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Who hasn’t spent time daydreaming about retirement? Long days with no responsibilities and endless time for hobbies, travel and naps … it’s the ultimate goal!

Of course, hobbies and travel can cost a lot of money. (Naps are still free.) Even if you plan on a low-key retirement, it can feel daunting to save enough money to cover decades of expenses without working. And people seem to feel it’s growing more daunting by the day: In 2024, one study showed Americans think they need to save almost $1.5 million for retirement. As recently as 2020, it was less than $1 million.

Let’s be real: While many folks manage to save at these levels, other people retire without hitting these kinds of numbers every day. And it doesn’t make sense to target an average, round number in your planning, at least once you get close to retirement. Your location, lifestyle and health care needs will all play a part in getting you to the right number.

Understanding the costs you’ll personally face is essential for having the dream retirement you’re looking for.

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What’s the average cost of retirement in the U.S.?

To account for lifestyle differences, a general rule of thumb recommends you plan to spend 80% of your preretirement income each year in retirement. This figure assumes you keep your lifestyle relatively stable but have somewhat lower costs now that you won’t need to commute, maintain a work wardrobe, pay payroll taxes or make 401(k) contributions.

In 2023, government data showed that the average retiree spent $57,866. The bulk of expenses were housing-related ($20,989), followed by transportation ($8,663), health care ($7,933) and food ($7,607). Obviously, these kinds of costs are highly variable and – especially relevant the last few years – are likely to rise over time with inflation. (Rule of thumb: At a 2% inflation rate, prices will double every 35 years. That’s probably at least once within your retirement.)

Combined with another popular rule of thumb (there’s one for everything!), the “4% rule,” a spending rate of $60,000 equates to a retirement savings goal of $1.5 million. But like the 80% rule, the 4% rule doesn’t work for everyone. (One big reason is that it’s based on a retirement that lasts 30 years, which may not be the case for you, and we’ll talk about that more later.)

So let’s look at the factors driving whether you’re likely to need more or less.

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Factors that impact retirement costs in the U.S.

Housing and cost of living

As we said above, housing-related expenses (mortgage and rent as well as things like utilities and insurance) are likely to be your biggest cost, and there can be a huge variance depending where you live, with factors like:

• The size, age and kind of house you have. Both brand-new builds and very old homes can be more expensive. Custom high-end homes cost more than builder-grade. And larger homes generally cost more than smaller ones.
• Your distance to desirable amenities and centers of business. Urban areas can have the highest cost because they’re close to everything. Nearby amenities like beaches or mountains also inflate housing prices.
• The region you live in. Homes are generally more expensive in the Northeast and the West Coast, and cheaper in the South and Midwest.

High housing costs often go hand-in-hand with overall higher living costs for everything from taxes to food to entertainment.

It seems like an obvious win for your money to simply move to a place with lower costs, whether that’s a different house or different region altogether. And many retirees do. But there are a lot of reasons that might not work for you.

Health care expenses

While Medicare kicks in once you turn 65, retirees still have plenty of health care expenses. First, there are the premiums – contrary to popular belief, Medicare isn’t free. There are also out-of-pocket costs, like deductibles and copays. Depending on your Medicare plan, you may also have vision, dental and prescription expenses.

Finally, don’t overlook long-term care as a potential and substantial cost. Medicare doesn’t cover it, and if you need it, it can cost hundreds of thousands of dollars. While you’re thinking about long-term care, consider the type of care you’d want. A nursing home may not cost as much as a higher-end assisted living facility, which might be cheaper still than full-time in-home care.

Overall, retirees spent an average of about $8,000 on health care in 2023. But if you’re generally healthy and continue to emphasize healthy lifestyle choices, and your family health history is good, you may very well spend less. The flip side can also be true, of course.

Planning to retire before 65? Health insurance may be a major expense during those years when you’ve lost employer-sponsored insurance but can’t get Medicare yet. You’ll need to have a plan for that.

Taxes and retirement

To know how much you need to have saved to make it through retirement, you’ll also need to understand how taxes are going to impact you. After all, the more Uncle Sam takes, the less is left for you to live off. Here are some areas to explore.

Social Security

For the majority of people, Social Security payments aren’t federally taxable – unless you have a lot of other income (or are married filing separately, in which case you’ll almost always pay taxes). At most, 85% of your benefits will be subject to tax, if you and your spouse have a “combined income” of over $44,000. Combined income in this case means half your Social Security benefits plus other income.

Pensions, 401ks and IRAs

For the most part, you’ll either pay tax on retirement accounts as the money is going in or coming out. So these are fully taxable as income if you didn’t contribute any after-tax money.

If you did contribute after-tax money (as with a Roth 401k or Roth IRA), those distributions will be tax-free as long as you meet the requirements.

State taxes

And don’t forget about the impact of state income, sales and property taxes. The variation here can make a big difference in your overall cost of living and, therefore, the amount you need to save. Lots of retirees specifically consider these taxes when deciding where to spend retirement.

Eight states have no income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming. (Additionally, Washington only taxes capital gains income.)

Conversely, some states have exceptionally high state income tax rates: California, Hawaii, Massachusetts, Minnesota, New Jersey, New York and Oregon all have top marginal rates above or very close to 10%. That’s not the full story, though: For states with a graduated state income tax, your personal rate will depend on your income level. And some states have standard deductions and personal exemptions; others don’t.

Note that the states with no income tax often have higher property and/or sales taxes to compensate. One analysis of 2020 U.S. Census Bureau data showed the highest average total income, sales and property tax burdens of about 10% or more in Hawaii, Maine and New York, while the lowest of under 5% were in Alaska, Delaware, New Hampshire and Tennessee.

Lifestyle and community preferences

So why isn’t Alaska a more popular retirement hotspot? Obviously, there’s more to choosing a retirement location than taxes. You’ll also want to think about:

• Weather. Many retirees prefer to be in a warm or at least temperate climate. Also consider a location’s susceptibility to natural disasters, like wildfires or hurricanes, as evacuating can get harder as you get older, and insurance costs in some places have skyrocketed.
• Community. If you like being social, you may want to move somewhere with a large, active retiree population.
• Leisure or cultural activities. Think about proximity to beaches, mountains, museums, theaters, gyms, restaurants or parks, depending on what you like to spend time doing. Having them nearby could even cut down on the amount of expensive traveling you need or want to do. Speaking of which, if you do plan to travel often, don’t forget about access to a major airport!
• Your everyday needs. Nearby grocery stores, doctors or transportation could be a must-have for you (and could become more so as you age).
• Your family. Many retirees want to stay close to their children and grandchildren so they can be part of their daily lives.

These kinds of factors mean the cheapest retirement locations aren’t always the most practical. Before you commit to a financial plan that involves moving to a low-cost location, make sure to carefully think through your needs now and in the future.

Of course, you’ll also need to plan for the costs associated with your ideal lifestyle. They can include traveling, equipment and outfitting or club fees, for example.

They can also include any number of luxury vs. budget decisions. Organic farmer’s market produce or big-box grocery? Designer duds or fast fashion? High-end home finishes or basic? Round-the-world cruises or road trips and camping? Luxury electric SUV or family sedan?

Length of retirement

It might seem obvious that the longer you’re retired, the more it will cost. But calculators and rules of thumb can give you a retirement number based on generic assumptions that don’t match your actual plans.

For example, calculators often default to a retirement age of 65. But the average age of retirement is currently 62, and many people want to retire even earlier. On the other hand, some folks don’t plan to retire until age 70.

Another example – as we touched on earlier, the 4% rule says that 4% is a safe withdrawal rate over a 30-year retirement. If you retire at age 55 and have a long life expectancy (based on your parents’ and grandparents’ lifespans) you may easily need your money to last 40 years or more.

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How do retirement costs vary by state?

Putting all this together can get tricky. A number of media outlets have ranked the “best states to retire” by diving into metrics around low cost of living (including taxes), health care access and quality of life.

One study by WalletHub came up with an “affordability” metric based on cost of living, tax friendliness and costs associated with late-in-life medical care. Here are those results.