This article was reviewed by Jay Brecknell, CFP®.
Why is budgeting so important in retirement?
Having a good budget can make or break your retirement. You’re entering a different phase of life with new costs, different sources of income, and many other changes that you may not have considered. Just like in any new season of life, being prepared for retirement is crucial.
Everyone is different, and we’ve seen some people have a much harder time creating and sticking to a budget just based on who they are. But even if the thought of tracking your spending sounds boring or even invasive, knowing where and how you spend money is the key to a relaxing retirement.
Whether you’ve been following a budget for your entire life or have avoided it for as long as possible, we’ll dive into everything you need to know and some tools for creating a solid retirement budget.
How is budgeting different in retirement?
The biggest change in retirement is being on a fixed income without the ability to make up for spending beyond your budget. There’s no more raises or bonuses at work. With different sources of money, whether savings, investments, or government payments, you’re working with a far more fixed income than you had pre-retirement, and having a solid plan to continue living comfortably is essential. There are also new costs that you’ll need to account for, as you’ll have a number of lifestyle changes.
Some of the main changes include:
- No income from work
- Additional travel costs
- Additional healthcare/prescription costs
- Additional hobby/entertainment costs
Think of retirement as being on a permanent weekend. Most people spend more money during the weekend than during the week. Your budget will need to take these changes into account, as well as have a long-term perspective so you don’t have to live in fear of running out of funds.
Without a good budget in retirement, you could find yourself running out of money early and be forced to live a different lifestyle than you had anticipated. We think that retirement is one of the best times of life, which is why we want you to be prepared to enjoy it to the fullest!
What to consider when making a retirement budget
Before diving into the actual numbers, it’s important to take some time to make a complete list of all the things you’ll need to track. One of the most common budgeting mistakes is leaving items out, which can cause problems with unanticipated costs.
Setting your priorities
A budget is useless if it doesn’t account for the things you truly care about. Setting your priorities is the first and most important step of creating your budget.
The key here is to be realistic. Before you start assigning numbers to your budget, take some time to consider your greatest priorities. Is going on a cruise every year important to you? Do you want to be a part of a pickleball club? Do you love trying new restaurants and enjoying fancy dinners? Are you planning to help your grandkids through college?
Make note of the things that are important to you. These are requirements for you to have a fulfilled and joyful retirement, so it’s key to make space for them.
Tracking your spending
Budgets mean nothing if you don’t track them. It might feel good to have a list that you’re aiming for, but without actually tracking your spending and recording it in your budget, you won’t know if you’re hitting your goals.
Without tracking, you might have a leak in the dam but not notice. Make sure you’re listing every expense, no matter how small, so that you can have the full picture you need to make informed decisions.
Commonly forgotten items
There are a surprising number of things that can easily be forgotten when creating a budget, especially a retirement one. Be sure to add these into your list, as well as anything that may be unique to you.
For things like car maintenance, you should be putting aside a set amount of money each month so that when your car needs repairs, you have a well to draw from and don’t have to scramble to reshape your budget for that month.
While you could just have a general savings amount that you budget for, we recommend getting more specific. Designate individual savings for each of the items that will have future costs so you can feel prepared for the inevitable and know exactly where your money is going.
If you don’t currently have any hobbies, start considering how you’re going to spend your additional free time to successfully transition into retirement. Without work, what are you going to do? What activities will bring you joy? And remember that tastes can change—you might swap hobbies after a few years or start giving more gifts, which is important to plan for.
How to make a budget
Whether you’ve never made a budget before or simply need to tweak your existing budget for retirement, we have suggestions and tools to help.
Changing an existing budget
If you already have a budget, perfect. The main difference with a retirement budget is swapping out pre-retirement items and adding in the costs you’ll accumulate after retiring. Many things will stay the same, such as your grocery bill, housing payments, and phone plan.
Some common items that will change are:
- Income. This will depend on your situation, but it will be less than pre-retirement.
- Healthcare. You will be in charge of paying for your own health, dental, and prescription costs after retiring.
- Travel. You will likely travel much more in retirement.
- Hobbies. You will have much more time for hobbies, and might find new ones. Consider club membership costs and craft supplies.
- Clothing. You will likely not need the same level of professional clothing without your job.
- Entertainment. Your entertainment budget will likely be higher in retirement as you have more free time to do things you enjoy.
Consider your current spending and make a note of what will no longer be a cost after retirement, and what will be added in. Think about the years ahead and consider what you will need.
Once you have your retirement budget ready, test it out for a few months. This will help you determine if this new budget will work for you, and give you more time to consider any additional parts you might have forgotten.
Creating a retirement budget
If you’ve never had a budget before, now is the best time to create one. Fortunately, the steps are quite simple. The hardest part is sticking to it and remembering to track all your expenses. It can be an adjustment, but the benefits of following a budget that works for your lifestyle is better planning and a worry-free retirement.
Determine your income
Find out where your money will be coming from and how much you can expect each month. Are you drawing from savings? Relying on investments? How much is enough for a comfortable retirement?
Determine your fixed spending
This is the non-negotiable spending. How much do you spend on food, clothing, transportation, pets, and housing? These costs can’t be eliminated, so you’ll want to find out how much they are and ensure that your income covers at least this amount.
Determine your flexible spending
These are the things like entertainment, travel, gifts, and other things that are enjoyable but not absolutely needed. This is where all the fun in retirement is, so you’ll want to make sure you budget enough here to live the lifestyle you’re expecting.
Consider any upcoming lifestyle changes
Will you move after retiring? Are you going to downsize? Will you and your partner share one vehicle instead of two? Take the future into account so that you can prepare for the costs and savings.
Set up your spending plan
With your income and expenses all listed, take a look over the complete budget and determine what your spending plan will be. Do you have extra income that you can put into entertainment? Does your income not cover everything you expected? Shuffle things around until you have a plan that you think will work for you.
Test the budget
It’s important to test the budget for a month or two to make sure it works for you. And remember to track everything—budgets are useless if you don’t use them properly. After testing the budget out, take a moment to assess. Did it work for you? Did you feel uncomfortable with certain parts, or have extra money you didn’t spend? Make any adjustments needed, and now your budget is ready to use!
Helpful tools
Budgets can take many forms, from simple spreadsheets to apps that track your spending for you. The important thing is to find a method that works for you so you can make following your budget as easy as possible.
We recommend Mint as a great tool for tracking budgets. It’s free, and includes notifications and tips to make the most out of your money. Many of our clients use this to create their budgets and then review it with us to go over our recommendations.
Creating a stress-free retirement
Budgeting may feel overwhelming, but it’s the first step to a worry-free retirement. It’s the number one part of retirement planning that no financial advisor can impact—it’s up to you to create and stick to one. But fortunately, once you get into the habit, you’ll find it gets easier with practice.
If you have any questions about budgeting or want to schedule a meeting, we’re always happy to discuss your financial goals.
While you’re working on creating your retirement budget, take a look at our eBook to find some more tips on having a stress-free retirement!