How To Budget for RetirementUpdated December 30, 2022 Personal Finance
Perhaps one of the most important things to figure out as you near retirement age is what your budget will look like after you’re finally done working. Hopefully, you’ve started planning and saving money well in advance of this date, but even the most prepared among us will still need help developing a realistic budget of monthly expenses that take into account your new life as a retiree. Whatever your financial goals are as you age, you can benefit from taking the time now to consider your retirement plan.
9 Retirement Budget Expenses
- Housing and Utilities
- Medical Expenses
- Hobbies and Leisure
Of course, each person’s retirement budget will look different based on where they live, their lifestyle, interests, financial obligations, and individual needs. However, most people will find it helpful to think about their expenses in the below categories to get a better understanding of where their monthly income actually goes.
9 Expenses To Include in a Retirement Budget
Some of these budgeting tips may seem obvious to you while others you may not have considered, but the more time you spend planning the better off you’ll be in the future.
1. Housing and Utilities
You have to live somewhere, and for the vast majority of retirees, housing and utility costs will eat up a significant part of your personal budget. Even if you’ll be living in a mother-in-law unit with your adult-age son or daughter, you’ll likely still want or need to contribute to the overall housing expenses in some form. If you’ve managed to pay off your home loan, you won’t have that monthly expense to contend with, but you will still be responsible for taxes, insurance, utilities, and the costs of general upkeep.
Many people of retirement age may choose to downsize to a smaller house or even move into a condo after their children have gone on to start families of their own. This can help reduce expenses, not to mention it forces you to address what to do with all your belongings that have accumulated over the decades and decide what to keep and what to toss. Smaller homes are also often more energy efficient which will cut down on how much heating and cooling costs take out of your monthly budget.
If you’re happy in your current home, consider other ways to spend less money. You could make your home more energy efficient by installing a solar energy system. Most states offer rebates and tax incentives to help with the upfront installation cost, but after this initial expense is covered, you can start generating power for free. With grid-tied solar energy, you may even be able to sell your surplus electricity back to the power grid and make money.
Another way to keep all your housing expenses covered is to expand your income sources by taking out a reverse mortgage on your home. This is a home equity line of credit that many older homeowners will qualify for using their home as collateral.
Although some expenses will be reduced after you retire, such as gas for commuting or wearing work-specific attire, other expenses like food and groceries will remain fairly level. Naturally, these costs will be significantly different for someone who likes to eat out at restaurants a lot compared with someone who cooks meals primarily at home. If most of your food is store-bought and cooked at home, you can expect your post-retirement food costs to go down.
Another retirement benefit you might not think about are the senior discounts you’ll get on groceries or other products! Stores like Home Depot, Rite Aid, and Walgreens, as well as most local supermarkets regularly offer 10% to 15% off for seniors. However, these discounts may only be available on specific days of the week.
No matter what stage of life you’re at, you’ll always need insurance coverage. This part of your budget will need to include costs of homeowners insurance, health insurance, car insurance, and life insurance which will all need to be calculated into your total retirement costs. A good place to start is by contacting your existing agents and asking them how they see your premiums changing as you age, and what advice they have to keep these costs down.
However, when you get older you’ll likely want to add on additional policies like long term care insurance which can be quite expensive. This supplemental health care policy covers many costs that older individuals encounter that aren’t covered by Medicare or a standard health insurance plan like nursing homes, hospice care, assisted living centers, or specialty treatments of chronic illnesses.
4. Medical Expenses
If you’re over the age of 65, then you qualify for Medicare. And, although this can often simplify medical expenses for retirees, you should still examine all your healthcare costs to see what plan works best for you. The vast majority of beneficiaries will qualify for free Part A coverage, but will have to pay a premium for Part B (which in 2023 is $164.90/month).
You also have the option to enroll in a Medicare Advantage plan (and nearly half of those eligible choose this route) and many of these have a $0 premium. Or, you may still wish to obtain health insurance through an employer or spouse’s employer. However, even with coverage, you’ll still need to budget for prescription drugs, specialist visits, or medical procedures that may not be fully covered under your policy. Talk with your primary care physician to get a better understanding of the medical costs you may be facing in the coming years. For example, if you know that you’ll need a hip replacement in the next 5-10 years, choose a plan that covers this procedure.
Whenever possible, you’ll want to pay off as much debt as possible before you begin retirement. Learning how to get out of debt will pay off in retirement, especially when you’re living on a fixed income. If it isn’t feasible to pay it all down in time, consolidate your debt. Concentrate on your high-interest debt first which typically means taking care of student debt (yours or your children’s) or any consumer debt like credit cards. Then make sure you account for any monthly payments for your lower interest debt like car payments or mortgages into your retirement budget.
6. Hobbies and Leisure
Even if you didn’t spend a lot of money going out before beginning the retirement process, you’ll now have significantly more free time on your hands. This means you may want to go out and explore all there is to do in your area including entertainment, dining, or travel plans you’ve had to put on the back burner while you were working. Try to be realistic about this when planning so you’re not surprised by how much these new activities take out of your budget.
If you’ve been responsibly putting money away into a 401k plan, mutual fund, or individual retirement account, these investment strategies have likely built a comfortable nest egg to help you live comfortably. Contributing to these retirement accounts during your working years can also provide deferred tax breaks, but once you enter retirement you’ll be required to take regular distributions to avoid tax penalties.
Additionally, if you’re receiving Social Security retirement benefits, you’ll also need to consider how this may affect your tax status. The best way to understand your options and how to best protect your income is to work with a financial advisor who can look at your specific situation and counsel you on how to make the most of your retirement income.
An emergency fund should be a part of everyone’s financial planning regardless of age. Like it or not, an unexpected expense can pop up at any time, whether it’s storm damage to your roof, a visit to the emergency room, or a new set of tires for your car. If you don’t take these unplanned costs into account, you’ll end up taking a big chunk out of your retirement fund and have none left for your everyday needs.
For many retirees, spending time with family (especially grandchildren) will be your number one priority. You may wish to visit family more often, or maybe even relocate so you can be closer to them. While this is often a good decision, preparing and budgeting for a move like this can delay your retirement date. You’ll also likely want to include your family in your estate planning by setting up a will or trust to allocate certain assets to them. Always work with an experienced financial professional or an estate planning attorney when setting up these accounts to ensure they’re legally binding and they impose the least amount of income tax burden on the recipients.
How Much To Budget for Retirement?
When it comes to retirement budget planning, everyone’s goals will be different since everyone has a different standard of what a “comfortable” lifestyle looks like. That said, there are a few guidelines anyone can follow to help figure out what your retirement savings plan will look like.
You’ll first want to look at your pre-retirement income since most people find they need between 55% and 80% of this after they retire. The more active you plan on being and the fancier your lifestyle, the higher this percentage will be. Since most retirees will be living on a fixed income made up of different sources like a Social Security benefit, pension, or monthly payout from a retirement account, it’s always better to overestimate your needs instead of underestimate. Of course, some retirees will choose to engage in part-time work, so you may have more wiggle room in your monthly income and this can offer you flexibility in your retirement planning.
You also need to be aware of how your expenses will change. While costs for housing, food, transportation, and discretionary expenses like entertainment tend to go down after retirement, healthcare expenses tend to go up. If you can, try to map out what you think your monthly expenses will be well ahead of retirement so you’ll have time to make adjustments. Consider using an online retirement budget worksheet or finance app to help you categorize your income and expenses and get a sense of what you’ll need. It’s also never too late to check in on your credit score and take steps to get this as high as possible in case you need to borrow money down the line.
It’s never too early to start planning for your retirement whether you’re 35, 45, or 55 years old. The key is to think thoroughly and realistically about all your different expenses to ensure you have a monthly income to meet them, with enough left over for emergencies.
Gone are the days when people could easily rely on a monthly benefit from the Social Security Administration to see them through their final years. The truth is, people are simply living longer, healthier lives, and you need to think critically about the retirement savings you’ll need to make the most of your golden years.