E86: Stop Budgeting for What Retirement Costs. Budget for This Instead.

A $500 error in a monthly retirement estimate drops a plan’s success probability from 82% to 68%. A $2,000 error drops it to 30%. That means seven out of ten projections show the money running out. And most retirement budgets are built from a method that makes that kind of error almost inevitable.

The standard approach feels thorough. You sit down with a spreadsheet, list every spending category you can think of, and estimate a number for each line. Groceries. Utilities. Car insurance. Travel. Subscriptions. You add it up, and that becomes your retirement budget.

Research by EBRI suggests that people who go through this exercise estimate what they think they can live on, not what they spend. The guessing reward goes to the frugal version of yourself. The version that skips the extra trip and doesn’t replace the car. Real retiree spending runs 20 to 30% higher than those estimates. On a $75,000 target, that’s $15,000 to $22,000 per year, the plan never accounted for. Stretched over 30 years, that gap is the difference between a plan that holds and one that sends a 78-year-old back to work.

There are three beliefs that drive people toward this method, and each one is worth examining.

The first is that you can estimate retirement spending by thinking through categories. The research above covers why that’s expensive.

The second is the 80% replacement ratio rule, the idea that you’ll need 80% of your current income in retirement. That rule is trying to approximate four specific costs you won’t be paying once you stop working: payroll taxes, retirement contributions, debt service, and invisible work expenses. For a high-earning nurse household, those four items alone can add up to $60,000 to $80,000 a year. The 80% rule misses by five figures.

The third belief is that the categories you budget today will drive your retirement spending. Groceries and utilities are real costs. But they’re not what determines whether your plan succeeds or breaks. Four specific categories decide retirement outcomes, and none of them show up prominently on a grocery spreadsheet.

At Oak Capital Advisors, we use a different approach called the Subtract-and-Replace Budget. Two halves, four lines each, and it starts with something you already know: your current paycheck.

The Subtract Side: Four Expenses That Disappear

The first half of the method is subtraction. You take your current household income and remove the four categories of expenses that stop the day you retire.

Payroll taxes come off first. Social Security and Medicare taxes leave every paycheck automatically. On a $200,000 income, that’s roughly $15,300 a year that simply stops.

Retirement contributions are next. If you’re maxing out a 403(b), backdoor Roth, and HSA, you may be putting $50,000 to $70,000 a year into accounts you won’t need to fund once you’re retired. That money disappears from your budget on day one.

Debt service follows. Mortgage payments, student loans, and auto loans ending around retirement can total $20,000 to $35,000 a year for most CRNA households.

The fourth category is invisible work expenses, and this one catches people off guard. Track your work-related spending for one week. Commute. Parking. Wardrobe. Work lunches. Professional dues your employer doesn’t cover. Licensing fees. Most people find $800 to $1,500 a month in costs that simply vanish when the job does.

What’s left after subtracting those four lines from your income is your actual lifestyle spend today. Not an estimate. What you spend. That’s your floor.

The Replace Side: Four Categories That Expand

The second half identifies what grows or appears in retirement. These four categories are what determine whether a plan survives.

Taxes look completely different in retirement. During your working years, they came out automatically and you never planned around them. In retirement, every dollar pulled from a traditional 403(b) or IRA is ordinary income. Required minimum distributions at age 73 force withdrawals whether you need the money or not. Social Security becomes partly taxable. And IRMAA, the Medicare income surcharge, kicks in when modified adjusted gross income crosses certain thresholds. For a married couple, one dollar over $218,000 costs $2,297 per year in extra Medicare premiums. That’s a cliff, not a phase-in. The highest IRMAA tier runs over $10,000 per year for a couple, every year, for the rest of retirement. A well-built tax plan is worth $100,000 to $300,000 over a retirement. For high earners, the tax plan is the budget.

Healthcare is the second category. Retiring before 65 means bridging to Medicare on your own. ACA coverage for a couple in their early 60s runs $10,000 to $15,000 a year, depending heavily on reported income. Once on Medicare, costs run $4,000 to $8,000 per year, depending on the supplement plan. According to Fortune’s 2026 analysis, a retired couple will spend an average of $345,000 out-of-pocket on healthcare over their retirement. Healthcare costs grow at 5 to 7% per year. The Social Security cost-of-living adjustment for 2027 is projected at 2.4%. That gap in growth rates compounds significantly over 20 years.

Go-go lifestyle spending is third. Year one of retirement often runs at 120% of working-year spending. People travel, do the things they put off, and spend on the life they worked decades to reach. The good news is that real spending typically declines after the first decade. Research by David Blanchett found a median real decline of about 2% per year, with most households spending roughly 26% less in real terms by age 84. The early years are the expensive ones, and they should be budgeted deliberately.

Healthcare inflation over the full retirement horizon is the fourth. At 5.8% average annual healthcare inflation, costs double every 12 years. What costs $12,000 a year at 62 costs $24,000 at 74 and $48,000 at 86. This is a separate line in the plan from the base healthcare cost.

What This Looked Like for David and Karen

David and Karen are both CRNAs in their late 50s. High household income, disciplined savers throughout their careers. When they came to Oak Capital Advisors, they had already built a line-item retirement budget. Spreadsheet, categories, estimates. They felt pretty good about the number they landed on.

We ran the Subtract-and-Replace method instead.

Starting with their income, we subtracted the four disappearing expenses: payroll taxes, retirement contributions, the mortgage, and invisible work costs. For that last item, we asked them to track work-related spending for one week. Commute, parking, lunches, scrubs, licensing fees. It added up fast.

What remained after the subtraction was their actual lifestyle spend, significantly higher than what their spreadsheet showed.

Then we layered in the four replacing expenses: healthcare coverage before Medicare, their tax picture in retirement, an IRMAA exposure they didn’t know they had, and a deliberate budget for the early years when most people spend more, not less.

Their real early-retirement number was meaningfully higher than the line-item budget suggested. A gap that, stretched across 30 years, is the difference between a plan that holds and one that doesn’t.

The good news: they had enough saved. They just needed to see the real number before they retired, not after.

A Note for CRNAs and NPs on the Tax Side

If you’ve spent 20 years maxing out a 403(b), that account has likely grown into a significant balance, and every dollar in it is pre-tax. When you pull it out, it’s ordinary income. When RMDs start at 73, the IRS decides how much you take, not you. Social Security taxation, RMD stacking, and IRMAA brackets interact. The specific withdrawal sequence you use, and when you do Roth conversions relative to Social Security and RMDs, can shift a lifetime tax bill by $100,000 to $300,000. That’s not a rounding error. It’s a budget category. A line-item spreadsheet doesn’t account for any of it. The Subtract-and-Replace method does, because it forces you to name those four replacing expenses before you retire.

If you’re within five years of retirement, the decisions that affect these costs are already in motion.

Ready to see how Oak Capital Advisors can help? Schedule a meeting.

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