Budgeting for Retirement

Trying to do financial planning for retirement, which can be ​20 or 30 years​ down the road, may seem like an exercise in futility. How much money should you be saving from each paycheck? How can you create a spending plan now for when you retire? These may seem like obscure moving targets, but it’s possible to put these figures in perspective with a little thought and planning.

Budgeting for your retirement expenses is not difficult. You can make certain assumptions at first about your essential expense and fixed expenses and recognize that these figures (think health insurance, sources of income and discretionary expenses) are not etched in stone and will change over time. And that’s OK because a projected budget will give you a place to start meeting your long-term personal finance goals.

Planning your retirement budget with income and expenses will give you peace of mind and show how you can enjoy your retirement years without running out of money. Follow these steps to create your retirement worksheet to get an idea of how much money you will need in retirement.

With your retirement budget in hand, start your retirement savings early to accomplish your retirement plan.

How much income do you expect to have in retirement and where will it come from?

​Social Security:​ According to the Social Security Administration, if you have a moderate income, you can expect Social Security benefits to make up about ​40 percent​ of your latest income before retirement.

You can start drawing Social Security at ​age 62​, but you will only receive about ​74 percent​ of the amount you would receive at the full retirement age of either ​66 or 67​, depending on your birth year. If you waited until ​age 70​, you would receive about ​132 percent​ of the amount at full retirement age.

​Retirement savings:​ Add in the income you expect to be receiving from your retirement savings accounts, such as a ​401(k),​ traditional IRA or Roth IRA. The rule of thumb used by many financial advisors is that you can withdraw ​4 percent​ annually of your retirement savings and not run out of money for ​25 years​. However, be aware that some withdrawals from your retirement savings accounts may be taxable, which will reduce your net income.

​Pensions:​ If you're fortunate, you may be entitled to pension income through a plan with your employer, especially if you work for any federal, state or local government organization.

​Part-time income​: Many retirees are now taking on part-time work to generate side income to make up for any shortfalls in retirement. With the current trend toward more remote jobs, it's becoming easier for retirees to work remotely to supplement their income.

​Read More​: What is the Rule of 85 With Retirement?

You can start creating a retirement budget by looking at your household expenses over the past several years. Take notes of the amounts you spend for housing, transportation, food, medical expenses and incidental expenses such as cable subscriptions, gym memberships and cell phone plans. You probably won't have the same expenses in retirement, but looking at your past expenses will give you some idea of where you spend your money to support your lifestyle.

Generally, you can expect your expenses in retirement to be around ​70 to 80 percent​ of your expenses while working, but there will be adjustments and differences. Some expenses will go up while others will go down and maybe even completely disappear.

​Read More​: What Happens to a Retirement Account When You Get Fired?

Housing will probably be your highest retirement cost, but there are several ways to handle this. You might sell your current house and pay off your mortgage, which would eliminate a major monthly expense and free up your home equity. You could then use the equity to add to your retirement nest egg or use it as a down payment on a smaller house. A smaller house would also reduce your heating and cooling bills and lower your real estate taxes, leaving more in your bank account each month.

If you currently have medical insurance through your employer, you may have to pick up the premiums when you retire. These premiums will add to your retirement budget. You won't be eligible for Medicare coverage until age 65. Even with Medicare, you'll still need to pay for Part B coverage, prescription drug coverage and possibly a supplementary plan to cover Medicare's out-of-pocket costs.

You may not have the cost of commuting to and from work, but your transportation costs won't disappear. People don't like to sit around their house doing nothing, so you'll need to include the cost of gas or public transportation for trips to restaurants, museums or other activities. If you have a car, it will need maintenance and repairs. If you’re planning on buying another car, either new or used, you'll need to add that monthly payment to your budget. If you want to avoid these costs, Uber and Lyft are now a favorite choice for some retirees.

Do you and your spouse like to eat out a lot? This may be an area to reduce spending in retirement if you need to make cuts in your budget to match your income. Giving up costly convenience foods and preparing healthier meals at home will reduce your food costs. Take advantage of senior discounts at restaurants and coupons at grocery stores.

Retirement is supposed to be the time to start enjoying everything you've always wanted to do. If spending $20,000 on a trip to Europe is on your list, then add it to your budget. Travel is only limited by your budget, but you can still take advantage of discounts on rental cars and hotels. Also, since you're retired, you're able to enjoy the benefits of lower prices by traveling during weekdays and other off-peak times.

Nothing makes grandparents happier than being able to give gifts to the grandkids, especially during the holidays. If you plan on spending ​$500 or $1,000​ on gifts, for example, add these costs to your budget.

​Read More:​ How Much Can I Make Before I Have to Pay Taxes on My Social Security?

Withdrawals from your tax-deferred retirement savings accounts will create a tax liability. In addition, some of your Social Security benefits could be taxable if your retirement income goes above certain levels. You'll need to include these taxes in your retirement budget.

Being able to enjoy your golden years is all about retirement planning. You need to have some direction on where you want to go and how you intend to get there. Creating a retirement budget is a good place to start.