--- title: "Your retirement math may have a surprising flaw" type: "News" locale: "en" url: "https://longbridge.com/en/news/293824027.md" description: "New Morningstar research reveals a flaw in the standard 70-80% income replacement rule for retirement. Essential, nondiscretionary expenses like healthcare and housing consume an increasing share of income as retirees age, rising from ~45% at 65 to ~73% at 90. Advisers recommend building retirement plans around guaranteed income sources to cover these essential costs, while using investment withdrawals for discretionary spending, and stress-testing plans against potential late-life cost shocks." datetime: "2026-07-25T13:53:47.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/293824027.md) - [en](https://longbridge.com/en/news/293824027.md) - [zh-HK](https://longbridge.com/zh-HK/news/293824027.md) --- # Your retirement math may have a surprising flaw By Robert Powell Stress-test your retirement plan against late-life healthcare and housing shocks Although retirees generally spend less as they age, essential expenses consume an increasingly larger share of income over time, researchers have found. Financial advisers have long relied on a simple rule of thumb when helping clients prepare for retirement: Plan to replace roughly 70% to 80% of your pre-retirement income. It's a useful starting point. But it leaves unanswered one of the most important questions in retirement planning: How much of that spending is truly essential? After all, not every dollar spent in retirement carries the same weight. Vacations can be postponed. Dining out can be reduced. Buying a new car can wait. Housing and healthcare costs and other basic living expenses, however, generally cannot be delayed. "There are many expenses that are discretionary," said Sebastian Gomez-Cardona, director of research, investment advice and planning at Morningstar. "People can decide where to go on vacation or not. Those are easier to adjust and cancel or dial back. But those required or necessary expenses are there, and they are very hard to adjust." That distinction sits at the heart of new research by Gomez-Cardona and Spencer Look, associate director of retirement studies at the Morningstar Center for Retirement and Policy Studies. While retirement planning often focuses on accumulating assets, the researchers argue that advisers and retirees should also pay close attention to future liabilities, particularly the essential expenses that are almost certain to occur. "People not only need to plan what their income is going to look like, but also their expenses," Gomez-Cardona said. Their study found that although retirees generally spend less as they age, essential (or what the researchers referred to as nondiscretionary) expenses consume an increasingly larger share of income over time. The findings have implications for how retirees build income plans, manage investment portfolios and prepare for unexpected expenses later in life. Dependable income is essential The practical lesson from the research: Build your retirement plan around essential expenses. "Planning for retirement should include discretionary and nondiscretionary expenses," Gomez-Cardona said. "But the floor should be the nondiscretionary expenses. Since those expenses have a high degree of certainty of happening, you should try to match those expenses with safer assets ... and, if possible, with something related to guaranteed income." That guaranteed income might come from Social Security, a pension, an annuity or another dependable income source. So let's say your pre-retirement salary was $100,000 and you're planning to spend $80,000 a year in retirement, including both essential and discretionary expenses. Based on the research from Gomez-Cardona and Look, you'd want roughly $45,000 in dependable, guaranteed income in your first year of retirement to cover your essential expenses. The remaining $35,000 could come from investment withdrawals or other assets earmarked for discretionary spending. For instance, if you had $1 million in your retirement fund and withdrew 4% per year, that would cover your discretionary spending. Covering essential expenses with dependable income also leaves savings, a 401(k) and other investment accounts available for unexpected financial shocks later in retirement. Healthcare and housing deserve special attention Healthcare and housing costs are among the biggest wild cards in retirement. Gomez-Cardona said the data show that average healthcare spending remains relatively stable because many retirees incur modest costs, while a smaller share of retirees face exceptionally large medical expenses that skew the distribution. Housing presents similar challenges. The researchers found rent expenses tend to increase after age 80 or 85, potentially because retirees sell their homes and move into rental housing or enter assisted-living or long-term-care facilities. Those are the types of shocks retirees should factor into their plans. The lesson for retirees is straightforward: Don't build a retirement plan around "average" spending alone. Test your plan against higher-cost scenarios to make sure you'll still have enough dependable income and savings if healthcare or housing costs turn out to be significantly higher than expected. Essential expenses consume more income as retirees age The study confirmed that overall spending generally declines throughout retirement. But that's only part of the story. For households with average income, essential expenses account for about 40% of pretax income before retirement and, on average, roughly 60% during retirement. However, the real story is that essential expenses climb steadily throughout retirement. At age 65, essential expenses for the average household consume about 45% of income. That rises to 51% by age 70, reaches 58% by age 75, climbs to 64% by age 80 and approaches 73% by age 90. The pattern is similar for higher-income, higher-wealth households, although the increases are less dramatic. Essential expenses rise from about 29% of income at age 65 to roughly 54% by age 90. Even though retirees typically spend less overall as they age, Gomez-Cardona said they also have less flexibility, because a growing share of their spending goes toward necessities they cannot easily cut back on. Gomez-Cardona also recommends that couples stress-test their retirement plans for widowhood. When one spouse dies, household income often falls while many essential expenses, particularly housing, remain largely unchanged. Couples should determine whether guaranteed income sources would still cover their essential expenses if either spouse were to die What is essential? The research doesn't suggest abandoning the traditional 70% to 80% income-replacement rule. Instead, it suggests asking a different question: How much of your retirement spending is truly nonnegotiable? The answer may determine not only how much income you'll need in retirement (and thus how much you need to save), but also how much of that income should come from dependable sources rather than investment portfolios. \-Robert Powell This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal. (END) Dow Jones Newswires 07-25-26 0953ET ### Related Stocks - [MORN.US](https://longbridge.com/en/quote/MORN.US.md) ## Related News & Research - [Morningstar Q2 revenue, adjusted EPS rise on credit segment growth](https://longbridge.com/en/news/294257878.md) - [Morningstar director William M. 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