How to build a retirement budget

Building a retirement budget is a step-by-step process. It takes planning to estimate your retirement spending. First, you should consider:

What should I consider when building a retirement budget?

When estimating your retirement budget, ask yourself the following questions to help develop a more complete and accurate set of expenses:

  • How many years remain on your mortgage?
  • Do you plan on moving or downsizing your primary residence?
  • How will your health insurance premiums change after you retire?
  • Do you have all of the insurance you need, or should you budget for additional premiums, such as long-term care insurance?
  • Will you spend more on travel or hobbies once you have more time to devote to them?

It’s important to itemize and categorize your anticipated average monthly expenses as you plan your retirement spending. For example, you may have ongoing expenses for a specific amount, but you may also have a fixed expense that lasts only a certain number of years, such as a mortgage.

As you complete your budget planning worksheet, you must take into consideration your changing income picture. When you turn age 70 1/2, you’ll have to begin withdrawing required minimum distributions from most retirement accounts.

Note: Also consider any retirement accounts you may have and the income they will provide in retirement. For example, you’re going to have to pay taxes on your 401(k) distributions. But if you’re still working at age 70 ½, you can postpone your required minimum distributions until the day you retire.

How should I budget for different types of retirement expenses?

First, understand what types of expenses you’re likely to incur and how big they’re going to be. This will help you determine the retirement income you’ll need to meet your average monthly expenses as well as surprise expenses.

Your expenses will fall into three categories:

  • Essential (must-have)
  • Discretionary (optional)
  • One-time (a remarkable but necessary occurrence)

According to the Bureau of Labor Statistics, a household run by someone 65 or older spends on average $45,756 per year (approximately $3,800 a month)1. How are you going to pay for these expenses? Some of your income will likely originate from fixed sources, such as Social Security benefits, pensions and annuities. But if you’re like most people, most of your retirement income will come from portfolio withdrawals. If you know how much retirement income you’ll need, you and your financial professional can invest your portfolio to give you the best chance at a successful retirement.

Essential expenses

Your essential average monthly expenses in retirement fall into categories such as:

  • Household
  • Automobile and transportation
  • Living expenses
  • Family care
  • Medical/health

These are necessary retirement expenses that you can’t live without.

According to the Bureau of Labor Statistics, the average partial monthly breakdown of some of these expenses by cost category1 is:

  • Housing: $1,322
  • Transportation: $567
  • Healthcare: $499
  • Food: $483
  • Personal insurance/pension: $237

Discretionary expenses

Discretionary expenses include spending on optional expenditures. These include:

  • Entertainment
  • Dining out
  • Hobbies
  • Publications
  • Education
  • Traveling/vacations
  • Charitable donations
  • Gifts
  • Professional/social dues
  • Gym membership

These are your extras. Unlike essential expenses, they’re under your control. If necessary, you can forgo or reduce them.

One-time expenses

You’ll need most of your required retirement income for average monthly expenses in retirement. But after you retire, in addition to your average monthly retirement expenses, you might face one-time expenses, such as:

  • A child’s wedding
  • A grandchild’s college tuition
  • An emergency (e.g., home repair due to a hurricane or a flood)
  • Home improvement
  • The passing of a loved one

By planning ahead for these liquidity needs and factoring them into your budget, you’ll lessen the chance that you’ll be surprised by these events and won’t have to adjust your ongoing expenses suddenly to pay for a one-time expenditure. For example, for whatever your home is valued, be sure you’re planning to account for upkeep, repairs or unexpected costs. Also, if you own a car and you drive, there will be annual repair bills.


Don’t forget taxes as you’re formulating your retirement budget. You’ll have to factor in:

  • Federal taxes
  • State taxes
  • Local taxes

Your taxes will vary with your income. Research the tax rates in your area and match them against your income level so you’ll be prepared for your tax bills when they arrive. For example, if you worked in Minnesota, but now live in Florida (which has no state income tax), you won’t owe Minnesota any income tax on the pension you receive from your former employer. FINRA offers some useful tips.

How do I make the most out of my retirement budget?

While it’s important to identify your retirement budget before you retire, it can be even more vital to monitor your expenses during retirement. Because your expenses are likely to change over time, you may need to adjust your retirement income plan to reflect these changes. We can help you address your retirement concerns.

By meeting regularly with your financial professional during your retirement years, you can help ensure that your investment plan continues to meet your needs as they evolve over the course of your lifetime.