How to Make a Retirement Budget

Regardless of what you want to do in your retirement, you should always be aware of how much money you have left in your savings and retirement accounts. This is where a retirement budget can help. Failing to plan your spending over time can not only hurt your finances in retirement, it can also increase the risk you’ll run out of savings. A retirement budget can help by accounting for all of your income and expenses in a comprehensive and long-term manner.

Do you need help with your retirement plan? Consider speaking with a financial advisor.

Why Having a Retirement Budget Is Important

Spending money during retirement is a challenge because most retirees have limited income sources outside of their savings. Yes, there are Social Security benefits, but Social Security alone often isn’t enough to live off of, especially if you plan to travel. To ensure you don’t draw too quickly from your savings, it can be helpful to create a plan for your spending. This plan is your retirement budget.

Some people don’t the word “budget” because they feel it has a negative connotation. The word makes people think of depriving themselves of the things they want. But a budget isn’t about depriving yourself. Rather, it’s about making sure you have the funds necessary to spend on the things you truly want in retirement.

How Much Will You Spend in Retirement?

When planning your retirement budget, a good place to start is figuring out how much you’re likely to spend. Most people spend significantly less each month after they retire than they did before. A rule of thumb is that you can expect your expenses to be 70% to 80% of what they were before you retired. So, if you spent $5,000 each month before you retired, you could expect to spend about $3,500 to $4,000 each month in retirement.

Now, this is just a rule of thumb. Your exact spending will depend on where you live, your lifestyle and how much you have in your retirement savings. So, while the 70% to 80% figure is useful for getting you started, you should take your calculations a step further, creating a more specific plan for your spending that’s tailored to your situation.

Making a Retirement Budget: 4 Steps to Follow

Starting a budget from scratch can seem like an overwhelming undertaking. But broken down step by step, it becomes a more manageable—and even empowering—exercise.

1. Know Your Income

Start your retirement budget planning by considering what your retirement income will be. Do have a pension plan? How much will you make each month from Social Security benefits? (If you’re unsure, try this Social Security benefits calculator. It will tell you how much you can expect based on what your income is and when you retire.)

Look at your retirement savings across all of your accounts. You may have some money in an employer’s 401(k) and some in an IRA. If you switched jobs at any point and didn’t roll over a 401(k), you may have money saved with a previous employer. Some people also have annuities that pay a certain amount each month.

Write down all of your sources of income and how much you plan to make each month.

2. Add Up Existing Expenses

A couple reviewing their retirement budget.

Once you know how much money you’ll have each month, the next step is to figure out how much you’ll spend. Look over your bills from the months leading up to retirement in order to see where your money is going.

It’s a good idea to label your expenses as either essential or nonessential. Essentials are the things that you have to spend money on. This includes any rent, mortgage payments, loans, household bills and groceries. Nonessentials are the things you don’t absolutely need to have to get by. This would include subscriptions, dining out and travel.

Write down all of your essential monthly expenses in one place. Adding these up tells you the bare minimum that you need to spend each month. If you ever get into a financial bind, this is the figure you should fall back on. You can’t cut out these expenses without creating financial or personal risk, but you can cut out expenses like streaming subscriptions and morning lattes when you need to save.

Note that some expenses, like a mortgage payment, are “fixed expenses,” meaning you’ll pay the same amount every month. Expenses like an electric bill, on the other hand, are probably variable, as you pay a different amount each month. For variable expenses, look back over the past year or so and take an average of how much you spent. That average will be a good amount to use for your monthly spending as you come up with a retirement budget.

3. Consider Any Potential New Expenses

For the most part, your essential expenses will be similar both before and after retirement. If you were paying rent before you retired, you’ll still have to pay rent after you retire. However, some costs will shift.

One of the biggest changes to consider is healthcare. Most employers give their employees some kind of assistance with healthcare. That often means paying some or all of an employee’s premiums. Naturally, your employer won’t pay any premiums after you retire.

You are eligible for Medicare benefits once you hit 65, but there may be a gap between when you retire and when you receive Medicare benefits. So, depending on when you plan to retire, you’ll be paying for some or all of your own healthcare services. Make sure to include all of those expenses in your retirement budget. Even if you’re eligible for Medicare, it’s highly possible you’ll pay more for health insurance than you did before you retired.

It could even be helpful to talk to your doctors. The next time you go to your primary care physician or dentist, ask them how costs typically change for older patients. They should be able to offer some idea as to how their prices change for their patients as those patients get older.

Don’t forget to consider your taxes, too. You’ll have less income in retirement, so you’ll likely have lower taxes. That said, the tax man won’t disappear from your life entirely. First of all, Social Security benefits are taxable at the federal level. Many states, however, don’t tax Social Security payments. Withdrawals from tax-deferred accounts like 401(k) plans and traditional IRAs are also subject to federal income tax, though, again, state tax laws vary.

4. Make a Plan for Enjoying Your Golden Years

The last part of making your retirement budget is adding in the fun expenses. How much of these you’ll include in your budget will depend on how you answered the questions in the previous paragraph. If you only have $200 of income left after paying essential expenses, you won’t be able to spend as much as someone who has $500 left.

To start, add in the things, big or small, that make life more enjoyable. This could include getting your nails done once a week, having dinner out with your best friend once a month or taking a camping trip every summer with your family. You don’t want to deprive yourself of the small joys in life. You just want make sure that you plan for those things in your budget.

Once you add these expenses into your budget, see how much you have left over. Anything that remains is yours to use however you choose. Pull out that bucket list. Have you always wanted to travel to Australia but could never get the time off work? Well, the time has come.

There’s only one thing you should do before spending any of your extra savings: Have a plan. Let’s say you want to travel and take multiple small trips. You don’t want to plan your first trip, add on all the extras and end up blowing your whole retirement travel budget. Or, maybe the opposite is true, and you want to take a huge trip now and spend the rest of your retirement relaxing. You can make most things work as long as you have a good plan.

Retirement Budgets vs. Other Types of Budgets

The mechanics of building a budget stay largely the same in retirement. You tally income, separate essential from discretionary expenses and plan accordingly. What changes is where the money comes from and how predictable that income is.

During your working years, a paycheck arrives on a fixed schedule and typically grows over time through raises or promotions. In retirement, income shifts toward sources you control more directly, including Social Security, withdrawals from retirement accounts, pensions and any part-time work. That income generally does not grow the way a salary does.

This shift reshapes how much margin for error a budget can afford. A working-years budget that runs short one month can often be corrected by taking on an extra shift or making a temporary cutback, since more income is typically on the way. But a retirement budget draws down a finite pool of savings. This means overspending in one stretch can have a lasting effect on how long those savings last.

Sequencing withdrawals also matters more in retirement. Decisions about which accounts to draw from first, how withdrawals affect your tax bracket and how Social Security timing interacts with other income sources are budgeting questions that simply do not exist during your working years. A retirement budget has to account for these in a way a standard household budget does not.

How to Adjust Your Budget as Retirement Progresses

A retirement budget is not a one-time exercise. Spending patterns shift meaningfully over the course of a 20- or 30-year retirement. As a result, a budget built at 65 may not reflect what your finances actually look like at 75 or 80.

The early years of retirement tend to involve the most discretionary spending. Travel, hobbies and other activities you finally have time for often peak in this stage, while essential expenses remain relatively stable. As the years go on, many retirees naturally spend less on travel and entertainment simply because they are less inclined or less able to do as much.

Healthcare spending tends to move in the opposite direction. Early retirement healthcare costs may be limited to insurance premiums and routine care. Later, however, expenses often climb as health needs increase. Long-term care, whether at home or in a facility, is one of the largest and least predictable costs many retirees face. Rarely does it fit neatly into the budget built at the start of retirement

Inflation also compounds over time in ways that are easy to underestimate early on. A budget that comfortably covers expenses in the first few years of retirement can fall short a decade later if it was never adjusted for rising costs. In particular, pay attention to healthcare costs, which tend to increase faster than general inflation.

Reviewing your budget every year or two, rather than treating it as a fixed plan, allows you to catch these shifts before they create a financial strain. At each review, compare your actual spending against your original plan, check whether your essential and healthcare costs have changed and adjust your discretionary spending accordingly. If you’re depleting your savings faster than expected, an earlier adjustment gives you more options than you wait until the shortfall became urgent.

Bottom Line

A husband and wife traveling during their retirement.

A retirement budget will allow you to track how much you’re spending and to spread your savings out so that you can live the retirement lifestyle you want. The firs step in making one is to asses your anticipated income, considering soruces like Social Security, 401(k)s and IRAs. From there, determine your expenses, creating a baseline for how much you need to spend each month. From there, add in the fun things that help you enjoy life.

And if this whole process seems like a lot of work, remember that doing this now will make things easier for you down the road. No one wants to spend their retirement worrying about money. Having a plan will allow you to focus on the things that really matter to you.

Things to Consider in Retirement

Alongside a retirement budget, retirees have many other financial needs, like investing, taxes, insurance and more. A financial advisor can be helpful in these areas, and finding one doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. From there, you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Creating an estate plan is something most retirees will need to think about, too. No matter how much money you have, you want to make sure your loved ones will be taken care of after you pass.