Chapter 2: How Much Do I Really Need?

Chapter 02  ·  Client Edition  ·  8 min read

The right number is yours, not a generic percentage. Here’s how to build a retirement spending plan around the life you actually intend to live.

If you have ever sat through a retirement webinar or read a planning article, you have probably heard the 80% rule, the idea that you can comfortably retire on 80% of what you were making before. It is the most quoted rule in retirement planning, and for a lot of people, it is also one of the least useful. The rule was built on data from typical workers, and it assumes the same things shrink in retirement for everyone: the mortgage, the commute, the work wardrobe, the taxes on earned income. For someone earning a moderate income in a paid-off house, those assumptions hold up reasonably well. For the kind of clients we work with at Penobscot Financial Advisors, they often do not.

Many of our clients, the doctors, attorneys, professors, and senior executives we sit down with each month, actually spend more in their first decade of retirement than they did in their last decade of work. They travel more. They upgrade the house in Maine or add a second place down south. They take up hobbies that turned out to be more expensive than the spreadsheets predicted. They write checks for grandchildren’s college tuition.

45% Spent more in their first 5 years of retirement than their last 5 of work

35% Spent about the same as their working years

20% Spent meaningfully less in retirement

One large study of high-net-worth retirees found that breakdown across its sample. The 80% rule was never built for that group.

A more useful starting point than the 80% rule is your own life. The goal is not to back into a percentage; it is to look honestly at what your retirement will actually cost, line by line, and build the plan around that real number. Start by pulling your actual spending from the last full year, the real number from your bank and credit card statements, not the number you would guess. Sort it into the categories that matter most: housing, utilities, food, transportation, healthcare, travel, entertainment, charitable giving, and the discretionary category that catches everything else. That gives you a baseline, but the baseline is just the beginning.

From there, look at each category and ask what is going to change. Will you carry a mortgage into retirement or pay it off first? Will you stay in Maine year-round or spend winters somewhere warmer? Will the travel calendar look more like four trips a year or two? Your housing choices alone can swing the annual budget by $20,000 to $60,000 or more, and that is before you have factored in healthcare.

A plan that uses one healthcare number across thirty years will almost always understate the real bill.

Healthcare is its own conversation. It tends to climb steadily through your 60s and 70s, then accelerate after age 80 as the long-term care category enters the picture. A plan that looks at healthcare year by year, layered against Medicare and supplemental coverage, gives you a number you can actually trust.

The other rule you have probably heard about is the 4% rule. The short version is this: in year one of retirement, you withdraw 4% of your starting portfolio, and each year after, you adjust that same dollar amount upward for inflation. So a $1 million portfolio supports about $40,000 of annual spending in year one. A $2 million portfolio supports about $80,000. The rule came out of a 1998 study at Trinity University that looked at a 30-year retirement, a balanced 50/50 stock and bond mix, and an acceptable risk that the portfolio would not quite make it the full 30 years, roughly a 5% failure rate. For a generation of pre-retirees, it became the answer.

It is a useful starting point, and we still use it in conversations to anchor expectations. But for the clients we work with, the 4% rule alone leaves a few important things on the table. It assumes you hold the same investment mix the whole way through, when in reality a thoughtful plan will rebalance and adjust as your situation and the markets change. It says nothing about taxes, even though a dollar pulled from a taxable brokerage account, a traditional IRA, and a Roth IRA are not the same dollar after the IRS takes its share. And the 5% failure rate means that in roughly 1 of every 20 scenarios, your money runs out before you do. For most of the people we sit across from at the kitchen table, that last sentence alone is reason enough to want something more personal than a rule of thumb.