How To Budget for Retirement

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.

Your expenses can be broken down into three major categories — essential expenses, nonessential expenses and 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.

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.

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.

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.

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.

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.

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.