Whether retirement is decades or just a few years away, developing a retirement budget can help you prepare for expenses you'll encounter during this life stage.
Retirement can look remarkably different from one person to another. Some want to travel the world, while others want to downsize to a place close to their grandkids. No matter your vision, you’ll need a certain amount of retirement income to bring it to life.
Setting a target for your retirement savings may seem like a daunting task, but if you break it down into a few helpful categories, you can start to estimate your needs. Here are some of the areas to consider:
Income is the top line of your budget and, as such, may directly affect your financial options in retirement. The Social Security Administration website has a retirement benefit estimator that can project what your benefit amount might be based on what you earned last year. You can also access your Social Security Benefits Statement on the website as well. On average, retirees receive $1,866.44 per month from Social Security.1
Saving on your own throughout your career can supplement this amount and give you more flexibility to cover needs, wants and any unexpected costs that arise. Using a tax-advantaged retirement account, like a 401(k) or 403(b) at work or an individual retirement account (IRA) through a financial institution, may help you build your nest egg.
If you need help determining a savings rate or making investment decisions, a Financial Advisor can be a good resource. There are also many online retirement calculators, many of them free, available through retirement plan providers and other sources.
One of the biggest line items in your retirement budget may be housing. If retirement is years away, you might not know exactly where you want to live, but it’s worth considering how you feel about and how much it would cost to stay in your home, move to a smaller one or relocate to a retirement community.
As you get closer, you may want to narrow down your options and ensure your savings strategy is aligned to your chosen path. And beyond just rent or mortgage payments, remember to factor into your budget the costs of transportation, property maintenance and other living expenses.
Beyond covering basic needs, you might have big dreams for retirement. Consider accounting for how much it might cost monthly or annually to finance long-held goals, such as starting a second-act career in your own business, visiting places you’ve never been or leaving a philanthropic legacy.
Of course, most of us may need to be practical about which dreams we pursue and at what scale. Retirees with more limited means might find they need to prioritize and make trade-offs in order to honor their financial reality. If seeing the world is non-negotiable, for example, you might downsize your housing situation to free up space in your budget for all that traveling entails.
As you age, both routine care and care for chronic conditions may become costly. While some employer-sponsored healthcare plans carry over into retirement, retirees 65 or older without that benefit may qualify for Medicare.
Premiums and coverage will vary depending on the plan you’re in. Think about your lifestyle as well as your personal and family medical history, as well as those of your partner if you have one. This can help you estimate potential expenses and whether it makes sense to supplement Medicare or another plan with long-term care insurance, for example.
National non-housing debt sits above $1.115 trillion,2 and many Americans take consumer debt into retirement, with 53% of Americans saying that they are behind on retirement saving and planning. 3 If you do retire with debt, it’s important to have enough saved to keep up with payments while also covering your needs.
One potential strategy is delaying retirement for a few extra years to focus on debt elimination during the highest-earning phase of your career. But that’s a personal choice that may depend on your health, family situation and other factors.
Inflation is the increase in the price of goods and services over time. You can’t control it, but you can plan for it. Because of inflation, money saved today might not be enough to cover your lifestyle tomorrow. If an investment portfolio is providing returns that are less than the rate of inflation, it’s technically losing money. A Financial Advisor can help make sure that your portfolio is keeping up with inflation.
The benefit of retirement budgeting is twofold: listing estimated expenses gives you an idea of how much you need to save and sticking to your budget during retirement can help your money stretch.
Again, it can be a good idea to use a retirement calculator if you need help determining how much to save, or to consult a financial professional about the best investment strategy for your needs and goals. The more you plan, the better prepared you may be to have the lifestyle you want in retirement.
1Social Security Administration “Monthly Statistical Snapshot”(opens in a new tab) Accessed May 15, 2024
2Fool.com “Average American Household Debt in 2022: Facts and Figures(opens in a new tab)”
3Magnify Money “Despite Lofty Dreams, 46% of Americans Expect to Retire in Debt(opens in a new tab)”
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