How to Make a Retirement Budget

Image shows steps to making a retirement budget: Step 1: Gather the following items: Bank and credit card statements from last six to 12 months, your last two pay stubs, if you or your spouse is still employed Last year’s tax return. Step 2: Identify all of your recurring monthly, quarterly, or annual payments. Step 3: Account for healthcare. Step 4: Remember to factor in fun. Step 5: Calculate fixed vs. flexible costs

Image by Colleen Tighe © The Balance 2020

Planning your finances using a retirement budget can improve your peace of mind and lessen your stress about money in your golden years. Plus, calculating your budget will help you avoid spending too much of your nest egg too soon—a financial mistake many retirees make.

With a few simple steps, you can develop a budget that accounts for your obligations but leaves plenty of room for enjoyment.

Importance of a Retirement Budget

Many factors can affect your retirement income: inflation, rate of return on savings and investments, your retirement date, taxes, spending, part-time earnings, Social Security, and pensions if any.

You have the most control over one critical factor: your spending. Once you've retired, it may be tempting to see that sizable nest egg you've saved as a good excuse to start checking items off your bucket list. But over-spending can be financially dangerous; you've got to make your savings last, likely for decades.

You may find you’re willing to make certain trade-offs to retire earlier, travel more, or spend more on fun and hobbies. A good, detailed budget helps you live within your means, enjoy your life, and make your savings last as long as possible.

Find Your Fixed Expenses

Start to create your retirement budget by gathering the following items:

  • Bank account statements for the last six to 12 months
  • Credit card statements for the last six to 12 months
  • The last two pay stubs, if you or your spouse is still employed
  • Last year’s tax return

Look for all of your recurring monthly, quarterly, or annual payments. Using highlighter pens, divide your expenses into the following categories:

Essential Spending

This category of spending includes food, clothing, housing, utilities, transportation, and health care.

Non-essential Monthly Expenses

These include things you receive a monthly bill for, such as cable TV, streaming services, gym memberships, cell phone plans, or other subscriptions.

Required Non-monthly Expenses

Bills for property taxes, insurance premiums, auto registration, and home warranties may arrive once a year. Add up these periodic expenses and divide by 12 to calculate their monthly cost to include in your retirement budget.

Use lined paper or a computer spreadsheet program to account for the timing of expenses. List the months, January through December, across the top in separate columns. Down the left side of the spreadsheet, list each expense on a separate line.

If your utility bill runs an average of $200 a month, put $200 in each monthly column. For Christmas gifts, if you spend about $500 a year, divide the $500 in two and put half each in November and December. Do this for each expense item, then find the sum for each month. These are your fixed costs.

Account for Health Care Costs

If your employer has been paying your health insurance premiums, after retirement, you may have to pick up the tab. If you retire before age 65, you'll need to explore the available options for health care coverage before your Medicare kicks in. Shop for plans now so you can add an estimate of that monthly expense into your budget.

Don't forget about dental, vision, and hearing care. Add those expenses to your budget, too. Estimate other health expenses such as medication as well, so you have the full picture when creating your retirement budget.

Factor in Fun

Discretionary spending is the flexible part of the budget that includes all the fun stuff, such as travel, grandkid outings, sports, and other entertainment. Do you love to dine out or want to go on a yearly cruise? Figure out how much you'd like to spend on these fun retirement activities, then figure them into your budget.

Consider how your hobbies and lifestyle may change, as this could affect the way you spend. If married, ask your spouse to do this also.

If you plan to spend your newfound free time in pursuit of expensive hobbies, you must account for that spending in your budget. Think about changes you may be willing to make to free up money for these activities; the trade-off may be worth it. For example, if you want to travel more, would you be willing to downsize and live in a smaller home to reduce housing costs?

Calculate Fixed Versus Flexible Costs

Now that you've gathered all your expected costs, calculate how much is fixed and how much is flexible:

  • Total all your fixed expenses
  • Total all your other, non-fixed expenses separately
  • Divide your fixed expenses into your total expenses

What percentage of your retirement income will go toward fixed expenses? Does this align with your thoughts in step three on how you want to spend your time in retirement? If you have large monthly obligations for house and car payments, for example, maybe a lifestyle change is in order.

As a general rule of thumb, if you want more fun in retirement, find ways to lower your fixed expenses so you can have more flexible funds available to spend on the interests you most enjoy.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.