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Ask Our Retirement Expert

Have a question? Ask our Retirement expert.

Have questions? Email Send your question to jbarnash@smartasset.com

making a retirement budget 1

You’ve worked hard for decades and now the time has come to enjoy yourself. Regardless of what you do in your retirement, you should always be aware of how much you have left for retirement savings. There isn’t just a danger issue of running out of savings, you can also hurt yourself by not spacing out your spending. This is where a retirement budget really helps.

Why Is a Retirement Budget Important?

Spending money during retirement is a challenge because most retirees have little income outside of their savings. Yes, there are Social Security benefits, but those are not enough to live off (especially if you plan to travel). To ensure that you don’t draw too quickly from your savings, it is useful to create a plan for how you will space out your spending. This plan is your retirement budget.

Some people do not like using the word budget because they feel that the process of budgeting has a negative connotation. It makes people think of depriving themselves of the things they want to do. However, a budget isn’t about depriving yourself. It’s about making sure that you have the necessary funds to spend money on the things you actually want to spend money on.

How Much Will You Spend in Retirement?

When planning your retirement budget, this is a good question to start with. Most people spend significantly less each month after they retire than before they retired. The rule of thumb is that you can expect your expenses to be 70% to 80% of what they were before you retires. So if you spent $1,000 each month before you retired, you could expect to spend about $700 to $800 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 retirement savings. So while the 70% to 80% figure is useful for getting you started, you should create a more specific plan for your spending.

Retirement Budgets vs. Other Budgets

As you start a budget, you may first want to check out this article on how to make a budget. It will walk you through the steps of creating a general budget. The process for creating a retirement budget will be similar with a few retirement-specific things considerations. For example, your retirement income may come largely from personal savings instead of from an employer.

Making a Retirement Budget: Your Income

Start your retirement budget planning by considering what your retirement income will be. Do have any pensions? How much will you make each money 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 your income and when you retire.)

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

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

Making a Retirement Budget: Your Expenses

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You know how much money you will have each month. The next step is to figure out how much you will spend each month. 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 each month. This includes any rent, mortgage payments, loans, household bills and groceries. Nonessentials are the things you don’t need to have in order to get by in life. This would include magazine subscriptions, eating out at restaurants and travel.

Write down all of your essential monthly expenses in one place. Adding up expenses tells you the bare minimum that you need to spend each month. If you ever get into a financial bind, this is the spending number you should fall back on. You cannot cut out these expenses without exposing yourself to some financial or personal risk. Meanwhile, things like TV subscriptions and morning lattes can all be cut when you need to save.

Note than some expenses, like a mortgage payment, are be fixed expenses – you pay the same amount every month. Things like an electric bill are probably variable – 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 number to use as your monthly spending amount.

Making a Retirement Budget: New Expenses

For the most part, your essential expenses will be similar before and after retirement. If you were paying rent before you retired, you will still have to pay rent after you retire. However, some things will change. 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 will not pay any premiums after you retire.

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

It may 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 will not give you any confidential information about other patients, but they should know generally how their patients’ prices change as they get older.

Don’t forget to consider your taxes either. You will have less income in retirement and so you will have lower taxes, but the tax man won’t disappear entirely from your life. First of all, Social Security benefits are taxable. Withdrawals from tax-deferred accounts like 401(k) plans and traditional IRAs are also subject to income tax.

Making a Retirement Budget: Fun Expenses

You now have a baseline spending plan. You need to spend enough to cover all your monthly essentials (and healthcare). Compare this to your retirement income. How much does your Social Security cover? If you will need to use your retirement savings to cover expenses, how much will you need to spend each month? And how many years will your savings last based on just your essential expenses?

Well the last big part of making your retirement budget is adding in the fun expenses. First of all, how much of these fun expenses you include in you budget will depend on how you answer 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 of income left after essentials.

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

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

There is 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 blow 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 if you have a good plan for them.

The Takeaway

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Everyone wants to enjoy retirement but no one wants to run out of money after a few years. 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 lifestyle you want. As you think about income, don’t overlook anything. Consider Social Security, 401(k) savings and IRAs. Look back at old employers to make sure you haven’t forgotten about any savings.

As you look at expenses, start with the essentials. Create a baseline for how much you need to spend each month. After you compare your necessary expenses to how much income you will have each month, you can add in other expenses. Add 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 easy for you years 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 Your Retirement

  • Most of the savings that you have in retirement will come from your working years. However, you can still help yourself in retirement by putting money in a high-interest savings account. Every dollar helps in retirement but saving is hard. A good savings account will make your money do some of the work for you
  • Managing an estate is something that many retirees should think about. No matter how much you have, you want to make sure that your loved ones will be taken care of after you pass. To help you plan, consider working with a financial advisor. A financial advisor who works with trusts and estates will help you make all the necessary considerations for you to pass the torch onto the next generation.

Photo credit: ©iStock.com/shapecharge, ©iStock.com/seb_ra, ©iStock.com/AleksandarNakic

Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society of American Business Editors and Writers and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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