How To Recalculate Retirement for Today’s Economy

Today’s economy looks different than when many pre-retirees first built their plans. Inflation has eased from its 2022 peaks but is still running above the Fed’s 2% goal – i.e., about 2.4% year-over-year according to the Bureau of Labor Statistics as of March 2025. At the same time, interest rates are much higher than several years ago. Many people approaching retirement today remember the 1980s when inflation was in the double digits.

The Federal Reserve is currently keeping its benchmark interest rate at 4.25–4.50% (after cutting from over 5% in late 2024). Stock markets have fallen and then rallied slightly recently, so volatility and global risks persist. In practice, this means bond yields are slightly more attractive, but your retirement plan needs to account for lower real returns and lingering inflation.

Given these changes, it’s critical to update your retirement goals. Nearly 6 in 10 pre-retirees now say inflation is the biggest threat to their retirement. Many are adjusting: a recent survey found 41% of pre-retirees expect to keep working (at least part-time) in retirement, and 27% plan to trim spending so they can reach their goals. About 22% said they will delay the age they retire. In other words, consider whether the age or lifestyle you once had in mind still makes sense. You may need to shift timelines or budget for lower income in early retirement years.

Next, update your spending estimates with today’s inflation and personal situation. A common simplification is to take today’s budget and grow it by a constant rate each year. But in reality, retiree spending often follows a “smile” curve: costs may rise slowly in the first decade of retirement and then accelerate later, especially as healthcare and long-term care become bigger. UBS notes you shouldn’t assume all expenses simply rise in lockstep with general inflation. Instead, get granular: list major spending categories and how they behave. For example, travel or hobbies may spike early on, then drop as priorities shift. Food, utilities, and insurance may rise steadily. Pay special attention to health costs – these usually grow faster than inflation. Fidelity estimates a 65‑year‑old may need about $165,000 (after tax) to cover healthcare expenses in retirement. RBC Wealth Management finds a healthy 65‑year‑old couple can expect roughly $683,000 in lifetime medical costs (not counting long‑term care). Many people underestimate this: in one survey retirees guessed $2,700/year on routine care, but BLS data show closer to $6,500/year per person. Bottom line: build a budget that includes higher healthcare premiums (Medicare Part B/D, supplemental policies), out-of-pocket costs, and possible long-term care.

Adjusting Savings Targets and Assumptions

With more realistic goals and costs, recalculate how much you need to save. Plug the new spending and inflation estimates into your retirement calculator. You may find you need a larger nest egg than previously thought. Experts often suggest saving on the order of 10–20% of income during peak earning years; T. Rowe Price, for instance, recommends targeting about 11 times your ending salary by retirement, which typically means saving roughly 15% of income (including employer match) during mid-career. If your current savings fall short under higher cost assumptions or lower return expectations, you might tighten your budget, boost contributions, or delay retirement slightly. Remember that future portfolio returns are likely lower than in past decades – many forecasters now assume more moderate 5–6% annualized returns on a balanced portfolio. Even a 1–2% change in assumed growth can make a big difference in how much to save. As a practical step, update your retirement projections using higher inflation and conservative return inputs (many online calculators or advisor tools let you adjust these). That will show whether you need to increase savings today or adjust other goals.

Asset Allocation and Diversification

It’s also a good time to review your asset allocation. The old 60/40 stock-bond split may need tweaking. Higher yields mean bonds (and bond-like assets) currently offer better income, but traditional bonds may no longer hedge stocks as reliably as before. For example, in 2024, the Bloomberg U.S. Aggregate Bond index lost about -1.6%, underperforming cash, while U.S. stocks returned roughly +20%¹. But then in 2025, the NYSE index fell from a November 2024 peak of 20,332 to an April 2025 low of 16,820 (for a temporary 17% loss) before rebounding to 19,049 by May 1.

BlackRock’s Rick Rieder notes that the “traditional role of bonds as a hedge is no longer reliable” and advises investors to shift toward income-focused bond strategies. In practice, that could mean overweighting higher-yield or shorter-duration bonds, or diversifying globally. In fixed income, prioritize real yield rather than pure interest-rate play – think of securities that lock in current higher yields.

At the same time, don’t abandon equities entirely. Rieder emphasizes that quality U.S. companies still have strong growth potential. In 2024, tech giants delivered a 67% gain, driving U.S. stocks well ahead of other markets². Stick with a diversified mix of stocks to capture growth, especially if you have many years in retirement. You might overweight sectors that tend to keep up with inflation (like energy, materials, or dividend payers). Diversify beyond stocks and bonds too: consider adding assets like real estate funds, Gold, Commodities, and/or Bitcoin as an inflation hedge. Also consider inflation-protected securities: Treasury Inflation-Protected Securities (TIPS) can be a useful tool. TIPS are treasuries whose principal adjusts with CPI, so when inflation rises their payouts rise too³. Including some TIPS (or I-bonds, or commodity funds) can help guard against surprise inflation in retirement.

The key is a balanced, flexible portfolio: aim to optimize for income and stability, not just chasing past returns ⁴.

Withdrawal Strategy Updates

How you plan to take money in retirement should also reflect today’s reality. The old “4% rule” (withdraw 4% of your portfolio in year 1, then adjust for inflation each year) was a useful rule-of-thumb, but it has limitations. For one, it assumes a fixed portfolio (usually 50/50 stocks-bonds) and stable spending. Schwab warns that while the 4% rule “is a reasonable place to start,” it “doesn’t fit every investor’s situation”. It’s rigid: it doesn’t adjust withdrawals based on how your actual portfolio performs or if your expenses change. In reality, retirees often spend differently year to year (sometimes cutting back in lean years). Schwab’s research even suggests that, on average, retirees’ real spending declines over time (the above-mentioned “retirement spending smile”).

Given this, many now favor dynamic withdrawal plans. Instead of blindly pulling 4% + inflation every year, you could set a target range and adjust. For example, one “guardrail” approach starts with a base rate (say 4%) and then establishes upper and lower limits on how much to withdraw. If market returns are strong and your portfolio grows above expectations, you might allow yourself to withdraw a bit more (up to the high guardrail). If markets fall and your portfolio drops, you trim back withdrawals to stay above the low guardrail ⁵. This way you give yourself flexibility: if your investments outperform, enjoy a bit more spending; if not, tighten belts to preserve the nest egg. Doing this usually involves checking your plan at least annually and adjusting for both portfolio value and actual inflation. In short, use 4% as a starting point, but be prepared to deviate. (Financial advisors often recommend periodically reviewing and updating your withdrawal rate rather than locking it in.) The goal is to avoid depleting funds too early if markets go south, while still enjoying retirement when markets allow.

Social Security, Annuities, and Guaranteed Income

With markets and portfolios in flux, guaranteed income sources become relatively more attractive. Social Security is one major piece. A key decision is when to claim. Delaying Social Security can substantially raise your eventual check: starting at age 70 yields about 124% of your full retirement benefit compared to claiming at full retirement age (67 for most late-boomers). However, most people claim earlier, based on need, life expectancy, and other personal factors. If you can work a bit longer or have other income sources, you may benefit from the higher eventual payout by waiting.

In the meantime, consider other income sources. Annuities (insurance products that pay a steady income) can help fill gaps. Experts have long noted that adding even a small portion of life annuities to a retirement portfolio can improve outcomes. One Wharton study argued that having an annuity inside your retirement plan could allow you to defer Social Security and still have cash flow ⁶. You could use existing savings (outside retirement accounts) to buy an immediate annuity for yourself or your spouse, providing guaranteed monthly income for life. Or look into deferred income annuities (which start payouts later) or longevity annuities (which only pay if you live to very old ages). Even if annuities have fees, the certainty of a paycheck can be worth it as insurance against living too long. The idea is balance: blend market returns with some guaranteed income. Pensions (if you have them) and Social Security are the core guaranteed pieces; annuities can be a useful supplement. In short, recalculate the contribution of Social Security and any pension to your cash flow, and consider using annuities or other fixed-income to boost the guaranteed portion of your retirement income.

Tax and Healthcare Considerations

Finally, factor in taxes and healthcare when you update your plan. First, healthcare: beyond Medicare premiums, retirees face rising out‑of‑pocket expenses. As noted, Fidelity pegs the 65-year-old’s health bill at about $165K over retirement ⁷, and RBC’s survey shows most couples will spend hundreds of thousands on medical care. Plan for Medicare Part B/D premiums (especially the income-related IRMAA surcharges if your adjusted gross income is high), supplemental Medigap or Part D drug plans, and uncovered services (dental, hearing, vision, long-term care). Keeping healthy, evaluating Medicare Advantage vs original Medicare, and possibly buying long-term-care insurance (or saving for potential nursing home costs) are all part of modern planning.

Taxes are equally important. Under current law, RMDs (required minimum distributions) begin at age 73. Large RMDs can push you into higher tax brackets. Schwab points out that big RMDs “can push you into a higher income tax bracket and affect the taxation of Social Security benefits and the premiums you pay for Medicare”. In practice, this means you should plan your withdrawals strategically. For example, if you have substantial IRAs, you might take modest distributions early (even before 73) so you don’t face a huge RMD spike later. Or consider partial Roth conversions in years your income is lower: paying tax now can reduce future RMDs. Work with a CPA or advisor to model your tax picture. Making charitable contributions directly from your IRA can reduce capital gains taxes and count toward your RMD; strategies like timing charitable donations or bunching deductions can also help manage taxable income.

Explore Lifestyle Adjustments That Preserve Financial Flexibility

More than just about having enough money, retirement is also about how you stretch what you have. Sometimes, small lifestyle changes can go a long way toward keeping your finances strong without feeling like you’re giving anything up.

Relocating to a more affordable area is a popular move, especially where housing and healthcare costs are lower. But if moving isn’t on the table, smaller upgrades at home can still make a difference. Improving insulation, adding energy-efficient appliances, and tightening up on utility use can help cut monthly bills and shield you from rising costs.

Even clearing out extra belongings can lighten the load. Self-storage can simplify your living space without making permanent decisions. It’s a way to create breathing room, both financially and emotionally, as you settle into this new chapter.

These so-called sacrifices are smart choices that protect your freedom down the road.

Checklist: Steps to Update Your Retirement Plan

• Re-run your retirement budget with updated inputs: Assume about 2–3% inflation, higher healthcare costs, and realistic life expectancy. Identify how much income you’ll need each year in retirement, and which expenses will grow faster than others.

• Adjust savings targets: Use the revised spending goal to calculate the required retirement nest egg. If needed, increase your savings rate now or consider delaying retirement. Tools from Vanguard, Fidelity, or a financial planner can help you see how changes in return assumptions affect your needed savings.

• Revisit your asset allocation: Ensure your portfolio reflects today’s yields and risks. You may want more fixed income now that bond yields are higher (especially income-focused bond funds or TIPS) and still hold a healthy portion of stocks for growth. Diversify globally and include inflation-hedges as appropriate.

• Plan a flexible withdrawal strategy: Instead of a fixed 4% rule, decide on a starting withdrawal rate and “guardrails” for adjustment. For example, if your portfolio is well above target, you can spend up to the high guardrail; if below target, cut back. Update your withdrawal rate annually based on portfolio value and actual expenses.

• Optimize guaranteed income sources: Calculate the real expected Social Security benefit (use SSA.gov) and choose your claiming age. Consider delaying benefits if feasible. Evaluate annuities or pension options: using part of your savings to buy an immediate or deferred annuity can provide steady income that reduces strain on your portfolio.

• Coordinate with taxes and health costs: Plan for RMDs and their tax impact. Smooth withdrawals to avoid jumping tax brackets or IRMAA. Maximize pre-tax savings while working, then use Roth accounts (or conversions) in retirement for tax flexibility. Budget for Medicare premiums, and factor in out-of-pocket medical costs (remember the Fidelity and RBC estimates).

• Review and iterate: Retirement planning is not “set it and forget it.” Revisit your plan at least annually or whenever your situation changes (market swings, health changes, legislative shifts). Consider consulting a financial planner or using updated retirement planning tools.

By systematically updating each piece of your plan including: goals, budget, savings, investments, withdrawals, and benefits, you can build confidence that you’ll weather today’s economy and enjoy a secure retirement.