The No. 1 thing to know entering retirement: How much are you really spending?

When federal employees begin thinking about retirement, most focus first on the big questions. 

When should I claim Social Security? 

Should I keep Federal Employee Health Benefits or enroll in Medicare? 

How much can I expect from my Federal Employee Retirement System annuity?

But there’s one question that should come before all of that.

How much am I actually spending?

Understanding how to manage your finances in retirement must start with this simple question. While it may seem basic, this step is one of the most empowering, yet often overlooked, parts of planning for your future.

Your spending habits, not your Thrift Savings Plan balance and not your annuity estimate, create the foundation of retirement income planning. Because your spending dictates how much income you’ll need, it’s necessary before you retire to determine how much you’ll withdraw from your investments. Once you know how much you’re really spending, it’s much easier to figure out how to invest your money, how much you can safely take out each year and whether your savings will last.

Why spending is so often misjudged

Many people estimate their monthly spending with a round figure, such as “probably around $5,000.” However, a closer look at bank statements, credit card records and bills often reveals that the actual amount is 20–30% higher than their initial guess. National data backs this up — according to the Bureau of Labor Statistics’ Consumer Expenditure Survey, households headed by someone age 65 or older spent an average of $60,087 in 2023, not much lower than working-age households.

It’s not that people are trying to hide anything. It's just how we are. A lot of our spending happens automatically or pops up at odd times, so it’s easy to overlook certain costs.  

Insurance premiums, property taxes, vehicle repairs, vacations, gifts and subscriptions are easy to overlook. Plus, as we move toward retirement, life itself is changing. You may plan to downsize or travel more, or you may find new costs replacing old ones.

Without a true understanding of your spending, even the most detailed retirement plan can miss the mark.

Assess the situation prior to taking action

The most reliable way to find your true spending level is to track every expense for 6–12 months before retirement.

That’s long enough to capture both everyday spending and seasonal or annual expenses, everything from holiday travel to homeowners’ insurance renewals.

You can use a spreadsheet, budgeting software or simply your bank and credit card statements. Start by dividing expenses into broad categories:

• Housing: mortgage or rent, property taxes, maintenance, homeowners association fees, utilities.
• Transportation: car payments, fuel, insurance, repairs, rideshares.
• Health care: FEHB premiums, copays, prescriptions, dental and vision.
• Food: groceries, dining out, meal delivery.
• Lifestyle: travel, entertainment, gifts, hobbies, charitable giving.
• Other: taxes, personal care, subscriptions, miscellaneous items.

Once you’ve tracked and categorized expenses for several months, calculate your average monthly spending. Then multiply that by 12 for an annual estimate.

This is your real cost of living.

Be realistic about what will change

Many retirees assume their spending will drop dramatically once they leave work. After all, there’s no more commute, fewer dry-cleaning bills and less money spent on lunches or professional clothing.

This could all be true, but as these expenses fall off, other expenses often rise. You’ll have more free time, which can mean more travel, dining out or general spending. Health care costs tend to increase, even for those covered under FEHB or Medicare. And if you’ve been putting off home projects or bucket-list trips, the early retirement years are often when they happen.

A good rule of thumb: plan for the first few years of retirement to cost roughly the same as your final working years. You can always adjust downward once you see how your new lifestyle settles in.

Why your spending drives the whole plan

Once you have a realistic understanding of how much you spend, everything else in your financial plan comes into focus.

Your spending dictates:

• How much income you’ll need each month. This includes your FERS annuity, Social Security and TSP withdrawals.
• How your portfolio should be structured. The size and timing of withdrawals affect your investment mix, cash reserves and risk tolerance.
• How sustainable your plan will be. If you draw more than your portfolio can reasonably sustain, even a well-funded TSP can deplete faster than expected.

If you underestimate your spending, you may overestimate how long your assets will last. For example, if you believe your annual expenses are $60,000 but they’re actually $75,000, that $15,000 gap has to come from somewhere - likely from your TSP or savings. Over 20–30 years of retirement, that difference compounds significantly.

Adjusting as life happens

Retirement isn’t a static event. It’s a new phase of life that evolves over time. Early retirement years tend to be more active (and expensive), while later years may focus more on health care or downsizing.

That’s why it’s smart to review and update your spending plan every year, especially in the first five years of retirement. Keep an eye on new expenses like spoiling grandchildren, finding new hobbies or finally booking that trip you’ve been thinking about. All of this may require you to adjust your withdrawals accordingly.

It’s important to keep an eye on rising prices. Even small increases like groceries or gas, can add up over many years. Your plan should make room for spending to go up a little bit as things get more expensive. Unfortunately, that’s just inflation.

 Build a plan just for you, and your confidence

Many people resist tracking spending because it feels restrictive or annoying. 

But in retirement, knowing your numbers isn’t about limitation, it’s about freedom.

When you know exactly how much you spend and how much income you have to cover it, you gain confidence and clarity. You can enjoy your retirement without worrying whether every purchase is “too much.”

Every federal employee’s financial picture is unique, but the same principle applies across the board: your spending sets the stage for everything that follows.

Before you finalize your retirement date, take the time to understand your expenses in detail. Track them. Question them. Think about how they’ll change as your lifestyle evolves.

Your spending is your foundation. It’s data, so the more information you have, the better decisions you can make to prepare for the life you want in retirement. 

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Austin Costello, CFP® is an LPL Financial Planner with Capital Financial Planners. If you have questions about your insurance needs or any other federal-specific financial planning question, register for a complimentary checkup. For topics covered in even greater depth, see our YouTube page.