How to Make a Retirement Budget

woman writing on paper making a retirement budget

Whether you're planning for retirement or are already living the retired life, creating and sticking to a budget is key. Budgeting can not only tell you if you're ready for retirement but can help you manage your money so you can live comfortably without running out of money. Follow these steps to make—and adjust—your retirement budget.

1. Calculate How Much Money You'll Need in Retirement

Some experts suggest you'll need an income in retirement that's about 75% of your pre-retirement income to be financially comfortable. That can be a good starting goal, but you'll also want to account for your actual expenses. Add up how much you expect to spend post-retirement on the following basic categories:

  • Housing, including mortgage or rent, property taxes, insurance and maintenance
  • Medicare premiums
  • Health care, including medical, dental and vision as well as prescriptions, hearing aids, physical therapy and other needs
  • Income taxes on withdrawals from traditional 401(k)s or IRAs as well as capital gains tax on any investments you sell.
  • Food
  • Entertainment
  • Travel
  • Family
  • Transportation
  • Clothing
  • Emergencies

One of the best predictors of your future finances is your current budget, which already includes the basics listed above plus specific expenses that are unique to you. If you compile at least a year or two worth of data, you'll get an idea of how much you spend on your current lifestyle.

Once you lay out the fixed and unfixed costs of running your life as is, you can consider making adjustments to your lifestyle—and budget—after you retire. More on that in a moment.

2. Estimate Your Retirement Income

The other piece to your retirement puzzle is income. By the time you approach retirement, you may have multiple sources of retirement income to consider:

  • 401(k) or 403(b) plans, including any retirement plans you and your employers have contributed to over the years
  • Social Security: On average, Social Security benefits equal about 40% of your pre-retirement income. Estimate your benefits at
  • Pensions
  • Traditional and Roth IRAs
  • Savings
  • Investments
  • Passive income: Rental properties, royalties, businesses in which you are a "silent" partner and any other sources of income that may continue into retirement
  • Part-time employment

Your mix of retirement income may include fixed payments from Social Security or government pensions and more flexible payments from sources like your IRA accounts or investments. Although there's plenty of debate over how much you should have saved by the time you retire—and how much you can safely withdraw each year—you might start by using the "4% rule" to estimate monthly withdrawals. Here's how it works:

  1. Add up your retirement balances. Say you have two traditional IRA accounts and a Roth IRA, totaling $450,000. Use this total if you're retiring soon, or project modest growth for your totals if you're going to wait years or decades before you tap into it.
  2. Multiply the amount you expect to have at retirement by 0.04 (4%). If your investment total is $450,000, your 4% = $18,000.
  3. Divide your 4% by 12 months. In our example, $18,000 divided by 12 is $1,500 per month.
  4. Add your 4% to your other projected sources of income and compare it to your projected expenses. Ask yourself: Is this enough to live on?

The 4% rule might work for you as a starting point, but be sure to complete a thorough financial analysis before making any major decisions. It's a good idea to get expert advice on managing your retirement funds both before and after retirement.

3. Look for Factors That Can Build in Flexibility

Once you have a broad sense of your potential income and expenses in retirement, think about what adjustments you might make to increase income, reduce expenses and alleviate stress. For example, selling your home and moving to a low-maintenance condo or senior living community could help you add to your nest egg, reduce your monthly housing costs and/or eliminate some of the worry over home repairs and maintenance. Alternatively, consider paying off your mortgage before you retire to lower your monthly expenses.

Would you enjoy an encore career? Whether you continue doing your current job on a part-time basis or find a new, low-pressure position doing something you love, working for a few more years can put extra income in your pocket and help your retirement savings go farther.

Some spending may naturally decrease over time. You may travel less as you age. You and your spouse may decide you only need one car—or the cars you have will last longer because you no longer commute. Clothing, dry cleaning, expensive meals out and any number of miscellaneous expenses may not be the spending priorities they are during your working years.

At the same time, new expenses may rise up and claim more of your budget. Medical and dental expenses, help with daily living, home improvements that allow you to age in place—the list is long and the needs can be critical. As you build your retirement budget, don't forget to account for unforeseen expenses, either by building some savings into your monthly budget or by regularly spending below your means.

4. Set Up a System, Track Your Finances and Evaluate

Road testing is the final step of retirement budgeting and it applies whether you're years away from retirement or in the thick of it now.

Working people who are planning for retirement should revisit their retirement budget periodically to make sure plans are on track. Rebalance your investment portfolio at least once a year and check your progress toward retirement savings goals. Planning a major life change like moving to a new city or getting married? Will new medical concerns affect your future needs? Factor these changes into your budget to make sure your retirement is on target.

Retired now? Track your finances month by month. Are you able to keep your spending in check? Are there expenses you didn't account for? Recalibrate your budget if needed so you have a solid framework that allows you to live comfortably without spending all your money too quickly. After you've established a livable budget, reevaluate every few years or so as your needs change and your retirement portfolio rises or falls.

Budgeting Skills Give You an Edge

Mapping out your retirement income and expenses can help you decide when to retire and whether your retirement timeline is realistic. A retirement budget can also help you manage finite resources once you're no longer collecting a paycheck. Wherever you are on the path to retirement, knowing how to create and stick to a budget is an excellent skill to master. Though it won't add to your account balance or raise your Social Security benefits, being budget savvy can help you move confidently into retirement, knowing you can manage your money no matter how much, how little or how limited it may be.

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