Setting a Budget for Retirement

One of the more difficult tasks in planning your retirement is getting an accurate view of your ongoing expenses. In fact, once you’ve developed a reasonable sense of how much income you’ll have in retirement, figuring out your expenses is the only other major financial task before you retire. Many families don’t live according to a monthly budget, and even if they do, shifting your mindset on how you spend money in retirement can take some work.


The Shifting Reality of a Budget

When I say “budget” in this post, I really mean “spending guidelines”. Even though you’ll no longer be working full time in retirement, you will often have some flexibility in how you spend your money each week and month. Borrowing from one spending category to pay for a special expense is okay! It will likely take you several months in retirement to really settle into your spending approach. It’s quite normal for you to be anxious about how and where you’re spending money in the first year or so of retirement, so plan for that reality and accept that you’ll need to change some budgeted categories as you go along.

That leads us to the actual exercise of budgeting, how do you do it?


Approach #1—A Detailed Budget for Retirement

This is the more time-consuming option. It may not ultimately be more accurate for your situation than the second approach, BUT it has one major advantage—it forces you to confront what you spend your money on and whether that reflects your priorities in retirement.

How to do this:

  1. Gather up your bank statements and credit cards for a year, as well as your tax return for last year. Most banks and all credit cards allow you to pull a report of spending for the past year, and this can be really useful for the budget process. What you want is the list of places you’ve spent money, since the online categorization is sometimes wrong (you may know what that huge Amazon purchase in September was for, but the credit card company won’t know that it was for a birthday gift for your spouse).
  2. Plug the information into a spreadsheet tool. You may have one you’ve used in the past, that will be fine. If you haven’t done a detailed budget before, consider using Vanguard’s online tool and saving or printing out the results.


Use Vanguard’s spreadsheet:

  1. Reflect on what you’re seeing! Some questions to ask yourself:
    1. What am I missing? Are there any expenses I know I regularly pay for that didn’t make it into these statements?
    2. Do I spend a lot of cash that isn’t categorized somehow? If you have to, use a line in the budget specifically for cash purchases. Better to capture the spending than lose this info!
    3. How have my expenses changed over time? Is anything expected to change in the next couple years? Frequently my clients will have car loan or mortgage payments that are set to be done in the first few years of retirement. How will that change your spending in the future?


As you can see, this can take some time. You’ll need to discuss the results with your spouse, if applicable, and consider coming back to the budget a day or two after you first go through this exercise to review it again.

The goal: you want to have a rock-solid understanding of what you spend your money on today, and how you think that might change in retirement.  This is not a perfect document, don’t think you’ll live precisely according to this budget! But focus on understanding how and where you spend and you’ll have done the job correctly.


Approach #2—A Budget Rule of Thumb

The second approach to budgeting for retirement is much less detailed and faster, and quite frankly, I don’t really recommend it. Retirement is a really critical time to plan correctly, and you should expect to spend some time on your expense guidelines. Yet, this second way has a distinct advantage in that it uses the wisdom of a ‘rule of thumb’ to make sure you’re on track for spending.

What is that rule of thumb? 70-80%.

Take your current pre-retirement take-home pay (your after-taxes income) and multiply it by 80%. If your take home pay is $80,000, your estimate is $64,000.  70% of it would be $56,000.

This is the amount that we can estimate you’ll still spend in retirement after taxes. That’s because almost all retirees spend less over time than when they were working. Often that’s because you’re likely done raising children and paying on your mortgage, as well as some incidental costs for working (like work clothes and commuting costs).  

Beware, though, thinking that you’ll save a fortune on your day-to-day expenses as a retiree! Many people eat out at restaurants more frequently, go on better and longer vacations, and still have other home and living expenses (cable, cell phone, etc.) that don’t go away just because you’re retired.

So, the 80% number is actually the conservative rule of thumb. Most people will spend at least that much in retirement.


3 Places to Be Careful

Regardless of which approach you use, you’ll want to give some attention to these three items:

  1. Health expenses: Watch out for health care costs and insurance. Especially if you intend to retire before age 65, when Medicare becomes available, you’ll have to figure out some option for health insurance. Private insurance can be costly, and you need to do the legwork now to make sure you understand how expensive it will be. If you intend to just use Medicare at 65, try shopping for Medigap or Medicare Advantage plans now, so that you know how much coverage will cost you with your preferred drug benefit and any other health conditions you expect.  Medical costs go up over time, faster than inflation. Make sure you know how this will impact your budget in 20 years, not just today.
  2. Homes and Cars: Don’t forget about replacing your car in the future. Cars last longer these days, but if you’re considering a 30-year retirement, your car will have to be replaced a couple times in that duration if you drive any significant amount. Also, just because you’ve paid off the mortgage on your home doesn’t mean it’s free to live there.  All homes require maintenance, and over 30 years you’ll need a new furnace, roof, and potentially other costly repairs. Set aside an amount in your budget every month to pay for home maintenance and repairs.
  3. Higher Initial Expenses: Figure out what are optional expenses in your budget—travel, Netflix, and other expenses that may be important, but are not strictly necessary to keep the lights on in retirement. For most people, these optional expenses are higher in the early years of retirement, when your health may be better and you’re eager to get on with the life that’s been deferred during working years. These “go-go” years have more expensive vacations, more dining out, more hobby expenses, just more of the things we want to do in retirement! If you’ve spent some energy figuring out how you’re going to spend your time in the first five years of retirement, that will be the list of extra, optional expenses you want to make sure are covered in your monthly budget.


Figuring out how much you intend to spend living in retirement is a critical step in planning your retirement. Whether you take the time to do the (more accurate) detailed budget or guesstimate with a percentage of your take-home pay, you will need to give this facet of retirement some thought.  


Looking for help determining your budget and matching it to your retirement income? Schedule an introductory call today, no strings attached!


Let's Get Started

You'll get the most value from financial planning if your specific goals and needs match a firm's philosophy and services. Let's learn more about each other.

Ready to Get Started?