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How to Create a Comprehensive Retirement Budget in 5 Simple Steps Thumbnail

How to Create a Comprehensive Retirement Budget in 5 Simple Steps

Are you approaching retirement age and starting to think about how you'll manage your finances during this exciting yet often complex phase of life? Budgeting for retirement is absolutely essential to ensure you have sufficient income to cover your expenses and support the lifestyle you envision. But if you've never created a retirement budget before, the process can seem overwhelming.

Never fear! In this comprehensive, step-by-step guide, we'll walk you through exactly how to craft a detailed retirement budget tailored to your unique needs and goals. With our expert tips and strategies, you'll gain the knowledge and confidence to take control of your financial future and enjoy a secure, fulfilling retirement.

So grab a notebook, pour yourself a cup of coffee, and let's dive in!

KEY TAKEAWAYS

We've covered a ton of ground in this guide, so let's recap the most important points to remember:

  • Start by tallying up all your anticipated retirement income sources, including Social Security, pensions, part-time work, and investment returns. 
  • Next, make a comprehensive list of your expected expenses, categorizing them as needs, wants, and wishes.  
  • Subtract your monthly expenses from your monthly income to see if you have a surplus or deficit. 
  • Take inventory of your retirement investment accounts to determine your total liquid assets.
  • Decide on a withdrawal rate that will allow you to safely tap your portfolio to supplement your income. Consider the 4% rule as a starting point.
  • Build some flexibility into your budget for major one-time expenses and other curveballs. Review and adjust frequently.

Remember, there's no such thing as a "perfect" retirement budget. The key is simply having a realistic plan and proactively managing your money so you can spend retirement focusing on what matters most to you.

STEP 1: IDENTIFY AND CALCULATE ALL RELIABLE INCOME SOURCES

The foundation of any retirement budget is a clear picture of how much money you can count on coming in the door each month. For most retirees, income streams fall into a few main categories:

Social Security Benefits

Unless you're among the small minority of Americans who don't qualify, Social Security will likely make up a significant chunk of your retirement income. The amount you receive depends on factors like your 35 highest-earning years and the age when you start collecting benefits.

To get an accurate estimate, check your Social Security statement online (create an account at https://ssa.gov/myaccount/) or consult with your local Social Security office. If you haven't started benefits yet, it's well worth learning proven strategies to maximize your Social Security payouts.

Pension Payments

While increasingly rare, some lucky retirees still have access to a traditional pension through a current or former employer. If you've earned a pension, now is the time to get crystal clear on how much income you can expect and when it will start.

Contact your company's HR or pension administrator to request a pension statement detailing the specifics like your estimated monthly benefit, cost of living adjustments, survivor benefits, etc. Getting these details in writing will help you plan with greater certainty.

Part-Time or Consulting Work

Retirement doesn't always mean never working again! More and more retirees these days are choosing to take on part-time jobs, start side hustles, or do occasional consulting in their former fields. If you anticipate earning any income during retirement, factor those expected amounts into your projected income.

Just be sure to estimate conservatively and have a backup plan in case those earnings dry up down the road. And if you'll be self-employed, don't forget to budget for additional taxes you'll owe.

Investment Income

The final piece of the income puzzle is money generated by your investments, which may include:

  • Retirement accounts like 401(k)s, IRAs, and annuities
  • Taxable brokerage accounts holding stocks, bonds, mutual funds, etc.
  • Real estate investments and rental income
  • Income-producing assets like mineral rights, copyrights, or a business you own

Some investment income like stock dividends or interest payments will be relatively predictable, while earnings from assets like rental properties may fluctuate. To be safe, estimate your investment income on the low end to allow some wiggle room.

Tally It All Up

Once you have solid numbers for each income category, add them together to find your total projected annual and monthly retirement income.

Let's look at a sample expected monthly income breakdown:

Income Source Monthly Amount
Social Security $1,500
Pension $2,500
Part-Time Work $1,000
Investment Income $3,000
Total Monthly Income $8,000

In this scenario, you can reasonably budget around $8,000 per month as a starting point. Later, you'll compare that to your anticipated expenses to see if there's a gap to fill. Now you're ready to tackle the other side of the equation!

STEP 2: LIST YOUR ESSENTIAL AND DISCRETIONARY RETIREMENT EXPENSES

With your income estimate in hand, it's time to dig into the cost side of the equation by outlining all your expected retirement expenses. But before you start frantically listing every possible thing you might spend money on, take a breath! The key is to organize your expenses into three main priority categories: needs, wants, and wishes.

Needs: The Absolute Essentials

These are the non-negotiable living expenses you must cover every single month, no matter what. Your "needs" likely include:

  • Housing: Mortgage/rent, property taxes, homeowners or renters insurance, HOA fees
  • Food and groceries (be realistic!)
  • Utilities: Electricity, water/sewer, gas, trash, internet, cell phone
  • Healthcare: Insurance premiums, deductibles, co-pays, prescriptions
  • Transportation: Car payments, auto insurance, gas, registration, maintenance
  • Minimum debt payments: Credit cards, student loans, personal loans, etc.
  • Taxes: Most people pay some taxes in retirement

Total up your necessary monthly costs to maintain a basic standard of living. This is the minimum income you'll need to generate to make ends meet in retirement.

Wants: The Lifestyle Enhancers

The next tier of spending covers things you'd really like to be able to afford, but that you could live without (or cut back on) if money got tight. These "wants" are all about funding a retirement lifestyle you'll enjoy. Common examples:

  • Entertainment and leisure activities
  • Hobbies and sports
  • Travel and vacations
  • Gifts and charitable donations
  • Eating out and other little luxuries

Think through how you envision spending your time in retirement and estimate the associated costs as best you can. But also consider what you'd be willing to trim here if needed; could you take fewer trips or eat out less often? Build some flexibility into this category.

Wishes: The Big Goals and Dreams


Finally, create space in your retirement vision for a few big-ticket "wish list" items that you'll splurge on if there's room in your budget. Maybe you're hoping to:

  • Take a round-the-world cruise
  • Buy a vacation home or RV
  • Completely remodel your kitchen
  • Give your grandkids the ultimate college graduation gift

These large, lump-sum goals may not be possible right away, but having them on your radar can motivate you to save extra when you can. Just be sure to keep your "wishes" in perspective and don't derail your budget chasing them if the numbers don't realistically align.

STEP 3: PUT THE PIECES TOGETHER INTO A WORKABLE RETIREMENT BUDGET

Time for some simple math! To create your retirement budget, just subtract your projected monthly expenses (in all three categories) from your expected monthly income. The goal is to see if you'll have a surplus, a deficit, or will break even.

Let's continue our sample budget from Step 1. We already determined this retiree expects $8,000 per month in total income. Now let's suppose they've estimated their monthly expenses to be:

Expense Category Monthly Cost
Needs $5,000
Wants $2,000
Wishes $1,000
Total Monthly Expenses $8,000

In this simple example, the $8,000 in monthly expenses matches the $8,000 in income, so the budget balances out perfectly. But real life is rarely so neat!

More likely, you'll find either a surplus (income exceeds expenses) or a deficit (expenses exceed income). If you come up short, don't panic. You'll just need to explore ways to trim expenses and/or tap your retirement investments to supplement your income. We'll discuss that more in the next steps.

STEP 4: TALLY UP YOUR RETIREMENT INVESTMENT ACCOUNTS

Unless you're among the fortunate few whose retirement income will cover all your expenses, you'll likely need to rely on your investment portfolio to help bridge any budget gaps. So the next step is to take stock of all your retirement investment accounts, which may include:

  • Employer-sponsored plans like 401(k)s, 403(b)s, 457 plans, etc.
  • Traditional and Roth IRAs
  • SEP IRAs, SIMPLE IRAs, and Solo 401(k)s
  • Taxable brokerage accounts
  • Mutual funds held directly at the fund company
  • Annuities and cash value life insurance
  • Health Savings Accounts (HSAs)
  • Cash in checking and savings accounts

Basically, you want to know the total value of savings and investments you could tap if needed to supplement your retirement income. These are sometimes called your "liquid" assets, meaning you can convert them to cash relatively easily. Home equity and physical items like cars or jewelry technically contribute to your net worth, but aren't really liquid. Only include assets you'd be willing to sell to help fund retirement.

Add up the current balances or values of all your investment accounts to get your total investable asset number. You'll use this to determine how much you can safely withdraw each year, which brings us to the final budgeting step.

STEP 5: CALCULATE A SUSTAINABLE PORTFOLIO WITHDRAWAL RATE

The last piece of the retirement budgeting puzzle is deciding what percentage of your investment portfolio to withdraw each year. You want to take out enough to comfortably cover your living expenses, but not so much that you risk depleting your savings too quickly.

One common guideline is the 4% rule, which suggests limiting retirement withdrawals to 4% of your total invested assets each year (adjusted for inflation). In theory, this should provide a steady income stream while allowing your portfolio to continue growing over a 30-year retirement.

However, the 4% rule may be too aggressive in today's economic environment of lower expected investment returns. Many experts now recommend a 3% withdrawal rate to be extra safe, or suggest adjusting your withdrawals based on market performance by utilizing a guardrail strategy and/or a bucket strategy.

Another approach is to simply calculate the minimum withdrawal needed to cover your personal income shortfall each year. Let's revisit our example one last time to see how this might work in practice.

Recall that our sample retiree expects $8,000 per month in income and plans to spend about $8,000 monthly as well. At first glance, the budget is balanced. But suppose they've underestimated their "wants" and "wishes" expenses a bit. To build in a safety buffer, they decide to plan on withdrawing $500 per month ($6,000 per year) from their retirement portfolio.

This retiree's investable assets (excluding their home) total $950,000. So their planned withdrawal rate is just over 0.6% ($6,000 / $950,000). They could easily increase withdrawals down the road if needed without putting too much strain on their portfolio.

On the other hand, if their income fell short of expenses by $2,000 per month ($24,000 per year), that would equate to nearly a 3% withdrawal rate, which is more aggressive. In that case, they may need to consider alternative retirement income strategies to avoid overdrawing their savings.

There's no one "right" withdrawal rate for everyone. It all depends on your unique financial situation, risk tolerance, and other goals. That's why we highly recommend working closely with an experienced financial planner to optimize your retirement withdrawals. They can run detailed projections and suggest tax-efficient strategies tailored to you.

Plan for Major One-Off Expenses and Unexpected Costs

We wish we could tell you that creating a retirement budget is a "one and done" deal. But the truth is, your income, expenses, and goals will almost certainly evolve over time. Not to mention, life has a funny way of throwing curveballs when you least expect them!

As you tweak your budget over the years, be sure to incorporate some extra cushioning for those big, one-time expenses that tend to crop up in retirement, such as:

  • Out-of-pocket medical procedures for illnesses or injuries
  • Dental implants, hearing aids, and other common aging needs
  • Replacing a vehicle or major appliance
  • Home updates and long-overdue renovations
  • Rising long-term care costs, whether in-home or at a facility
  • Financially supporting a struggling family member
  • Dream vacations or bucket list adventures

The most diligent budgeters build up a special emergency fund to cover surprise bills rather than continually raiding their retirement portfolio. You might work toward saving 6-12 months' worth of expenses in a liquid account so you're prepared for whatever comes your way.

The bottom line? Think of your retirement budget as a work in progress, not an ironclad contract. Review it thoroughly every 6-12 months to confirm you're still on track, and don't hesitate to make changes if your priorities or circumstances shift.

FREQUENTLY ASKED QUESTIONS ABOUT RETIREMENT BUDGETING

To wrap up, let's address some of the most common questions and concerns we hear from folks trying to budget for retirement.

What's the number one budgeting mistake new retirees tend to make?

Hands down, it's underestimating health care expenses. Studies show a healthy 65-year-old couple will need nearly $300,000 to cover medical costs in retirement. Failing to plan for higher premiums, more frequent care, and uncovered costs as you age is a surefire way to derail your retirement budget.

How much inflation should I account for when budgeting long-term?

Historically, inflation has averaged around 3% per year. But we've seen how suddenly it can spike much higher! To be conservative, use a 3-4% annual inflation rate in your long-range retirement projections. So if your basic living expenses are $5,000 per month at age 65, budget closer to $7,500 by age 80.

Is an 80% income replacement rate sufficient to retire comfortably?

You may have heard the rule of thumb that you'll need 80% of your pre-retirement household income to maintain a similar lifestyle after you stop working. But that's really just a rough estimate. If you plan to live frugally, 60-70% may suffice. Got a lavish retirement in mind? Better aim closer to 100%. Your actual "income replacement ratio" will depend on your personal vision of a dream retirement.

What are my options if a retirement budget deficit seems inevitable?

First and foremost, look for ways to reduce spending, especially on non-essential "wants." But if your anticipated retirement income simply won't cover your needs, it's time to get creative. A few possibilities:

  • Delay retirement to save longer and maximize Social Security
  • Pick up a fun part-time job to boost your income
  • Relocate to a lower cost of living area
  • Sell your current home and downsize or rent instead
  • Start a side business or monetize a hobby
  • Purchase an annuity for guaranteed lifetime income

The sooner you get realistic about your retirement numbers, the more options you'll have to course-correct if needed.

CONCLUSION

Budgeting for retirement doesn't have to be daunting. By taking a proactive approach and breaking the process down into simple steps, you can create a plan that supports your ideal retirement lifestyle. Remember, small changes now can have a big impact over the long run.

We hope this guide has equipped you with the knowledge and tools you need to take control of your financial future. Here's to a retirement filled with joy, adventure, and peace of mind!

 👉 If you would like to get a FREE retirement assessment, click the link to schedule your 20-minute call to start the retirement assessment process.

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