When retirement comes into view, you probably have a lot of hopes for what it will look like—but have you thought about how your budget might need to change with your income? It’s great to dream big about retirement. And it’s just as important to build a retirement budget that can support those dreams.
Don’t assume retirement means you just have to cut back expenses. Instead, make sure your money supports the life you want.
That starts with understanding how much you need to spend in retirement and creating a budget based on how much income you’ll expect. Think of budgeting as your financial GPS that keeps you on track so you can focus on enjoying retirement.
To do that, you need to:
- Understand your income sources
- Organize your expenses into manageable categories
- Prepare to adjust your budget as life evolves
Understand Your Income Sources
Retirement income can come from multiple sources. Knowing how much you’ll have every month is the first step to building a budget. Once you’ve mapped out your income, you’ll have a clear picture of what you can work with each month.
Below, we break down a few of the common areas clients can expect to receive income:
1. Social Security
If you’re deciding the best time to review, your social security benefits could heavily factor in your decision. The earlier you begin claiming benefits, the smaller your paychecks will be. For example, delaying benefits from age 67 until 70 can increase your payments by 24%.
You can estimate your benefits using the Social Security Administration’s Quick Calculator and other online tools.
2. Pensions
Very few companies still offer pensions. If you’re one of the lucky ones who has a pension, find out the details. How often are payments made? Do they include a cost-of-living adjustment (if so, how much)?
Don’t assume you’ll receive the same pay periods, increases, or amounts as your regular paycheck. If you’re unsure, talk to Human Resources at your employer and ask for a copy of your pension paperwork.
3. Investment Income
Without pensions, this is where most retirees will supplement their social security benefits. Investment income could come from dividends, interest, or withdrawals from retirement accounts like 401(k)s and IRAs.
It’s important to understand limits. Plus, if you’re over age 73, don’t forget about required minimum distributions (RMDs). RMDs require you to take out a certain amount each year, regardless of need. (We can talk about how to manage those funds if they exceed your needs.)
4. Other Income Sources:
Now consider all other sources of income you can expect. Do you own rental properties, annuities, or other passive income streams? You can even consider a part-time job to supplement your budget.
Examine Your Expenses
Now that you have an idea of how much you’ll have coming in, let’s take a closer look at what you’ll have going out in expenses. This likely will be more nuanced than taking stock of your income.
Evaluate Today’s Spending Habits
To understand how much you’ll need to spend in retirement, take a look at your current take-home pay. You want to see the amount after taxes and other deductions have already been taken out.
- What’s coming into your bank account? This will give you an idea of how much you spend on a monthly basis.
- Then take a look at monthly trends. Over the last 6-12 months, has your bank account average gone up or down (or sideways!)?
Getting this information will help you see how much it actually takes to run your household today. Don’t panic if the trend doesn’t seem favorable (and don’t get overly confident if it appears positive). We’re only gathering data right now.
Detail Future Spending Plans
Consider how much you want to spend in retirement. Do you want to spend more or less than you are right now? The answer is different for every individual. Here are some questions to think about as you decide:
- Will you travel more, or stay close to home?
- What costs may be associated with new or expanded hobbies you take up in retirement?
- Looking at your current spending trends, which days of the week do you typically spend the most? Do you spend more during your free time on the weekends or as part of your daily work routine?
- Where do you plan to live after retirement? Some people look to downsize their homes and overall costs, while others consider moving to a more desirable location (hello, beach house!). Consider how any adjustments in your current living situation may impact your budget.
- If you need to add a car payment for a new vehicle or RV? Does your budget have the wiggle room?
- Does your employer cover health insurance for retirees or do you need to go on the exchange for coverage? Many employers used to offer retiree health insurance benefits, but fewer are these days.
- Finally, think about your charitable giving plans. How might you alter them during retirement?
Organize Expenses into Manageable Categories
Knowing where your money goes is just as important as knowing where it comes from. To get an idea of your spending habits, go back through 6-12 months of bank statements to see where your money goes.
Expenses fall into three main categories: essential, discretionary, and unexpected.
1. Essential Expenses
Essential expenses include needs like housing, utilities, groceries, and healthcare. They also include taxes on withdrawals from retirement accounts and out-of-pocket costs. According to Fidelity, the average 65-year-old couple may spend over $300,000 on healthcare throughout retirement—including Medicare premiums, co-pays, and prescription costs. That’s why it’s so important to build these expenses into your budget early.
2. Discretionary Expenses:
Discretionary expenses are wants or “nice-to-haves” like travel, hobbies, dining out, and spoiling the grandkids. While it can be easy to say you’ll just cut back, it’s important to account for these to avoid revenge spending after overly restricting your spending. One retiree set aside $5,000 a year for trips to visit family across the country.
3. Unexpected Expenses:
Surprises are part of life. Some unexpected expenses, like home repairs or a major health event, may not be welcome surprises. But planning an emergency fund to cover them makes these moments less stressful.
Build Your Retirement Budget
As we mentioned at the beginning of this article, it’s important to consider all aspects of your financial picture in retirement – before you even lock in a retirement date. Retirement isn’t just a date on the calendar; it’s a financial decision that should reflect your goals, desired lifestyle, income sources, and flexibility.
Now that we’ve outlined how to take stock of your finances and expenses above, let’s get into the weeds of building your budget.
You may be familiar with the 50/30/20 rules for budgeting (this stands for 50% needs, 30% wants, and 20% savings). In retirement, plan to budget your budget in a similar way; however, expect to adjust that ratio slightly. Your needs may account for closer to 60 or 70%, with wants and savings making up the difference. The concepts are the same, though.
Just as you audited your current expenses above, you can use the same concepts and process to approach your future budgeting:
1. Cover the Essentials First
Use your fixed income to cover things from your needs list first, like housing, utilities, groceries, and healthcare.
2. Plan for Fun
Once you have covered the basics, decide how much you want to spend on hobbies, travel, and dining out. Your budget should reflect your priorities—whether that’s travel, family, or staying debt-free.
3. Save for the Unexpected
Set aside a portion of your income for an emergency fund. Aim for 6–12 months’ worth of essential expenses.
4. Explore the Impact of Delaying Retirement
As an additional consideration, adjusting the start date of your official retirement could impact your income significantly. Even working just one or two additional years—full- or part-time—can increase income, reduce pressure on your savings, and boost benefits like Social Security and pensions. As an added benefit, many people find that stair-stepping into retirement (like moving from full to part time briefly) can also help with the emotional adjustment of such a big life change as well. We will cover this topic in more detail below.
5. Review and Adjust
As life changes, so will your budget. Review it at least once per year to ensure it still works for you.
Adjust Your Budget Over Time
Just like life in general, retirement isn’t static. You have to be ready to adjust when life throws curve balls your way. As your life evolves, your budget should too. For example, you could experience health changes that could mean higher medical bills or long-term care needs. As we’ve seen already, inflation can balloon costs for your groceries and utilities. A big life event like downsizing your home might free up funds or create new expenses as the housing market fluctuates.
Your retirement budget isn’t one-and-done. Life evolves, and your budget should too.
You can pivot effectively by:
- Revisiting your budget annually to adjust for new expenses or changes in income.
- Reconsidering discretionary spending if your essential costs increase drastically.
- Working with a financial advisor to align your investments with your budget goals.
While it’s impossible to anticipate every possible curve ball, you can set yourself up for the most success by avoiding common pitfalls.
Common Retirement Budgeting Mistakes to Avoid
Mistakes happen, and sometimes unavoidable issues throw you off, but some common mistakes are avoidable. Having a solid plan in place can save you from these common pitfalls:
1. Not Considering the Power of Working Longer
Many people overlook how impactful it can be to work just a few more years. Working longer allows you to:
- Delay taking Social Security and increase your benefit
- Continue contributing to retirement accounts
- Shorten the number of years your savings need to last
- Potentially maintain employer health insurance longer
Working longer can also have a major impact on pensions. Additional years of service can often increase monthly payments significantly—especially if you’re approaching a milestone like 30 or 35 years of service. Some plans also calculate payouts based on final average salary, which can rise in the last few years of work.
Solution: Consider how even one or two extra working years can enhance your budget flexibility and long-term financial confidence.
2. Overspending Early in Retirement
You finally have the free time to do what you want! Retirees often splurge on big trips or hobbies in the first few years, only to find themselves short later.
Solution: Build a solid plan in your budget for discretionary funding to avoid uncontrolled revenge spending.
3. Underestimating Healthcare Costs
Medicare doesn’t cover everything. Many fail to account for increased premiums, co-pays, and prescription costs. This is especially true should you experience a serious illness or injury.
Solution: Keep tracking average costs and make sure your essentials budget includes these increased costs.
4. Forgetting The Impact of Inflation
A dollar today doesn’t have nearly the buying power it did in the 1970s. That value will only continue to shrink as costs rise over time.
Solution: Add a buffer into your budget for these inevitable increases to protect you in the future.
Budget for Your Retirement Lifestyle
Budgeting in retirement isn’t about restricting yourself; it’s about giving yourself the freedom to enjoy life without financial stress. A well-planned budget helps you cover your essentials, enjoy retirement, and stay prepared for the unexpected. We can give you advice on how to create a retirement budget that works for your lifestyle. Take the first step toward a confident retirement. Reach out to Flynn Wealth Partners today for professional advice by calling 517-336-0321 or completing our online form.
About Flynn Wealth Partners
For over 30 years, we’ve helped Michigan families create smart, flexible financial strategies that align with their values and goals. Our team of experienced advisors provides personalized guidance for every aspect of your financial life—from college savings to retirement planning and beyond. Schedule a consultation to learn how we can help your family prepare for college while building a comprehensive plan for your financial future.