Creating a budget for retirement is a critical component of you reaching your retirement goals without dying broke! But budgeting isn’t easy for most of us.

Does the word ‘budget’ cause you anxiety, provoke yawns of boredom, or make you feel like you can’t have any fun? Well, it doesn’t have to. Believe it or not, budgeting can actually be entertaining, and you can even purposely set up your budget with the objective of setting aside cash for having more fun. 

Every budget is going to look drastically different due to not only vastly different financial and personal circumstances, but also due to contrasting ideas of what is a “priority.” Some may prioritize a fun retirement budget while others prioritize never running out of money. 

We find your balance between spending too much and living too little!

Greg Phelps, CFP®, CLU®, AIF®, AAMS®

While a retirement budget is quite serious in nature, it doesn’t need to cause worry, panic, obsession, or guilt. The purpose of a budget is to make sure that you know exactly where your money is being spent to assure you have enough to last your retirement lifetime.

Why budgets often don’t work

Similar to diets, exercise plans, and other goals, we tend to start out on fire! Then the flames are extinguished over time.

Add on to this poor planning like under or overestimating income or expenses, disagreements between spouses, stressing over every penny, and thinking that you will be able to cut way back on having fun, and it’s no wonder that only 30% of American households stick to their budget. 

So before you even start, don’t try to eliminate all of your ‘fun money,’ go easy on yourself, have well-established goals, and look for areas of improvement as you go. You should also understand that some discipline now will help you later in retirement. 

How to create a budget for retirement

Learn how to create a budget for retirement
Learn how to create a budget for retirement to help ensure you don’t die broke!

A retirement budget is a dynamic picture of the flow of your money, where it comes from and where it goes. For a more robust financial picture, you can include your net worth and analyze investments and assets to know where you stand financially.

Basic budget steps:

  • Have a clear picture of your short, medium, and long-term goals
  • Write down your income from all sources, taking note of expected inflationary increases throughout your retirement
  • Record your necessary expenses, things you can’t live without like food in the fridge, a roof over your head, and clothes on your back
  • Assign leftover dollars to your other non-critical goals like travel, Christmas gifts, and playing golf or going fishing 
  • If you have overlap, GREAT! You can tweak your budget towards a savings account for larger goals or more fun during retirement
  • If you have a shortfall, consider creating a plus and minus column for each line item that’s on the chopping block to help you determine the priority of each line item

Use S.M.A.R.T goal setting

S.M.A.R.T goal setting is a special method of setting clear and concise goals and is credited to work by Peter Drucker

  • Specific
  • Measurable 
  • Achievable 
  • Relevant/Realistic
  • Time-bound 

Maybe you have a fun goal in mind, like traveling to Paris. A great S.M.A.R.T budgeting goal would be:

  • Specific: To travel to Paris
  • Measurable: Easy to measure as you step off the plane in beautiful Paris
  • Achievable: I can budget and save every month for 12 months to cover the costs of the trip
  • Realistic: People travel to Paris all the time, and so can I! 
  • Time-bound: Take trip 12 months from now

Repeat this for all of your goals and budgeting will take on a whole new meaning and, most importantly, you will be more likely to achieve your professional and personal goals. 

There are many ways to budget:

  • Writing the budget down on paper
  • Creating excel spreadsheets
  • Downloading or signing up for one of the dozens of budgeting apps

Some retirees follow popular allocation models like the ’50/30/20′ budget, where you spend 50% of your income on needs, 30% on fun, and you set aside 20% for larger long term retirement purchases like a new car or vacation home. This may work if all of your retirement necessities can be covered by 50% of your retirement income, but it must be adjusted if you fall short.

The bottom line is to keep things simple and do what works best for you!

Evaluate your retirement income

Account for your monthly income from all sources such as pension income, Social Security, and investment distributions. Not all of those income streams will be available every year during retirement, however.

Some income streams like Social Security will start several years into retirement. Some income streams such as annuities or business interests may end after a certain number of years.

Other income streams will be drastically affected by taxes during retirement. Pre-tax IRAs or 401k rollovers will be taxed as ordinary income when you retire. Variable annuities will have their own set of tax consequences as well depending on whether you annuitize them or take retirement income distributions.

For these types of investment accounts, it’s critically important to “gross-up” the expected distributions to accommodate for the tax implications. Failure to do this will get your retirement income plan in hot water down the road!

This retirement income planning becomes a juggling act, and oftentimes requires the analysis of some complex financial programs such as the MoneyGuidePro software.

Evaluate your expected retirement expenses

For many people, accurately accounting for monthly and yearly expenses may be one of the most challenging aspects of creating a budget. You may wonder, “Am I really expected to track every single penny I spend?” The truth is that tracking every penny causes lots of stress and is difficult to do.

However, with technology, it can be easier to track all of your expenses, especially if you use a credit or debit card. Of course, there will be those that swear to avoid cards while others frantically figure out which cards give them the biggest “rewards.” A debit card or cash may be best for those that tend to spend without knowing how they will pay for it. 

Common expenses

  • Rent or mortgage
    • These payments usually make up the largest monthly expense for the majority of Americans
  • Vehicle expenses
    • For vehicle expenses, include gasoline, car insurance, yearly repairs and common repairs for your car make, oil changes, and other maintenance
  • Transportation costs in addition to (or in place of) a vehicle like Uber
  • Utilities: Water, sewer, trash, electric, cable, phone,
  • Food
  • Monthly and yearly subscriptions:
    • Dig deep to find all of your subscriptions and investigate to see if you signed up to pay recurring fees like a magazine subscription. Are you still using all of the subscriptions? If not, consider canceling.
  • Taxes
  • Insurances: Home insurance, life insurance, health insurance & Medicare costs, dental and eye care insurance
  • Debt payments such as credit cards or department store payments
  • Healthcare, childcare, pet care 
  • Fun, recreation and entertainment
  • Travel

Notice that the above list mentions life’s necessities first. Add to it the costs of your hobbies, vacations, eating out, and unplanned events like an illness or a flat tire.

There is no doubt that life’s expenses can quickly add up! However, this is exactly why a budget is a great idea and a very necessary tool. Creating a retirement budget is also clearly very individualized!

Age and health affect your budget

According to the U.S. Department of Health and Human Services, the average monthly cost in 2016 of a private room in a long term care facility is $7,698. The average cost of an in-home health care aide is $20.50/hr. It is a safe bet to assume that these costs will rise.

Paying for these services can be accomplished through a combination of Long-term care insurance, Medicare & Medicaid, and VA benefits. However, the state in which the patient lives, the time period that care is needed for, and the particular services required will cause insurance coverage and out-of-pocket costs to fluctuate. 

Assessing your retirement budget

Part of the fun of a budget is seeing where you can make improvements. After considering all of the parts that make up a budget, are you in the green or are you in the red? Do you have a small leak in the pipe, or has the pipe broken and your money is gushing out to cover all of your expenses and lavish purchases? 

Maybe the results of your budget will motivate you to work longer, get a side-gig, or simply go without a portion of your desired future expenses.

Or perhaps your results calm your worries about needing more money for retirement and you realize that you are doing just fine.

Can you reduce your expenses? Are you using all of those subscriptions that you previously signed-up for? When is the last time you shopped around for better insurance policies? 

The most important revelation may be whether or not you are on the path to achieving your goals.

What to do with left-over money from your retirement budget?

After paying all of your critically necessary expenses, if you have money left over you are probably facing the common dilemma of feeling obligated to save it for future retirement expenses, but attracted to being able to spend.

You can do yourself a huge favor by using that money to establish an emergency fund, pay off debt, or create a “side-pot” for future large expenes like a new car.

You may be asking yourself, “Will I have enough money to retire?” Check out some of these calculators. They may help you answer that question.

What if you can’t stick to a budget?

If the reason that you cannot follow through with your budget is lack of discipline, take yourself out of the equation with automation.

In today’s world, almost everything can be automated. You can set up automated and automatic transfers of your money into savings accounts, investment accounts, as well as set up automatic payments for many (if not all) of your monthly expenses. Send that money to where it needs to go before you have a chance to spend it!

Creating a budget for retirement isn't always easy to stick to
Creating a budget for retirement isn’t always easy to stick to

Or, maybe it’s not your discipline, but rather the budget specifics that are making things difficult for you?

Have you stretched yourself too thin? Did you over- or underestimate income or expenses? Perhaps you low-balled yourself on fun, promising to only spend $250 for the month when you habitually spend much more than that.

It’s quite possible that you forgot about a certain expense as well. Don’t be hard on yourself, sit down again, see where things went wrong, and re-hash the budget.

Use technology to help stick to your retirement budget

Highly rated budgeting tools include:

Several other tools exist and they were created because many people need help with their budgets. 

OR you cut through the BS and do what I do . . . The Anti-Budget!

This type of retirement budget simply won’t work for most people. The Anti-Budget is a different way of looking at your finances. Your assets, income, expenses, and debt don’t really matter with the Anti-Budget. The only thing that matters is “Do I have enough to do X?”

Personally, I feel it’s easier than budgeting. I’ve been a financial planner for well over two decades. I’ve tried a detailed budget several times for my own families finances. I found the stereotypical budget process boring, tedious, time-consuming, and frankly OBNOXIOUS!

What is the Anti-Budget?

The Anti-Budget is doing one thing really well and very consistently—checking your spending account balances. I do it like this, but I’m putting a spin on this for those of you about to retire or already retired.

Let’s assume you’re a 62 year old retired couple with roughly 1.5 million in investments. Here’s how it would work for you:

  1. What’s your current retirement income? I’ll assume $5,000 per month from your investment accounts because you’re smart, and you are choosing to defer your Social Security income until age 70.
  2. What’s your checking account balance? You should keep a healthy cushion of two or three months in your checking account, so let’s assume this is $15,000 you leave as your “baseline” balance.
  3. How much is in your savings account? Ideally, you should have another three months of your monthly income in savings at a minimum. Let’s say you have $15,000 in savings as well.
  4. Ask yourself the question “Can I afford this?” before every purchase! If you’re towards the end of the month and your checking has $15,500 left in it, you have $500 to spend! If you’re towards the end of the month and your checking has $14,000 in it – the answer is unequivocally NO! You cannot spend it!

It’s simple enough on the surface, but harder to do in real life because you need a very good grasp on your monthly retirement expenses. You also need to have a good grasp on your annual, semi-annual, and quarterly expenses because they won’t show up each month.

What if you have a property tax payment of $600 due next month? What if you pay your $800 a year car insurance semi-annually?

These retirement expenses won’t show up each and every month. This is why you really need to have a solid understanding of those randomly recurring expenses.

I handle this by trying to constantly build a cushion in my savings account. For example, if I found myself at the end of a month with $16,000 left in my checking, I’d transfer $1,000 to my savings account and that “side-pot” becomes its own Anti-Budget for the non-monthly retirement expenses.

The savings account then becomes the “Go-To” for those random or seldomly occurring retirement expenses like the car insurance payment or the property tax payment. Should that account dip close to—or below—the $15,000 baseline the answer becomes “NO” for every non-essential expense.

This means I may really want to go to Hawaii, but it’s going to cost $4,000 and I’m running too close to my baselines in both checking and savings to say “Yes, I can go!”

I may have to sacrifice some fun stuff if I’m not smart with my money each month. That’s on me, that’s my own fault!

However, as I go through life and build up my savings I may easily say to myself “I have $24,500 in my savings and my baseline is $15,000, so I can absolutely transfer $4,000 to my checking and go take the trip!”

The Anti-Budget is simple, it’s straightforward, it works, and frankly, it’s fun! When my boys ask me to go golfing I look at the checking and gauge if I’m ahead of—or behind—my downward sloping baseline for the month. Hopefully, the answer is I’m ahead because I LOVE golfing with my boys!

What if my savings account builds up too high?

In the Anti-Budget, if my savings account builds up too high—let’s say $30,000—then the smart move is to reduce my $5,000 monthly retirement budget to $4,000 per month and readjust my baseline checking and savings amounts. I can also choose to reinvest that extra $15,000 back into my investment portfolio.

See how the new baseline checking and savings account amounts work for a quarter or two. Is it still too high? Too low? Time to adjust again unless it’s just about right!

What if my checking account keeps breaching the baseline?

You’ve got a PROBLEM! This budget won’t work for you. Your retirement expenses are too high or your retirement income is too low.

But my retirement income will go up when I claim Social Security!

Yup! It sure will. So here’s where the monthly cash flow amount needs some advanced calculations. When Social Security kicks in, you’ll reduce your investment portfolio draws. But by how much? And how much more can I draw down my portfolio NOW in advance of reducing those draws LATER?

This is a highly complex calculation that must factor in several things:

  • Investment rate of return
  • Inflation
  • Expected Social Security benefits

This is why I wholeheartedly endorse getting a thorough retirement financial plan created, either on your own through retirement software like MoneyGuidePro, or preferably with the help of a CERTIFIED FINANCIAL PLANNER who specializes in actual retirement planning, not just product sales.

Keep in mind, in this day and age you should find a financial specialist that can help you achieve your retirement goals even if they’re not located down the street. It’s simple to work online through various video conferencing services and get the exact same results—perhaps even better results because you’re hiring a specialist—as if you were sitting down in front of that financial advisor.

Key takeaways on creating a budget for retirement

  • Budgeting shouldn’t be synonymous with suffering or boredom
  • Keep it simple
  • Establish goals with the S.M.A.R.T. system
  • Account for all major expenses, especially subscriptions, but don’t obsess over pennies
  • Look for ways to increase your retirement income, spend less, and move towards your goals
  • Don’t try to eliminate ‘fun money’
  • Remember that age and health will affect your budget
  • Use technology to help you with your budget
  • The Anti-Budget is simple to execute, but won’t work for everyone
  • Consider hiring a financial specialist to create your retirement plan, even if you use video conferencing tools to get the job done