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 stay retired—which is sometimes easier said than done.

We’ve talked to lots of people who retired but then had to unretire because they didn’t plan well and 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 and it also brings you peace of mind.

So to help you get started, here are five steps to creating your retirement budget:

1. Add up your income streams.

2.  List your expenses.

3. Create a zero-based monthly budget.

4. Plan your distributions carefully.

5. Track your spending.

Think of your income streams as buckets of money that you’ll pull from in retirement. Hopefully, you’ve been investing consistently for years and building wealth in a diverse set of “buckets” that will now replace your paycheck!

As you get closer to retirement, sit down with an investment professional and make a list of all of your income streams, like the following:

• Tax-advantaged retirement accounts, like 401(k)s, 403(b)s and Roth IRAs that hold your investments.  
• Social Security benefits are the icing on the cake of your retirement fund—not the cake itself! Today, the average Social Security retirement payment is about $1,867 per month—that’s not enough to live on for most people. It’s up to you secure your retirement future, not Uncle Sam.  
• Pensions, which provide a steady monthly payment for the rest of your life in retirement, are a thing of the past for many Americans. But if you’re on a pension plan with your employer, get the details from HR.  
• Part-time earnings can provide some extra cushion to your budget if you plan to 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 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 (although we don’t typically recommend them).

Total up your projected income based on all of the revenue streams you plan to pull from, 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.  

Trying to estimatefigure out how your expenses will change once you retire (think health care or travel costs) can be a challenge. But those changes to your monthly and yearly are one of the main reasons why making a retirement budget is so important in the first place!

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

When you list out your expenses, start with the essential expenses:

• Groceries
• Health Care Costs
• Personal Care (like hygene)
• Utilities
• Home repair and maintenance
• Transportation
• Tithing and charitable giving

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!

Next, list out your nonessential expenses:

• Travel
• Subscription services
• Gyms
• Hobbies
• Gift giving
• Pet care
• Clothing

And lastly, list your seasonal expenses:

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

Pro tip: Don’t forget to give yourself a miscellaneous category too so you’ve got a little extra cushion in your retirement spending. That way, anything that pops up unexpectedly isn’t a problem—it’s in the budget.

Once you’ve listed out your expenses, use them as your retirement budget starting point. Have a brainstorming session about what you currently spend on each of those line items. Then consider which expenses will likely increase or decrease in retirement.

What expenses might go up during retirement?

Health care costs may be the biggest expense you can expect to increase in retirement. A recent estimate from a Fidelity study suggests an average retired couple will need about $315,000 to cover all their medical expenses in retirement.¹ That’s because as you age, you’re more likely to have health problems.

Health care costs aren’t the only expense you have to keep in mind. You’ll still have monthly bills. How you budget for these will depend on what you want to do when you have more time and more money than ever before. Here are some expenses to think about:

• Utilities. If you plan on sticking close to home, you’ll probably use more electricity, water, heat, cooling, etc.
• Recreation. If you plan to travel the world or visit the grandkids living out-of-state, this expense will definitely increase.
• Property taxes. Most of the time, these taxes go up as home values rise.
• Hobbies. This could go up, especially if you choose to golf seven days a week or start car collecting! Even more budget-friendly hobbies can be costly, so keep an eye on those line items in your budget.

What expenses might go down (or go away completely)?

The biggest expense you shouldn’t have to worry about in retirement is debt.

Hopefully, you’ve done the Baby Steps and said goodbye to your mortgage, student loans and any other debt that might have been lying around. Why? Because debt is retirement quicksand. It’ll delay your retirement dream by eating up your monthly income and leaving you with little to no margin in your retirement budget.

Make getting out of debt the priority before you retire!

If you kick your mortgage and consumer debt to the curb before you retire, you can focus on spending your income on the things you’ve been looking forward to the most in retirement, like spending more time at the lake house, volunteering at your favorite charity, or traveling through Europe.

And it’s not just your debt payments that might go away—other variable expenses might go down in retirement:

• Entertainment. Lots of movie theaters, sports venues and fun centers offer senior discounts.
• Travel. Some airlines, hotels and rental cars offer a senior rate for those 65 or older—if you ask for it!
• Clothing. If you don’t have to dress professionally for work anymore, you can lower this category in your budget. And as a bonus, some retailers will offer senior discounts on a particular day of the week.
• Groceries. Yep, lots of stores knock down the prices on a weekday, so you can benefit from that!
• Gasoline. If you’re no longer commuting, you can lower this budget amount. But if you plan on lots of trips to see grandkids, your gas budget may actually go up!
• Memberships/subscriptions. Again, some companies offer senior discounts. Ask!

Now that you have a good idea of what your income and expenses will look like in retirement, you can use those numbers to create a zero-based monthly retirement budget.

Zero-based budgeting is when your income minus your expenses equals…you guessed it…zero.

So, for example, if all your retirement income streams total $5,000 per month, then everything you give, spend, and save should add up to $5,000. Every dollar should have a purpose—a job to do for the month.

If you’re new to zero-based budgeting, it may take a few months to iron out the wrinkles and figure out how much of your income is allocated to which budget item, but that’s okay! Practically no one gets this right the first time. Don’t be afraid to move things around and make adjustments to your budget. The goal is to give every dollar an assignment.

Most likely, your 401(k) or IRAs will be your biggest “bucket.” Whenever you stop working or by the time you reach a certain age, you’ll start taking out distributions (aka withdrawing 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 questions 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 your money invested in the right mix of good growth stock mutual funds).

Required Minimum Distributions

If you have a tax-deferred retirement account, like a traditional 401(k) or IRA, you need to be aware of required minimum distributions (RMDs). The IRS requires you to start taking money out of your retirement account at age 72 or 73, depending on the year you were born.²

It’s important to remember that these RMDs will be taxed like regular income, so make sure you’re setting aside money to pay for those taxes!

On the other hand, if you’ve been saving in a Roth account, you don’t need to worry about RMDs because you’ve already paid income taxes on the money you put in. As far as Uncle Sam is concerned, you don’t have to take any money out of a Roth account ever!

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 the money to your loved ones once you’re gone.

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!

Start Getting Ready For Retirement Today

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!

The good news is you don’t have to do this alone. It’s a lot easier to chase your retirement dreams and goals when you have someone cheering you on and giving you advice. That’s why we recommend you get an investment professional on your team to help you along the way.

Our SmartVestor program can connect you with a pro who can look at all your income streams and help you plan your distributions. Then you can create a retirement budget with confidence.

 

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.