INSIGHTS

May 22, 2025

Manager Perspective

It’s Not How Much You Saved for Retirement—It’s How Much You Spend Annually

When people talk about retirement planning, the conversation almost always begins—and ends—with one question: “How much do I need to save?” Financial headlines throw around magic numbers: $1 million, $2 million, or more. But while savings are important, the real key to retirement security isn’t how much you’ve saved—it’s how much you spend each year.

We understand that planning for retirement can be overwhelming. Let’s explore why your annual spending is the most important number in retirement—and how understanding it can make your savings go a lot further.

C. Angus Schaal, CFP^®

Senior Managing Director

The Myth of the Magic Number

It’s comforting to aim for a nice, round savings goal. But that number means nothing without knowing how you plan to use it. A couple with $500,000 saved and a simple lifestyle in a low-cost town may be far better off than someone with $2 million living in an expensive city with high fixed expenses.

The problem with the “magic number” approach is that it ignores the burn rate—how fast your money will be depleted based on your lifestyle.

Annual Spending: The Real Retirement Metric

Think of your retirement savings as a reservoir. The size of the reservoir matters— but what truly determines how long it lasts is how fast you drain it. That’s where your annual spending comes in.

A common guideline, the “4% rule,” suggests you can safely withdraw 4% of your retirement portfolio annually without running out of money over a 30-year retirement. That means if you spend $40,000 per year, you’d need about $1 million. But if you can live comfortably on $25,000? You may only need $625,000.

In other words, if you can reduce your annual spending, you reduce the pressure on your savings—and increase the chances that your money lasts.

What Drives Retirement Spending?

Understanding what drives your spending is essential. Here are a few major categories:

Housing: Do you have a paid-off home, or will you pay rent/mortgage in retirement?
Health care: Medicare helps, but premiums, out-of-pocket costs, and long-term care add up.
Lifestyle: Travel, dining, hobbies, and entertainment can fluctuate year to year.
Location: Living in a high-tax or high-cost-of-living area can eat into your nest egg.
Inflation and taxes: These can quietly erode your purchasing power over time.

Budgeting: Your Secret Weapon

Controlling your expenses in retirement can have a more meaningful impact than trying to stretch for higher returns or save more aggressively in your final working years. Flexibility is also a powerful tool. If you can adjust your discretionary spending in leaner years—say, cutting back on travel or large purchases—you increase your financial resilience.

Tools like retirement budgets, spending buckets, and “guardrails” (maximum and minimum safe spending levels) can help you stay within sustainable limits.

Real-Life Scenarios

Let’s compare three retirees:

Claire has $1.2 million saved, but lives in an expensive city with high fixed expenses.
John has $800,000 saved and lives in a moderate-cost area with a paid-off home.
Lisa has $500,000 saved but lives a simple lifestyle in a low-cost town.

By understanding their unique spending habits, each of them can feel more confident about their retirement security. Let’s take a closer look at your spending habits together and create a plan that ensures your savings go the distance.

Disclosures:

Tandem Wealth Advisors LLC (“Tandem”) is an SEC-registered investment adviser.

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