Retirement Budget Planning: 9 Steps to Consider

Ready for retirement planning? Here are nine categories to help you start budgeting for retirement.

Planning ahead for your retirement years can aim to provide additional confidence and financial security. And with increased life expectancy, a retirement budget can take into account your future income and spending over a longer period of time.

There are no clear rules about how much you might spend in retirement because everyone is different. But one of the first things you might want to consider doing is getting a handle on the line items in your retirement planning budget and determining your retirement “needs, wants, and wishes.”

How to budget for retirement: Getting started

Start by separating your spending into two buckets: mandatory (your “needs”) and discretionary (your “wants and wishes”). Then, compare them to your expected income in retirement.

Start with the mandatory expenses. Consider the spending items that you’ll really need, such as transportation, clothing, housing, and medical insurance costs. Note that your “needs” may shift up or down over time, which is why it’s important to go over your budget each year.
Next, determine your discretionary expenses. What items and activities are on your retirement “want” list? Travel, activities, child’s wedding, a car, spoiling the grandkids? Also, note if these items may change over time.
Once you reviewed your expenses, consider your retirement income. Where will the money come from? Add up income from pensions, Social Security, and any other nonportfolio sources. Subtract that number from your target annual income to determine how much money you’ll need to generate from your portfolio, such as your 401(k), IRA, or brokerage accounts. Also, account for other future sources of income; for example, perhaps you’re planning to downsize into a smaller, less expensive home and add the proceeds to your nest egg.

Building out a realistic budget can help you increase the likelihood that you’ll fulfill your future goals and enjoy the life you envision.

What’s on your spending list?

Many people never take a good look at all the things they spend on. That might be OK if you have a paycheck coming in every week or two, but once those paychecks stop coming and you’re relying on your savings, it could be time to look at your receipts.

One key is to try to understand exactly what you’re spending your money on now. You can start by following these steps:

Analyze your credit card and checking account statements by looking over the annual summary to help determine your average monthly spending.
Compile a list of the essentials. Consider what spending areas may go down and what areas may go up in retirement.
Account for one-time purchases that occur infrequently (like a new car, replacing a roof, or buying a major appliance).
Remember that although living expenses might decrease with the kids out of the house, your travel expenses might rise if you’re taking lots of trips to visit the grandchildren and health expenses typically increase as you age.

Take the time to give your retirement situation and its changes from your working life a thorough and serious review. Sure, once you retire, you won’t need a professional wardrobe, and you might not go out for lunch as often—but then again, you might. In fact, the more time you have on your hands, the more likely you are to fill that time with activities that increase spending.

For example, you may find you want to travel more in retirement, perhaps to see your grandchildren or to explore new cities. By scrutinizing the line items in your budget, analyzing your expenses, and allocating funds correctly, you can be better prepared to finance any trips you envision and any costs for your overall lifestyle in retirement years.

Line items to consider

Here are nine categories to help you start building your retirement budget.

1. Housing expenses. Will your mortgage be paid off by the time you retire? If so, congratulations. If not, this could remain a major line item in your budget. And you’ll still need to include property taxes and perhaps homeowner association (HOA) fees.

2. Home maintenance. Dishwashers, refrigerators, and other appliances eventually need to be replaced. You probably haven’t thought about your water heater for years—that is, unless you recently had one break down. And are you planning to take care of your lawn and other household chores, or would you like to hire someone?

3. Health insurance. For most people, a Medicare supplement policy will be a must. And if you’re retiring before the age of 65, you need to budget additional dollars for the cost of health care until age 65 when Medicare eligibility occurs.

4. Long-term care insurance. A long-term illness could destroy a couple’s financial situation, making it difficult for the healthy spouse to succeed financially if all the money is going toward the long-term care of the other spouse.

5. General living expenses. Food, utilities, cell phone, internet, gas, car maintenance, and at least a modicum of entertainment are among the necessities of life.

6. Vacations. People have more free time in retirement and frequently travel more, especially in the first few years. If children are out-of-state, you need to account for travel expenses.

7. Hobbies. Expensive hobbies like golf or skiing can take significant resources and need to be included in the budget.

8. New car purchases. Will you still be driving during retirement? For how long? Cars eventually wear out and need replacing. Remember to factor in this major expense.

9. Short-term reserves. An adequate short-term reserve can help you avoid withdrawing from your portfolio during a bad market or when you have an unexpected expense. We suggest having enough cash on hand to cover a year’s worth of retirement expenses, plus another two to four years’ worth of spending needs in short-term investments like money market funds, certificates of deposit, or Treasury bills.

Courtesy Charles Schwab