Creating a retirement budget that actually works

ByDaria Kelly Uhlig

When it comes to planning your retirement budget, knowing how much you’ll spend is just as important as knowing how much income you’ll have. While calculating future income and expenses is an inexact science, following established guidelines and using free budgeting tools will get you close enough to know whether you’ll have enough income to support the lifestyle you want after you stop working.

Step 1: Estimate Your Monthly Retirement Income

Income includes all the money that comes into your household, such as:

  • Social Security benefits
  • Pensions
  • Distributions from retirement and other investment accounts
  • Savings account withdrawals
  • Earnings from jobs and side gigs

List all of the sources of income you expect to have in retirement and estimate how much monthly income you’ll get from each one.

Your Social Security statement provides an estimate of your monthly benefit based on when you start collecting. You can get the statement by creating or logging in to your my Social Security account, located here.

As for investment income, an investment calculator, like this one from the U.S. Office of Financial Readiness, will help you project your future portfolio value based on the current value, future contributions and rate of return.

Now you have to figure out how much income the accounts will provide. Some experts recommend the 4% rule, which says you can withdraw 4% of your portfolio each year, adjusted for inflation, for 30 years without running out of money. Others suggest a lower withdrawal rate, with increased withdrawals in years with strong returns.

You can do a deeper dive into your income and asset calculations with the U.S. Department of Labor’s Taking the Mystery Out of Retirement Planning tools.

Step 2: Estimate Your Monthly Retirement Expenses

Your retirement expense estimate has three components:

  • Current expenses
  • Adjustments for how current expenses will change in retirement
  • Expenses you expect to have in retirement that you don’t have now

Keep in mind that most people spend less as they age. The most recent consumer expenditure data from the Bureau of Labor Statistics, for 2023, shows how drastic that decline can be:

  • 45-to-54 age group: $97,319 in average annual expenditures
  • 55-to-64 age group: $83,379
  • 65-to-74 age group: $65,149
  • Average for all individuals ages 65 and older: $60,087

That doesn’t mean you won’t spend more in some categories. You might travel more, for example, or devote more of your budget toward hobbies. And you might spend more than you expect on routine expenses. In fact, a recent study from Senior List Found that retirees are often surprised by healthcare, home maintenance and food costs in particular.  The Teachers Insurance and Annuity Association of America has an interactive worksheet, which you’ll find here, to help you list and calculate your current and projected expenses. One particularly useful feature is a breakdown for essential vs. discretionary expenses.

Step 3: Subtract Expenses From Your Income

Now comes the moment of truth, where you see if you have enough income to cover your expenses. If you’re left in the hole, you’ll have to reduce expenses or increase your income.

Step 4: Adjust Your Budget

You’ll probably find it easier to adjust expenses than income, so start your tweaking there, tackling discretionary spending first.

If that doesn’t balance the budget, look for ways to reduce your essential spending. For example, auto insurance is a must-have if you’ll be driving, but you can shop around for a less-expensive policy.

For larger savings, consider downsizing your home, which can both reduce your expenses and increase your savings.

If you’ve cut everything you’re willing and/or able to and still come up short, you’ll have to increase your income. You can do that by delaying retirement, which has the added bonuses of earning you delayed retirement credits that increase your Social Security benefit.

Or you can supplement your retirement income with a part-time job or side hustle. In addition to filling the gap between income and expenses, part-time work can be a fun way to add structure and purpose to your days.

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Daria has over 15 years of experience as a service journalist covering personal finance and other topics. Her work has been featured on GOBankingRates, WSJ Buyside, Fox Business and USA Today. Daria earned a degree in communications from Centenary University, in her home state of New Jersey. She lives on Maryland's Eastern Shore, where she's also a photographer and avid kayaker.

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