Determining your budget in retirement

Building a budget for your spending in retirement

Budgeting your spending in retirement looks and works similarly to the way it does in your working years. You may be faced with new and greater expenses, however, and having a budget becomes even more crucial to help you live effectively off of your savings. Building this budget is a step-by-step process.

To calculate your retirement budget, it’s best to first calculate your expected average costs per month. As you estimate what your spending in retirement might be, it can be easy to underestimate your expenses. To help avoid being caught short unexpectedly, start now by making a list of your anticipated costs.

To gauge the accuracy of your forecasted budget, you may want to track your expenses for a few months to check whether your estimates are aligned with your actual expenses.

It’s also important to realize that your retirement budget will change based on when you plan to retire:

  • If you retire early, say at age 63, you may need a bigger nest egg to carry you through your retirement years. You also will not get maximum Social Security benefits. If you wait until age 70, you can enjoy the maximum amount.
  • If you retire later, you’ll still need to have enough income to last throughout retirement, but you will have fewer years with less income coming in.

What expenses belong in a retirement budget?

When estimating your retirement budget, consider asking 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 to move or downsize your primary residence?
  • How will your health insurance premiums change after you retire?
  • Have you factored in the increased out of pocket medical costs that often accompany age?
  • 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 also take into consideration your changing income picture. When you turn age 73, you’ll have to begin withdrawing required minimum distributions from most retirement accounts.

Essential, discretionary and one-time retirement expenses

First, understand what types of expenses you’re likely to incur and how big they’re going to be each year. This will help you determine the retirement income you’ll need to meet your average monthly expenses as well as cover surprise expenses. Your expenses may fall into three categories: essential (must-have), discretionary (optional) and one-time (a remarkable but necessary occurrence).

According to the U.S. Bureau of Labor Statistics, a household run by someone 65 or older spends on average $52,141 per year (approximately $4,345 a month).1 How are you going to pay for these expenses? Some of your income will probably 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.

  • Your essential average monthly expenses in retirement fall into categories such as household, transportation, living expenses, family care and medical/health. These are necessary retirement expenses that you may not be able to live without.


    According to the Bureau of Labor Statistics, the average partial monthly breakdown of some of these expenses by cost category1 is $1,573 for housing, $597 for transportation, $586 for health care, $541 for food and $238 for personal insurance.

  • Discretionary expenses are expenditures such as entertainment, dining out, hobbies, publications, education, travel/vacations, charitable donations, gifts, professional/social dues and gym memberships.

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

  • You may need most of your required retirement income for average monthly expenses in retirement. But in addition to your average monthly retirement expenses, you might face one-time expenses after you retire, such as a child’s wedding, a grandchild’s college tuition, an emergency (such as a major home repair), home improvement or the passing of a loved one.

    By planning ahead for these potential liquidity needs and factoring them into your budget, you may 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. If you own a vehicle, plan for annual repair bills.

  • Don’t forget taxes as you’re formulating your retirement budget. You may have to factor in federal, state and local income taxes, as well as property taxes if you own a home.

    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. 

Putting your budget to work in retirement

While it’s important to determine 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 might 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.