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  • Writer's pictureMark Fonville, CFP®

How to Budget for Retirement: 5 Simple Steps

Updated: Jan 19


How to Budget for Retirement: 5 Simple Steps

There are dozens of resources that offer advice on how to save for retirement. But, saving for retirement is only half of the battle. 


Once you’ve officially entered your retirement, you’ll begin another journey to figure out how to budget for retirement. This consists of tracking your income, monitoring your expenses, and ensuring that both sides of your cash flow stay balanced. 


Establishing clear goals is a cornerstone of effective budgeting for retirement. Identifying and ranking your financial objectives, whether in consultation with a financial advisor or through self-guided planning, is a crucial step to take prior to creating your retirement budget.


To help identify and establish your goals, be sure to download our free master list of of goals for retirement so you don't miss an important expense for your budget.


Budgeting for retirement comes down to five simple steps:



With that in mind, let’s examine how to budget for retirement.


Step 1: Establish Reliable Income Sources and Amounts 


Average household retirement savings account balance, by age

The first step to determining how to budget for retirement is understanding how much money you’ll make in your golden years. 


For most people, retiring marks a significant transition where they won’t be working full-time anymore. If this is the case, you’ll need to adjust to a different income approach than you’re used to. 



This also means you might have to get accustomed to receiving your income at irregular intervals – instead of receiving a bi-weekly paycheck.


To start, you need to establish all of your reliable income streams. Here are a few of the most common:


  • Social Security: Check your Social Security statement online or consult with the Social Security Administration to determine how big of a monthly check you can expect to receive during retirement. If you haven’t started receiving your benefit yet, learn 12 strategies to maximize your social security benefits


  • Pension: If applicable, understand the details of any pension plans you will receive and determine the income that they will provide. To learn about any potential pension plans, reach out to your employer’s human resources department.


  • Part-Time Work: If you plan to work part-time during your retirement, then you’ll be able to rely on this for additional income. 


  • Investments: Consider income that’s generated from retirement accounts (401(k), IRAs) and other investments). This includes income like stock dividends, bond/annuity/insurance payments, and investment income from any property or businesses that you own.


The main goal here is to get an accurate estimate of how much money you can expect to make once you retire. Once you’ve established all of your income streams, add them all up to determine your expected annual income. From here, you can easily divide this into monthly/weekly income.


Again, keep in mind that you likely won’t be receiving consistent checks like you did when you were employed full-time. For example, stock dividends are usually only paid every quarter. 


Have over $1 million in savings and investments? Be sure to conduct our free retirement assessment to find the strategy that works best for you.


Step 2: Identify Your Needs, Wants, and Wishes 


Identify your needs, wants, and wishes

The second step to setting a budget in retirement is to establish how much your lifestyle will cost you. In other words, what expenses will you need to cover? In general, the best strategy is to break down your expenses into three main categories:


  • Needs: This includes all of your fixed monthly expenses like groceries, debt payments, home maintenance, utilities, healthcare, and auto expenses. These are the costs that you will 100% need to pay each month or risk a serious decline in your standard of living.

  • Wants: These are expenses that you’d like to pay for in a perfect world but can be modified in terms of cost and timing if necessary. A few examples include new cars, charitable giving, traveling, giving to family members, paying for weddings (children or grandchildren), contributing to 529 plans for grandchildren, home renovation projects, etc.

  • Wishes: These expenses are things that you would buy if money wasn’t an issue. A few examples include big trips, second homes, giving more than normal to charity, large home renovations, etc.


By breaking expenses into these three categories, you can get a sense of how much money you need to meet your basic living expenses compared to how much it might cost if you want to spend a bit more freely in retirement. With that said, remember that everyone has different priorities when it comes to their budget. 



PRO TIP: The easiest way to break down your spending is simply to look at your bank statements from the past few years. This will give you an idea of exactly how much you tend to spend in any given year. Plus, almost all bank apps will automatically categorize your spending so that you can see what you already spend on your needs, wants, and wishes.


Step 3: Create Your Retirement Budget


Create your retirement budget

Now that you know your reliable sources of income and expenses, it’s time to establish how to budget for retirement. To do this, just subtract your needs, wants, and wishes from your reliable income sources. This will establish a baseline for how much you’ll need to withdraw from your portfolio each year.


For example, let’s say that your annual reliable income sources look like this:


Social Security: $20,460

Apartment Rental: $24,000

Part-time job:  $48,000

_________________________________

Total annual income: $92,460


Assuming you have average annual expenses of $180,000 then you know that you’ll be losing $87,540 each month.


  • Total income during retirement: $92,460 - $180,000 = $-87,540 

  • This tells you that you’ll need to withdraw $87,540 from your retirement account each year in order to make ends meet.


Ideally, you’d be making enough money from your reliable income sources to meet your expenses. But, don’t worry if your reliable income sources don’t bring in enough to pay all of your bills. You’ll be able to withdraw money from your retirement accounts each year to help bridge the gap.


PRO TIP: Be sure to factor in inflation when projecting future expenses. This ensures that your budget remains realistic as the cost of living increases over time. In general, you can expect inflation to be 2-3% per year. But, you can also use an inflation calculator to get an idea of how prices rise over time.


Step 4: Calculate Your Total Liquid Investments 


How Liquid are Different Assets

From here, the next step is to calculate your total liquid investments. This includes assets like:


  1. Cash sitting in checking or savings accounts

  2. Stock portfolios

  3. 401(k)s, IRAs, or similar retirement accounts

  4. Brokerage or trust accounts 


The cash that’s available in your investments is going to help you bridge the gap between how much you’re making and your expenses during retirement. It’s also important to note that the value of your investments is going to fluctuate each year. 


So, during bad years, you’ll likely need to adjust the amount that you’re pulling from your retirement funds. But, on the flip side, you’ll be able to withdraw a bit more during good years.


Step 5: Determine Your Withdrawal Rate

Determine Your Withdrawal Rate

When it comes to how to set a budget for retirement, the final step is to determine your withdrawal rate. Your withdrawal rate is the amount that you’ll be able to safely withdraw from your portfolio each year in order to meet your expenses without running out of cash.


To jump back to our previous example, we’ve determined that your retirement budget will look something like this:


Total income: $92,460

Total expenses: $180,000

______________________________

Total annual deficit:  $-87,540

 

Total annual withdrawal: $87,540


This way, you know that if you withdraw $87,540 each year then you’ll have enough money to meet all of your expenses. From here, you can get a sense of how this amount compares to your portfolio. 


For example, if you have a portfolio value of approximately $3,000,000 then taking out $87,540 each year would give you a withdrawal rate of 2.9% ($87,540 / $3,000,000 = 0.029). This puts you safely below the widely touted 4% withdrawal rate.


With all that said, this is a simplified version of how to set a budget for retirement and we’ve left out a few key factors for simplicity (taxes, portfolio income, etc.).


To get a better idea of what your personal retirement budget might look like, be sure to fill out our free retirement assessment. It's packed with helpful insights to help you budget and plan for retirement.


Prepare For Fluctuation

When you set your budget, you should also be prepared for it to fluctuate over time. After all, your needs and wants are going to change over time – and so should your budget! In general, these are the biggest fluctuating expenses that you’ll need to prepare for:


  • Medical care: Consider investing in high-quality health insurance to mitigate this expense down the road.

  • Long-term care: This includes potential costs like hiring an in-home aid or the cost of potentially moving into a senior facility. 

  • Wish Expenses: On a more positive note, you always want to leave room in your “wish” budget to allow for enjoyable expenses like traveling, hobbies, and, of course, spoiling any grandchildren that you might have.

  • Investment opportunities: You also might want to have some wiggle room in the budget so that you can take advantage of any investment opportunities that arise. For example, if the market dips 20% in one year then you might want to have cash on hand so you can invest in your favorite stocks.

Budgeting Tools For Retirees


If you still need a hand when it comes to tracking your expenses in retirement, Senior Living highlights the following apps as the five best budgeting apps for seniors:



These are all good options to help you keep track of your ongoing expenses through retirement. Additionally, you can also explore free retirement online retirement classes that offer a range of retirement insights, as well as read more from Covenant Wealth Advisors including:



How to Budget For Retirement: Bringing It All Together

By this point, you should have a firm idea of how to budget for retirement. Essentially, it just comes down to:


  1. Assessing your reliable income streams

  2. Understanding your expenses (needs, wants, and wishes)

  3. Creating your retirement budget

  4. Calculating your total liquid investments

  5. Determining your withdrawal rate


There’s quite a bit to consider so you might want to consult with a financial advisor, who will be able to provide even more guidance in areas like:


  • Estate planning: Develop or update a plan for your estate, including wills, trusts, and beneficiary designations.

  • Tax Planning: Understand the tax implications of your income sources and investment withdrawals and help you optimize your tax strategy to maximize savings.


We hope that you’ve found this article valuable when it comes to learning how to budget for retirement. If you’re interested in reading more, please subscribe below to get alerted of new articles as we write them.


If you have over $1 million in savings and investments then be sure to conduct our free retirement assessment to get a personalized budget for retirement.

 


Mark Fonville, CFP

Author: Mark Fonville, CFP®


Mark is a fiduciary and fee-only financial advisor at Covenant Wealth Advisors. We help individuals with over $1 million plan, invest, and enjoy retirement without the stress of money.


Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.



 

Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.



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