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How to Create a Retirement Budget

You did it. You worked hard, planned ahead, and set aside money over the years to be able to retire. Congratulations! Now, the goal is to remain retired. We’ve talked to dozens of people who didn’t plan well, retired, and later had to unretire because they ran out of money. Talk about a letdown! 

The key to making sure you have enough saved is to create a retirement budget—and stick to it! Despite what most people think, a budget isn’t a killjoy. In fact, it sets you up for success. It gives you permission to spend. It also brings you peace of mind.

Two to three years before you retire, we suggest you take an honest look at what you’ll actually need to fund your lifestyle. Create a budget and try it out for a while. That way, you’ll know what adjustments to make. We want you to dream big. We also want you to be realistic and have a plan to make those dreams a reality!

Here are four steps to creating your retirement budget.

1. Add up your income streams.

We like to think of your income streams as buckets of money that you’ll pull from in retirement. Hopefully, you’ve been investing consistently for years to build wealth in a diverse set of “buckets” that will now become your paycheck!

Sit down with an investment professional and make a list of all of your income streams, like the following: 

  • Tax-advantaged retirement accounts, like a 401(k), 403(b) or Roth IRA.  
  • Social Security benefits are the icing on the cake of your retirement fund—not the cake itself! We don’t want to you to count on Uncle Sam to take care of you in retirement, but you can calculate your Social Security benefits to know how much to expect. 
  • Pensions are a thing of the past for many Americans, but if you’re receiving a pension from your employer, get the details from HR.  
  • Part-time earnings: Do you plan to still work here and there in retirement? Add up how much you think you’ll make each year.  
  • Taxable investments are a way to save for retirement, especially if you’re a high-income earner. If you’ve got money put away in a brokerage account, you can start to withdraw money during retirement.  
  • Real estate can be a steady source of passive income—just make sure you don’t carry a single penny of mortgage debt into retirement!     
  • Annuities are an insurance product that many people use to fund their retirement years. 

Total up your projected income based on all of these revenue streams, then divide that number by how many years you plan to live in retirement. This is a rough ballpark number for your annual income. From there, you can break it down into monthly income.  

2. Plan your distributions carefully.

Most likely, your 401(k) or IRAs will be your biggest “bucket.” When you reach a certain age, you’ll begin to take distributions (or withdraw money) from these accounts. Planning when, how and from which accounts you’ll take distributions is a crucial part of creating your retirement budget.

We can’t emphasize how important it is to work with an investment professional as you make these calculations. Don’t risk a big mistake—your future is too important! An investment pro will help you navigate all the debate about how much to pull out and when to do it. 

The main thing is to make sure you’re not pulling out so much that you “kill the golden goose” and stop the growth on what you still have invested. In theory, your portfolio will continue to grow (if you keep it all well-balanced in the right mutual funds).

Required Minimum Distributions

If you have a traditional retirement account, like a 403(b) or 401(k), you need to be aware of required minimum distributions (RMDs). The IRS requires you to start taking money out of your retirement account at either 70 or 72, depending on the year you were born.


How much will you need for retirement? Find out with this free tool!

Use the RMD worksheets on the IRS’s website to understand how much you’ll be required to take out of your account. It’s important to remember that these will be taxed like regular income, so make sure you’re setting aside money to pay for those taxes!

If you’ve been saving in a Roth account, you don’t need to worry about RMDs. As far as Uncle Sam is concerned, you don’t have to take any money out of a Roth account ever! You’ve already paid income taxes on that money. If you want to let your Roth account grow and grow, you could theoretically never touch it (if you have other funds to live on) and leave it to one of your beneficiaries once you’re gone.

3. Have a plan for health care expenses.

As you age, you’ll notice a lot of new aches and pains. Things just don’t work like they used to! You can expect one particular expense to increase as you get older—health care. A recent study from HealthView services projects that the average, healthy 65-year-old couple retiring this year will need $387,644 to cover health care costs over 20 years!1 If you divide that number by 20, it adds $19,382 to your annual expenses, or $1,615 each month!

Our best piece of advice for health care planning is to talk with an insurance professional. Here are a few questions an insurance professional will walk you through:

  • Have you reviewed your health care insurance, and do you understand your coverage?
  • Do you have long-term care insurance in place?
  • Have you applied for Medicare?
  • Do you have money set aside in an HSA, or are you eligible to open one?

Insurance is a complicated topic. And one hospital visit could put you in the hole for a long time! So, make it a priority to meet with an insurance pro!

4. Create a zero-based monthly budget.

A zero-based budget helps you spend all your money on paper and on purpose. You used a budget to get to retirement, and this budget will help you stay in retirement! You never outgrow the need to plan and track your spending.  

What is a zero-based budget?

A zero-based budget totals up your monthly income and deducts your expenses so that nothing is left over. It helps you make sure you’re spending, saving or giving every single dollar exactly how you should. You can read more about how to create a zero-based budget, but here’s a summary of the steps:

  1. Write down your monthly income (from your “retirement buckets”).
  2. Write down your monthly expenses.
  3. Write down your seasonal expenses.
  4. Subtract your expenses from your income to equal zero.
  5. Track your spending.

List your monthly expenses.

When you’re ready to list your expenses, start by reviewing your most recent bank statement. Track where your money goes each month. You’ll be amazed when you notice all the ways your money leaks out of your bank account.

As you decide how to spend your money, it can be helpful to divide your expenses into different categories:

Essential expenses:

  • Tithing and charitable giving
  • Groceries
  • Utilities
  • Home repair and maintenance
  • Transportation (gas, car maintenance)
  • Clothing

Guess what you don’t see on this list: a mortgage payment. You shouldn’t carry a single penny of debt into retirement—including your mortgage!

Nonessential expenses:

  • Travel
  • Subscription services
  • Gyms
  • Hobbies (especially if you decide to start playing lots of golf in retirement!)
  • Gift giving (everybody loves those grandbabies!)
  • Pet care

Seasonal expenses:

  • Property taxes
  • Insurance premiums
  • Auto registration
  • Christmas, anniversary, birthday and special occasion spending

Use these categories as a starting point and keep brainstorming until you have a dollar amount for each monthly item. 

Start your sinking funds.

You should already have an emergency fund in place that will cover three to six months of living expenses if something were to happen to you. In retirement, you’ll also want to maintain sinking funds to pay for things like vacations, Christmas with the grandkids or new vehicles. Set your sinking fund as a line item in your budget each month and save the money for that particular goal in a high-yield savings account or a money market account. 

Manage your spending.   

It’s not enough to set a budget and hope for the best. If you don’t actually stick to it, it won’t do you any good! Once you create a monthly budget, you need to work with your spouse or a friend who can hold you accountable and keep your finger on the pulse of your spending.

Remember: You’re in control of your budget. Be intentional about the choices you make with money. Tracking your spending will help you stay away from stupid and stay close to your retirement dreams!

Build Your Retirement Budget in EveryDollar

We’ve just covered a lot of ground. To start creating a retirement budget, check out EveryDollar—our zero-based budgeting app that does all the calculations and heavy lifting for you. 

Make an Investment Plan With a Pro

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Find Your Pros

This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros. 

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About the author


Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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