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How to Make a Retirement Budget


You’ve worked hard for decades and now the time has come to enjoy yourself. 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. Many retirees worry about running out of savings. Not spacing out your spending can also hurt your finances in retirement. A retirement budget can help you face these fears by accounting for all of your income and expenses in a comprehensive and long-term manner.

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

Why Having a Retirement Budget Is 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 Social Security alone often isn’t enough to live off of, especially if you plan to travel. To ensure that 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 like to use the word “budget” because they feel that budgeting has a negative connotation. It makes people think of depriving themselves of the things they want. But a budget isn’t about depriving yourself; it’s about making sure you have the funds necessary to spend money on the things you truly want in retirement.

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 retired. 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 your 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 that’s tailored to your situation.

Making a Retirement Budget: 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 your income 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 money 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.

Making a Retirement Budget: 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 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 can’t cut out these expenses without exposing yourself to some financial or personal risk, but you can cut out things like TV subscriptions and morning lattes when you need to save.

Note that some expenses, like a mortgage payment, are “fixed expenses,” meaning you pay the same amount every month. Things 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.

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’ll 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 won’t 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’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 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 won’t give you any information that could be considered confidential, of course, but 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, but 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.

Making a Retirement Budget: Enjoying Your Golden Years

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’ll 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?

The last part of making your retirement budget is adding in the fun expenses. How much of these fun expenses you 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 just 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 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 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

As you start a budget, you might want to check out SmartAsset’s guide 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 largely similar, with a few retirement-centric things to consider. For example, your retirement income will likely come mostly from personal savings instead of from an employer. However, your expenses may be quite similar.

Bottom Line

A husband and wife traveling during their retirement.

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’ll have each month, you can add in other expenses. 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 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 Retirement

  • Other than 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 up to three vetted financial advisors who serve your area, and 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.
  • Get a good estimate of the average budget of a person in your neighborhood with our free budget calculator.
  • 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.

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