Retirement Budget Planning: 9 Steps to Consider

Planning ahead for your retirement years can aim to provide additional confidence and financial security. And with increased life expectancy, a retirement budget can take into account your future income and spending over a longer period of time.

There are no clear rules about how much you might spend in retirement because everyone is different. But one of the first things you might want to consider doing is getting a handle on the line items in your retirement planning budget and determining your retirement “needs, wants, and wishes.”

Start by separating your spending into two buckets: mandatory (your “needs”) and discretionary (your “wants and wishes”). Then, compare them to your expected income in retirement.

1. Start with the mandatory expenses. Consider the spending items that you’ll really need, such as transportation, clothing, housing, and medical insurance costs. Note that your “needs” may shift up or down over time, which is why it’s important to go over your budget each year.
2. Next, determine your discretionary expenses. What items and activities are on your retirement “want” list? Travel, activities, child’s wedding, a car, spoiling the grandkids? Also, note if these items may change over time.
3. Once you reviewed your expenses, consider your retirement income. Where will the money come from? Add up income from pensions, Social Security, and any other nonportfolio sources. Subtract that number from your target annual income to determine how much money you'll need to generate from your portfolio, such as your 401(k), IRA, or brokerage accounts. Also, account for other future sources of income; for example, perhaps you're planning to downsize into a smaller, less expensive home and add the proceeds to your nest egg.

Building out a realistic budget can help you increase the likelihood that you’ll fulfill your future goals and enjoy the life you envision.

Many people never take a good look at all the things they spend on. That might be OK if you have a paycheck coming in every week or two, but once those paychecks stop coming and you’re relying on your savings, it could be time to look at your receipts.

One key is to try to understand exactly what you’re spending your money on now. You can start by following these steps:

• Analyze your credit card and checking account statements by looking over the annual summary to help determine your average monthly spending.
• Compile a list of the essentials. Consider what spending areas may go down and what areas may go up in retirement.
• Account for one-time purchases that occur infrequently (like a new car, replacing a roof, or buying a major appliance).
• Remember that although living expenses might decrease with the kids out of the house, your travel expenses might rise if you’re taking lots of trips to visit the grandchildren and health expenses typically increase as you age.

Take the time to give your retirement situation and its changes from your working life a thorough and serious review. Sure, once you retire, you won’t need a professional wardrobe, and you might not go out for lunch as often—but then again, you might. In fact, the more time you have on your hands, the more likely you are to fill that time with activities that increase spending.

For example, you may find you want to travel more in retirement, perhaps to see your grandchildren or to explore new cities. By scrutinizing the line items in your budget, analyzing your expenses, and allocating funds correctly, you can be better prepared to finance any trips you envision and any costs for your overall lifestyle in retirement years.