Maybe you love budgeting. Maybe you hate it. Maybe you gamify your budget to reach your goals. Or maybe you think that budgeting is just downright frustrating.
But regardless of how you feel about budgeting during your working years, you had better learn how to like it. Because if you don’t budget for retirement (and keep a tight budget in retirement), you run the very real risk of running out of money.
Pre-retirement and retirement budgeting share similar processes, but the inputs might look a whole lot different. Your expenses won’t necessarily be the same in retirement, and your income sources will assuredly change.
If you haven’t yet made a budget for retirement, read on. I’ll go over the basic steps of creating a retirement budget to give you a clearer picture of how to handle this vital financial task.
Building a Budget for Your Retirement Years
When you’re in your working years, you can’t just copy and paste your current average monthly expenses into your retirement budget and call it a day.
Yes, the expense categories will be mostly the same, but the amounts will likely change. For instance, you might find that less of your money goes toward certain essential expenses (such as housing and transportation), and that more of it goes toward other essential expenses (such as health care costs) and recreational expenses (like traveling or dining out).
Your income will be different, too. You’re retiring—and while that might mean you still work a few hours a week, you probably won’t be collecting a full paycheck anymore. Instead, your money will come from any number of different sources, such as Social Security and retirement savings.
And just like you have to adjust your budget as your circumstances change throughout your working years, your numbers will almost certainly shift in retirement, too.
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Step 1: Determine Your Retirement Expenses
I’ll start by running through the main categories of retirement expenses. Most people will have to spend at least some amount of money on every one of these items.
Just how much one spends, of course, will vary from person to person.
Housing
You’ll still need a roof over your head in retirement. However, the amount you pay for said roof could change—it’s likely your housing expenses will decrease or stay roughly the same in retirement, with a small chance that they’ll actually go higher.
It all depends on your plans.
According to the Transamerica Center for Retirement Studies’ 2023 report Life in Retirement: Pre-Retiree Expectations and Retiree Realities, nearly two-thirds of retirees (63%) live in the same homes they did prior to retirement. If this is also your intention, you have a good sense of how much your housing will cost. If you’ll still have a mortgage heading into retirement, your costs likely will stay the same. If you pay off your mortgage prior to retirement, your costs won’t disappear—you’ll still have to pay property taxes and homeowners’ insurance, for instance—but they’ll probably plummet.
Of the remaining 37% who moved to a new home, the majority—27% overall—downsized into a smaller home. If you do that, and you don’t move into a more expensive area, chances are your housing costs will drop, too.
But a few people do upsize, whether that’s to make room for a caregiver, live with additional relatives, or simply to have more room to themselves. In that case, you might need to budget for larger housing expenses.
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Utilities / Bills
Your home size and the size of your utility bills are closely related. Barring a move to somewhere with a significantly different climate, if you downsize during retirement, you might save on heating and cooling bills. If you upsize, expect your utility bills to be upsized, too.
According to the Alliance for Lifetime Income, the average monthly utility expenses for a household with only people age 65 and older is $308. However, that doesn’t factor in other regular non-utility bills such as your phone plan, internet service, and more.
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Health care / Insurance
Typically, health insurance premiums are the largest medical expense in retirement. According to T. Rowe Price, Medicare premiums (including prescription drug coverage) account for between 73% to 81% of the annual health care expenses for retirees, regardless of which type of Medicare coverage they have.
In addition to Medicare premiums, retirees have to pay deductibles, coinsurance, and out-of-pocket medical costs. Retirees also sometimes make health- and mobility-related quality-of-life purchases, such as power wheelchairs or installing bathroom handrails.
Health care expenses during retirement can vary drastically by person depending on known medical issues and those that occur during retirement.
Related: HSA Rollover: How to Transfer HSA Funds to a New Provider
Food
Great news for this expense category: There is a very good chance this cost will go down for you in retirement. Currently, the Silent Generation (people between ages 78 to 96 years old in 2024) spends the least amount on food out of all generations—and it’s likely your food expenditures will follow a similar trajectory as you advance in age.
Here’s the breakdown of average annual food expenditures by generation as of 2021, per data from Consumer Expenditure Surveys by the U.S. Bureau of Labor Statistics:
- Gen Z: $5,529
- Millennials: $8,463
- Gen X: $10,388
- Baby Boomers: $7,651
- Silent Generation: $5,487
Also worth noting: Of the roughly $5,500 the Silent Generation spends on food, about three-quarters is spent on food at home, while only about one-quarter is spent on dining out.
There are a few reasons those numbers get lower with age. At some point, kids move out and you’re no longer responsible for buying their food. Many people also eat out less as they get older—of the roughly $5,500 the Silent Generation spends on food, about three-quarters is spent on food at home, while only about one-quarter is spent on dining out.
Many older adults also take advantage of senior dining discounts and may spend more time comparing prices or clipping coupons.
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Transportation
Transportation costs also tend to decline during retirement—largely an effect of no longer having a daily commute to and from work.
But while this expense might decline, it likely will still play a significant role in your budget. According to BLS data, U.S. households spend nearly $11,000 a year on transportation costs, such as vehicles, car insurance, and gas. For adults age 65 and older, that average dips to a little above $7,000.
Anyone who plans to take big road trips or frequently visit far-away relatives by car should expect to spend (and thus budget for) more.
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Vacation / Travel
Thinking about spending your newly found free time traversing the country or even flying around the globe? If so, we hope you enjoy yourself—just know that the cost of vacations can quickly add up.
You have obvious expenses such as flights, hotels, and meals. But there are also less obvious costs, such as hiring a house sitter and/or pet sitter.
It’s not just the frequency of travel that can send your vacation budget soaring—in some ways, travel becomes more expensive as you age.
For example, the average cost of travel insurance for a 20-year-old is only $224, says USA TODAY. Meanwhile, the average price of insurance for a 70-year-old is $555, and it’s $907 for an 80-year-old. Plus, you likely will require more comfortable accommodations when you travel—cheap hostels and renting a bike might be fine when you’re young, but retirees likely will want to book nice hotels and easier transportation.
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Entertainment
Entertainment is a broad spending category. It can include in-person experiences, such as going to a movie theater, live concert, or sporting event. Entertainment costs also include digital purchases, such as cable, streaming TV and music services, and video games.
Many entertainment costs are small on their own, but they can add up. The Alliance for Lifetime Income states that the average monthly entertainment expense for a household aged 65 and older is $233—though the number can vary significantly depending on your hobbies.
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Family and friends
Many retirees love to spoil their family and even friends during retirement. Some see their loved ones frequently and insist on paying for every activity and restaurant bill. Others go as far as to partially or fully support their adult children.
A 2024 Savings.com study found that the majority of parents (58%) sacrificed their own financial security to help their adult children. The survey also found that, on average, parents who provided financial support to their kids were giving $1,384 per month.
So don’t just budget for how much money you’ll spend on yourself in retirement. Think about how much you are likely to spend on a spouse, children, and other people close to you.
Related: How Much Should I Contribute to My 401(k)?
A quick-and-dirty way of determining expenses: Just take 80% of your pre-retirement income
Feeling overwhelmed? Not quite ready to forecast your monthly expenses in retirement?
One quick-and-dirty shortcut you can take to get a very rough approximation is to budget for roughly 80% of your working income. For instance, if your pre-retirement income is $100,000, you can estimate your annual retirement expenses to be about $80,000. (You might spend more or less depending on your lifestyle, but generally speaking, it’s a fair expectation.)
I’ll be clear: This method helps paint a broad picture, but it’s not nearly as accurate as doing the hard work of digging into the numbers. At some point, you should at least do your own calculations, if not have a financial advisor crunch them for you.
Why the step-down in expenses between retirement and pre-retirement?
If it seems odd to you that your essential monthly expenses are lower during retirement, just consider how many major expenses decline or vanish once you retire:
- Retirement contributions: Financial experts generally suggest workers contribute around 15% of their pre-tax income to retirement savings (though individual circumstances vary). This expense usually disappears upon retirement.
- Housing costs: Housing costs go down for many retirees because they choose to downsize their homes and/or move somewhere cheaper.
- College education savings: Most retirees are past the point where they are saving for their kids’ college educations, though you might help your grandchildren save for school.
- Transportation expenses: Transportation costs thin once you give up your daily work commute.
- Food costs: Retirees tend to eat out less frequently, can use senior discounts when they do, and often simply eat less food than their younger counterparts.
Related: What Are the Average Retirement Savings By Age?
Step 2. Determine Your Retirement Income
Some of your retirement income will be highly predictable, whereas other income streams may be less reliable.
First, add up “reliable” income
Start by adding up all of your sources of income that are guaranteed throughout your retirement. Importantly, these sources of income might not stay the same across your entire retirement—in some cases, they might grow (such as how Social Security provides cost-of-living increases indexed to inflation). Typically, when retirement-budget planning, expected growth in these sources will be factored into your income projections.
- Social Security: The amount of money a person receives through Social Security retirement benefits depends on the number of years they worked, how much they got paid while they worked, and when they retired. The estimated average monthly Social Security retirement benefit was $1,907 as of January 2024, according to the SSA.
- Pensions: Pensions are defined benefit plans where employers contribute to a large pool of money, which is then invested to grow. They are less popular than they once were, but according to the Bureau of Labor Statistics, around 15% of private industry employers still offer pensions.
- Annuities: An annuity insurance contract is a tax-deferred investment vehicle. Individuals who purchase annuities receive a guaranteed income stream for a predetermined period of time or the rest of the annuitant’s life.
- Permanent life insurance: Permanent life insurance offers lifelong coverage and provides a way to invest your premiums.
Next, add up potentially temporary income you’ll be earning when you start your retirement
Next up, you’ll want to include “less reliable” sources of income, which include types of income that could significantly fluctuate during retirement, or that you might have at the start of retirement but that you might not be able to count on after a few years. For instance:
- Part-time job income: Some people ease into retirement by switching to a part-time job. If you plan to work a part-time job, include how much income you expect to make each year.
- Other sources of income: You might expect to bring in other types of temporary income, such as a lawsuit settlement or rent from renting out real estate.
Then, factor in your retirement savings
Now you can start determining how your retirement savings factor into the equation.
Take your expected annual expenses and subtract the annual income from the items above. The remainder is how much you’ll need to withdraw each year from your retirement funds, which includes any money across tax-advantaged retirement accounts, taxable brokerage accounts, and basic cash savings.
Let’s say you have $80,000 in expected annual living expenses, and your annual income from the sources above comes out to $50,000. You would need to withdraw at least $30,000 a year from your retirement savings.
Interestingly, there’s more than one way to determine your withdrawals. For a longer explanation, check out our primer on withdrawal strategies in retirement.
Lastly, you’ll need to remember to factor in any applicable taxes for all of the above sources of income, as that’s not accounted for in your expenses line.
Related: How to Choose a Financial Advisor
Step 3. Monitor Your Actual Expenses and Spending
Expectations and reality don’t always align. The budgeting advice above factors in many expected essential and discretionary expenses, but unexpected expenses just have a way of arising. So be aware that your actual costs might look different than your budget, and those costs might shift over time.
At the end of the day, a budget is a plan, and plans sometimes need to change. So, regularly revisit and adjust your plan as needed.
Related: 10 Common Social Security Mistakes You Should Know
An Important Limitation of Retirement Budgeting
What happens if you prepare a budget, but you realize it’s not very accurate.
If you catch this mistake before you retire, you can choose to delay retirement—not necessarily a great outcome, but it’s a way to make up a significant shortfall.
But once you’re already in retirement—particularly if you’ve been retired for a substantial amount of time—things become trickier.
If you’re already retired, you might find it much more difficult to jump back into the workforce. In a recent AARP poll, nearly two-thirds of respondents aged 50 and older (64%) said they think older workers are subject to age discrimination in the workplace.
Also, returning to work could affect your monthly income from Social Security. You can pause Social Security benefits should you change your mind in retirement, but your opportunities are limited and your options might involve repaying paid-out benefits.
Because it can be difficult to make adjustments once you’re already retired, you need to have a strong handle on your anticipated expenses going into retirement.
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