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How To Build A Retirement Budget


While working over the years, you’ve probably thought on more than one occasion about retirement. You’ve probably asked yourself, “When will I retire?” And after contemplating your answer, you were probably left with the question of “how much money do I need to have saved in order to retire?”

These questions are typical for everyone as they begin to think about life after work. In this article, we’ll explore how to create a map or a budget to help put you on the right path towards retirement.

There’s a lot of debate surrounding the topic of how much money you need saved in order to retire. Some sources recommend at least $500,000 saved before retiring. While others say, you must have enough to replace at least 80% of your working income over 30 years.

I call these “magic number” solutions. They claim to be a sort of one-size-fits-all remedy to all your retirement questions. However, there’s a serious problem with most of these solutions: They’re too arbitrary. They’re not tailored to your personal retirement plan.

From a financial standpoint, the worst thing that can happen to you in retirement is realizing you don’t have enough money. To prevent this scenario from happening to you, you’ll need to know exactly how much your retirement will cost. In short, you need to build a retirement budget.

Building Your Retirement Budget

A good budget spreadsheet will lay out each of your expenses on a monthly basis to account for the timing of expenses. To get a realistic estimate of these costs, you’re going to a need a few things, such as:

  • Last year’s tax returns.
  • A year’s worth of bank account statements.
  • A year’s worth of credit card statements.

Needs Expenses

I recommend making a spreadsheet or using an accounting journal and compile a list of all your fixed expenses or all of your recurring payments. These expenses can be broken up into Monthly and non-monthly expenses. Monthly expenses include items like groceries, transportation, and cable, while non-monthly expenses cover areas such as property taxes and holiday gifts.

For example, let’s assume that you spend $200 a month on groceries, and $300 on utilities, etc. These expenses are better referred to as your Needs-based expenses. Your Needs expenses should be kept separate from your expenses that satisfy your Want & Wishes. By breaking up your expenses into Needs, Wants and Wishes, you are better able to prioritize your budget. For more information on organizing your budget according to the Needs, Wants, & Wishes framework, click here.

Optional Purchases

The next step in creating your retirement budget is to determine how much you currently spend on optional purchases, as well as the cost of any trips or similar activities you plan to engage in retirement. There are two ways to handle this section of your budget: The Top-Down Approach and the Bottoms-Up approach.

1. Top-Down Approach

If you’ve ever overseen a large organization, you may be familiar with this approach. With the top-down approach, you establish annual spending limits, rather than trying to predict your future expenditures. This approach is dependent on how much you already have saved as well as other costs.

For most retirees, this spending limit is 70% of the amount earned while working. Once this limit has been established, you can work backward to calculate the exact dollar amount you can spend on optional items.

2. Bottom-Up Approach

The bottoms-up approach tracks the expenses by category. Here, you would determine each purchase you have planned and calculate the annual expenditure. From there, you can decide whether or not you have enough to meet your costs.

Now you have a spreadsheet detailing your average monthly expenses. We’ve got nearly everything we need to calculate the costs of your retirement. However, there are still a few remaining adjustments.

Next, you need to review your healthcare expenses. According to a recent study by Fidelity Investments, a 65-year old couple retiring this year will need an average of $275,000 to cover their medical expenses throughout retirement.

Unfortunately, these costs are only going to rise in the coming years. According to Health Services Research, the cost of medical care for the average senior is expected to be 40% higher by 2035. Rising health care costs will likely to affect you, and should be accounted for in your retirement budget.

Estimating The Cost Of Retirement

Now that you’ve created your monthly budget, you can use it to estimate the total cost of your retirement. You might be surprised at just how costly retirement is. Isn’t life as a senior supposed to be less expensive?

Contrary to popular belief, your annual cost of living doesn’t decrease by that much after retirement. In fact, some people spend just as much in retirement as they did while working. According to studies by the Motley Fool, the average retiree spends roughly 20% less annually than the average worker.


It can be tough to meet such standards without working. That’s why most financial advisors recommend creating a portfolio where your resources exceed your budget. A surplus will allow you to feel secure even when facing unexpected costs.

Remember, while the tips in this article can help create a retirement budget, there’s no substitute for the assistance of a dedicated financial adviser. If you have any concerns about your specific retirement situation, I recommend meeting with a professional adviser.