Simple Steps to Building a Retirement Budget

Simple Steps to Building a Retirement Budget

Key Takeaways

    Start a retirement budget by listing mandatory expenses

    Aim to have your retirement income exceed all the costs in your plan 

    Develop a healthy emergency fund for additional confidence 

Planning ahead for your retirement years can 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 budget and determining your retirement “needs, wants, and wishes.”

Getting Started

Dara Luber, Senior Manager, Retirement Product, TD Ameritrade suggests starting on your retirement budget 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 costs, and whether they might increase, decrease, or stay the same in retirement. Consider your retirement income. Where will the money come from? Include Social Security, pensions, 401(k), IRA or other retirement accounts, annuities, and any other expected income streams. Perhaps you plan to downsize into a smaller, less expensive home and add the proceeds to your nest egg.Prioritize the discretionary expenses. Once you’ve estimated your retirement income and factored in the mandatory items, you can move to the discretionary. What items and activities are on your retirement wish list? Travel, activities, and luxury goods, or do you plan to be more of a homebody?   

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 worth it to consider taking a look at your receipts.

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

    Analyze your credit card and checking account statements over the last three to six months 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.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.

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, 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. 

Simple Steps to Building a Retirement Budget

Line Items to Consider

Here are nine categories to help you get started 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,” Peterson says.

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 such as 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 your retirement? For how long? Cars eventually wear out and need replacing. Remember to factor in this major expense.

9. Emergency fund. Just like the rainy day/emergency fund that you have during your working years, it’s always wise to prepare for unexpected expenses in retirement. For example, health care costs during your retirement could be a complete wild card.

Getting serious with retirement income?

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