How To Budget for Retirement
Your retirement budget balances your income against your expenses. You’ll generally need about 80% of your former income to live comfortably in retirement. So, if you earned $100,000, your income from all sources should be $80,000. Calculate your monthly budget by subtracting your essential and nonessential expenses from your income.
- Written by Terry Turner
Senior Financial Writer and Financial Wellness Facilitator
Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).Read More
- Edited ByLamia Chowdhury
Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.Read More
- Financially Reviewed ByToby Walters, CFA®
Toby Walters, CFA®
Chartered Financial Analyst and Paraplanner
Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.Read More
- Published: March 22, 2023
- Updated: October 13, 2023
- 9 min read time
- This page features 15 Cited Research Articles
- Edited By
- Your retirement budget begins with your income, which should generally be 80% of your pre-retirement income.
- Your retirement income will likely derive from several sources, including Social Security, pensions and personal assets.
- Divide your expenses into three categories, essential, non-essential and irregular, and subtract them from your income.
- It’s wise to test your retirement budget while you’re still working to determine whether it works for your lifestyle.
Creating a Retirement Budget
Creating a retirement budget is an important step to ensure your savings will last through your lifetime. It’s a good idea to create and test your budget while you’re still working, so you have time to adjust it as needed.
As with any budget, your retirement budget is a way to ensure your expenses don’t exceed your income. During your working years, your income probably came from one main source. In retirement, you’ll likely have several income streams, including Social Security and other retirement funds. As for expenses, some will increase when you retire, but others will decrease.
Your budget should have some wiggle room. If your income and expenses cancel out, then you’ll have nothing left over for unexpected events or emergencies.
Preparing a budget for retirement is crucial since most retirees are drawing down from their savings and investments and not adding to them. A ‘practice’ retirement can help you prepare a budget. Take inventory of what you plan to do, whether it’s traveling, seeing friends and family, or planning to downsize your home. This will give you a better idea of what your expenses may add up to.
- Start with your income.
- According to USA.gov, you should plan a retirement budget with 80% of your previous income. Be sure to consider all your sources of income, including Social Security, defined benefit or defined contribution pensions, income from IRAs or Roth IRAs, along with any employment or other income (real estate rentals, etc.).
- Calculate your expected expenses.
- What are your housing costs? If you have a mortgage, will it be paid off when you retire? While your day-to-day costs for groceries will likely stay the same (changing only for inflation), your gas and car expenses will likely decrease without a daily commute to work. Include all your personal care and hygiene expenses, as well.
- Consider the lifestyle you want.
- What are your plans for retirement? Do you want to travel? What hobbies or entertainment will you pursue? Do you plan to stay in your home, in the same city or state? These are big questions that will affect your budget.
- Subtract your expenses from your income.
- If your expenses are higher than your income, you will have to make some choices. Are there ways to increase your income? Or will you have to sacrifice some retirement plans? If your income is higher than your expenses, you’re on the right track.
- Create and track a test budget.
- Try your estimated budget in the real world to see if it works the way you want. Are you able to do the things you want to do and live the life you want to have? Don’t be afraid to adjust your plan as needed.
Common Expenses in Retirement
Your expenses can be broken down into three major categories — essential expenses, nonessential expenses and irregular expenses.
- Essential expenses
- This includes everything you need to maintain your life, such as housing, food and transportation expenses. Insurance such as health care also fall in this category, as well as any regular family expenses like support or contributions to education.
- Nonessential or optional expenses
- These are the expenses that increase your enjoyment of life, but don’t impact your ability to live, including entertainment from movies and book purchases to memberships in social clubs. Your hobbies fall in this bucket as well, including travel, eating out, athletic memberships, the cost of any courses you take and your charitable donations.
- Irregular expenses
- These expenses can’t always be planned for, but they can be estimated. These are one-time expenses, like wedding or funeral expenses, emergency car or home repairs, and similar unexpected costs. Your budget needs to have enough room to deal with occasional irregular expenses.
A report from the Bureau of Labor Statistics lists the average amount of common expenses per year for people 55 years and older. Housing is the single largest expense, followed by transportation.
- Housing: $23,007
- Transportation: $10,936
- Insurance: $9,403
- Groceries: $8,419
- Health care: $6,093
- Entertainment: $3,700
- Restaurants: $2,895
Changes in Spending
Some of your expenses will change when you retire. For example, if you commuted to work by car, you will use less gas and need less auto maintenance when you retire. Costs for business wear, lunches out and similar work-related expenses are also likely to drop.
Timing also plays a part in annual spending. If you pay off any outstanding car or home loans before you retire, you won’t need the additional income to cover such bills.
Other expenses may rise, however. For example, you may want to budget for travel plans. In addition, inflation will increase the price of everyday items each year — and most importantly, health care costs will go up.
Account for Health Care Costs
Health care expenses tend to rise in retirement. Not only does health decline with age, but out-of-pocket expenses increase, as do health insurance premiums. In 2022, Medicare premiums rose more than 14% — one of the highest increases ever, according to a report from Kaiser Family Foundation.
Americans are also living longer lives than before, which means more likelihood of illnesses and accidents that may require lengthy and/or costly recoveries. In fact, most Americans 65 and older are likely to need long-term care at some point, which isn’t covered by Medicare, according to LongTermCare.gov. Medicare also does not cover most dental, hearing or vision care.
It’s also important to note that women spend more on health care in retirement than men, mostly because women live longer. A study from the Employee Benefit Research Institute (EBRI) estimates that a man will need $166,000 saved to have a 90% chance of covering all his health care spending needs in retirement, while a woman would need $197,000.
Taxes and RMDs
When creating your retirement budget, carefully evaluate your tax liability so you can account for the amount you will owe during tax season. If you are 65 and older with a gross income of $14,700 or more, you will need to file a tax return with the IRS.
If your only income is Social Security, you may not have to file at all. But if you have any other sources of income or earn wages of any kind, a tax return is required.
To avoid tax penalties when you reach the age of 72 (or 73 if you turn 72 after Dec. 31, 2022), you must withdraw a required minimum distribution (RMD) from your retirement account every year.
Calculating Your Income in Retirement
A sufficient retirement income is entirely relative to the person. An income that may not be enough to maintain a continued standard of living in one household might seem excessive to another. Your assets, health, lifestyle and location will determine the retirement income that is right for you.
As your plans evolve, your needs and expenses may change with them. That said, 80% of your pre-retirement salary is a good place to start. Add all your sources of income together to see if you reach that mark.
Factors That Affect Retirement Income
Your retirement income is derived from several sources. Having several income streams is the best way to ensure financial security through your golden years.
Social Security plays a major role in retirement income. Last year, more than 48.6 million American retirees received a Social Security benefit, with an average monthly benefit of $1,825, according to the Social Security Administration. The exact amount you receive will depend on your age, earnings history and when you start collecting your benefit. But Social Security is not meant to be your sole means of income in retirement.
Pensions are another source of retirement income, whether it’s a defined benefit pension supplied by your employer or a defined contribution pension like a 401(k). Your own retirement assets, like IRAs or Roth IRAs can also contribute to your retirement income.
You might have other sources of income as well, including dividends from stocks, income from any annuities you hold, or from rental properties. Employment can play a part in your retirement income as well, with about 20% of people 65 and older working in some capacity to earn wages.
If you can’t seem to get your retirement budget working, there are resources available. A trusted financial advisor can help you find all the information you need to make informed decisions, like what your sources of income might be or how much monthly expenses to budget for.
Your bank or credit union should also have resources for you to use, whether in person or online. The SSA will give you an estimate of what your Social Security benefit would be based on the age you start collecting. There are also free programs to assist seniors with tax preparation. Plus, the Department of Labor has several worksheets to track your savings fitness plan.
Retirement Budget Worksheet
A budget worksheet is an excellent resource. It can help you outline all your income and expenses, even those small items you might have otherwise forgotten. The Federal Trade Commission has both basic information and a budget worksheet you can use. Your financial institution should also be able to offer you a similar checklist, and there are countless apps, both free and for purchase, https://www.bulkorder.ftc.gov/system/files/publications/pdf-1020-make-budget-worksheet.pdfthat can help you prepare a budget.
Simply put, your entire retirement plan is about figuring out how much you’ll need to live the kind of lifestyle you strive to maintain in retirement. Once you have a solid idea what that amount might be, the next step is to ensure you’re on the right track to get there.
- Create a realistic goal
- Determine if you are saving enough to meet that goal
- Present options if you need to adjust your plan
FAQs About Budgeting in Retirement
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15 Cited Research Articles
- Spiegel, Jake & Fronstin, Paul. (2023, February 9). Projected Savings Medicare Beneficiaries Need For Health Expenses Remained High In 2022. Retrieved from https://www.ebri.org/publications/research-publications/issue-briefs/content/projected-savings-medicare-beneficiaries-need-for-health-expenses-remained-high-in-2022
- Neuman, Trica et al. (2022, January 12). Monthly Part B Premiums and Annual Percentage Increases. Retrieved from https://www.kff.org/medicare/slide/monthly-part-b-premiums-and-annual-percentage-increases/
- Rutledge, Matthew S., & Sanzenbacher, Geoffrey T. (2019, January). What Financial Risks Do Retirees Face In Late Life? Retrieved from https://crr.bc.edu/wp-content/uploads/2018/12/IB_19-1.pdf
- Administration of Community Living. (n.d.). Who Needs Care? Retrieved from https://acl.gov/ltc/basic-needs/who-needs-care
- Bureau of Labor Statistics. (n.d.). Table 1300. Retrieved from https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/reference-person-age-ranges-2021.pdf
- Federal Reserve. (n.d.). Economic Well-Being of US Households (SHED). Retrieved from https://www.federalreserve.gov/publications/2022-economic-well-being-of-us-households-in-2021-retirement.htm
- Federal Trade Commission. (n.d.). Make A Budget. Retrieved from https://www.bulkorder.ftc.gov/system/files/publications/pdf-1020-make-budget-worksheet.pdf
- Federal Trade Commission. (n.d.). Making A Budget. Retrieved from https://consumer.gov/managing-your-money/making-budget#what-it-is
- Internal Revenue Service. (n.d.). Free Tax Return Preparation for Qualifying Individuals. Retrieved from https://www.irs.gov/individuals/free-tax-return-preparation-for-qualifying-taxpayers
- Internal Revenue Service. (n.d.). Publication 501 (2022). Retrieved from https://www.irs.gov/publications/p501#en_US_2022_publink1000220687
- Internal Revenue Service. (n.d.). Publication 590-B [Appendix B]. Retrieved from https://www.irs.gov/publications/p590b#en_US_2021_publink100089977
- Social Security Administration. (n.d.). Fact Sheet. Retrieved from https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
- Social Security Administration. (n.d.). Plan For Retirement. Retrieved from https://www.ssa.gov/prepare/plan-retirement
- US Department of Labor. (n.d.). Savings Fitness Worksheets. Retrieved from https://www.askebsa.dol.gov/SavingsFitness/Worksheets
- USA.gov. (n.d.). Saving for Retirement. Retrieved from https://www.usa.gov/retirement
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