Learn How to Make a Retirement Budget

Woman planning a retirement budget
••• Budgeting can be fun. Here's how to get it done. kupicoo/Getty Images

Believe it or not, a retirement budget can lead to more fun in your golden years. By having a plan, you'll have less stress, and making a retirement budget helps you avoid one of the biggest retirement mistakes people make of spending too much too soon.

The Importance of a Retirement Budget

Of the many factors that affect your retirement income (inflation, your rate of return on savings and investments, your retirement date, taxes, spending, part-time earnings, Social Security, pensions, and more) you have the most control over one critical factor: Your spending. In retirement,  can become financially dangerous.

Getting a handle on your upcoming retirement budget puts you in a place where you’ll be able to make smart choices about the retirement lifestyle you want. You may find certain trade-offs you are willing to make that allow you to do things like retire earlier, travel more in retirement, or have more money for fun and hobbies.

Creating Your Best Budget

Start by gathering information. Below is a list of items you may need.

  • Your last 6 to 12 months' worth of bank account statements
  • Your last 6 to 12 months' worth of credit card statements
  • Last two pay stubs for you (and your spouse if you are married)
  • 10-12 colored highlighter marking pens
  • Last year’s tax return

Use the information on your bank account and credit card statements to see where your money has been going, and use the highlighters to group expenses into categories by following the five steps below.

STEP 1: Your Fixed Expenses

Start your budget by listing all of your recurring monthly, quarterly or annual payments. To make an effective retirement budget, break this list down into three parts:

  • Essentials: This includes food, clothing, housing, transportation, and healthcare.
  • Non-essential monthly obligations: Although we all may think of cable TV as an essential, it isn't. Non-essentials include things like cable, gym memberships, subscriptions, and other items for which you receive bills.
  • Required non-monthly expenses: Items like property taxes, insurance premiums, auto registration and home warranties may come up once a year. Add up these periodic expenses and divide by 12 to calculate their cost on a monthly basis to include in your retirement budget.

    To account for the timing of expenses,  with the months of January to December typed across the top in separate columns. Down the vertical side of the spreadsheet, list each expense.

    If your utility bill runs an average of $200 a month, put $200 in each monthly column. For Christmas gifts, if you spend about $500 a year, divide the $500 in two and put half each in the months of November and December. Do this for each item, then total up each month.

    STEP 2: Account for Changing Health Care Costs

    If your employer has been paying your health insurance premiums, once retired you may have to pick up the tab. If you retire prior to reaching age 65, . Between the ages of 60 and 65, before you become eligible for Medicare, health insurance premiums could run $1,000 a month per person. Shop for plans now so you can add an estimate of that monthly expense into your budget. 

    Don't forget about dental, eye care, and hearing. Add those expenses to your budget too. Add in estimates for health care costs in retirement in order to develop a realistic expectation of how much you'll need to live on each year. Getting this item wrong is one of the seven deadly retirement budget killers that can wreak havoc on your retirement plan.

    STEP 3: Add Optional Items

    This includes all the fun stuff, like travel, hobbies, sports, and entertainment.

    STEP 4: Determine How You'll Spend Your Time

    Consider how your hobbies and lifestyle may change, as this could affect the way you spend. If married, ask your spouse to do this also.

    If you have expensive hobbies, you'll need to budget more for those. Begin to think about changes you may be willing to make that would reallocate money from items that are less important to items that are more important. For example, if you want to travel more, would you be  and live in a smaller house?

    STEP 5: Calculate Fixed Versus Flexible Costs

    • Total all your fixed expenses.
    • Total all your other, non-fixed expenses separately.
    • Divide your fixed expenses into your total expenses.

    How much of your retirement income will go toward fixed expenses? Does this align with your thoughts in Step 4 on how you want to spend your time in retirement? If you have large monthly obligations for house and car payments, consider a lifestyle change to free up funds for travel or hobbies.

    As a general rule of thumb, if you want more fun in retirement, find ways to lower fixed expenses so you can have more flexible funds available to spend on the interests you most enjoy.