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How to Make a Retirement Budget

A Retirement Budget Leads to More Fun in Retirement

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Believe it or not, a retirement budget leads to more fun in retirement! In addition, making a retirement budget helps you avoid one of the biggest retirement mistakes people make – which is spending too much too soon.

Why is a retirement budget so important?

Of all 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) there is ONE that you have the most control over. It’s your spending.

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

Here’s how to create your retirement budget:

What You’ll 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 paystubs for you (and your spouse if you are married)
  • 10-12 colored highlighters
  • Last year’s tax return

Use the information on the items above to see where your money has been going and use the highlighters to group expenses into categories.

How Much Time Will It Take?
  • 1 hour to gather the info you need
  • 2 hours to create your retirement budget
Level of Difficulty
  • Easy to do, and easy to put off
STEP 1 – Make a list of all your fixed or required monthly obligations.

To make a super effective retirement budget, break this list down into three parts:

  • Essentials: This includes expenses that cover food, clothing, housing, transportation and health care.
  • Non-essential monthly obligations: Although we all may think of cable TV as an essential, it is not. Non-essentials are things like cable, cell phone, gym memberships, subscriptions and other items you receive bills for.
  • Required non-monthly expenses: Items like property taxes, insurance premiums, auto registration and home warranties may come up once a year. Be sure to take these periodic expenses and calculate their cost on a monthly basis and include it in your retirement budget.

You can use this retirement budget worksheet to help you think of any missing items.

STEP 2 – Research your costs for health care before and after retirement.
  • Account for all your expected health care costs in retirement. If your employer has been paying premiums, once retired you may have to pick up the tab. What about dental, eye care and hearing? Add those expenses to your budget. To get an idea of what to expect, read Rising Health Care Costs and Your Retirement. It walks you through all the health care expenses you need to plan for.
STEP 3 – List all your flexible or optional expenses.
  • This all the fun stuff, like travel, hobbies, sports and entertainment.
STEP 4 – Write down some thoughts on how you want to spend your time in retirement.
  • Ask your spouse to do this also. Think about the things you want to be able to spend money on in retirement. 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.
STEP 5 - Calculate Fixed verses Flex
  • Total all your expenses.
  • Total all your 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?

As a general rule of thumb, if you want more fun in retirement, find ways to lower fixed expenses so you can have more flex to spend on the hobbies and interests you most enjoy!

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