionary spending is highest. Travel, home projects, helping adult children, hobbies that cost real 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. Per the Bureau of Labor Statistics, the 65-74 cohort has the highest entertainment spending share of any age group.
Phase two: the slower years. Travel and active recreation decline. Healthcare spending rises. Net spending in this phase may be lower in dollar terms, but healthcare inflation runs significantly higher than general inflation and catches projections off guard. A healthcare budget built on standard CPI assumptions tends to understate the actual cost over time.
Phase three: the late years. Long-term care costs can dwarf anything in the earlier phases. A nursing home stay or multi-year home care need introduces expenses categorically different from anything in the pre-retirement budget. Per the Bureau of Labor Statistics, out-of-pocket healthcare spending as a share of total expenditures is highest for the 75-and-older cohort, not the 65-74 group most projections focus on.
The Three Expenses That Consistently Break the Projection
Home maintenance. A paid-off house sounds like a financial asset. It is, until the HVAC that was 15 years old at retirement fails, the roof needs replacing, and the kitchen remodel you’ve been deferring for a decade moves from optional to overdue. 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. Many aren’t. Down payment assistance, 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. And because they feel different from regular spending, they rarely get modeled as part of the retirement budget.
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 as the household reference person’s age rises. The gap between an early retirement date and Medicare eligibility can mean three to five years of full-cost insurance premiums running two to three times higher than the projection assumed.
What a More Accurate Spending Assumption Looks Like
The standard approach is to take current spending and subtract work-related expenses. That math produces a number that feels right and is often too low for the first decade of retirement.
The better approach: build the 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? These aren’t hypotheticals. They’re planning inputs.
Then test the projection against your actual spending in the two to three years before retirement. Real spending data is more accurate than any assumption. If you’ve been tracking what you actually spend, you have better inputs than any projection model.
The Question the Projection Doesn’t Ask First
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 in retirement. The fix is to plan honestly. Run the projection with the spending level that reflects what you actually intend to do, not a number that makes the math look comfortable.
Schedule a no-obligation call with Jeff to build a retirement spending estimate that reflects the retirement you’re actually planning.
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