What to Budget for in Retirement

Retirement is not an age; it’s a financial number. It’s the amount of money you’ll need each month to live out your retirement dream. The logical follow-up question is: How do I decide what to put in that monthly budget?

Good question. We're glad you asked! Just like your budget now, you will have monthly expenses and nonrecurring expenses that come yearly or quarterly. However, what those expenses are and how much you allocate for them will probably change, especially if your retirement living is vastly different than how you live now.

What Costs Will Go Up

You can expect one particular expense to increase as you get older. You guessed it—health care. A recent estimate from Fidelity suggests a retired couple can expect to spend $245,000 on health care over 20 years (from age 65–85).¹ That’s because as you age, you’re more likely to have health problems. Keep in mind, though, this amount doesn’t include dental care, vision, co-pays and other out-of-pocket costs. HealthView Services estimates that with these additional health-related expenses, the total amount a couple can expect to pay could reach about $662,000.² Here’s how that could break down for you if you think you’ll have more medical costs in your retirement years:

• $662,000 divided over 20 years = $33,100/year
• $33,100 divided over 12 months = $2,758/month

That’s the cost right now. Unless something drastic happens, health care costs will continue to rise. You’ll need to keep an eye on that number as you get closer to retirement. That’s why it’s important to meet with a financial guru regularly. Going on autopilot isn’t an option.

What Costs Might Increase

Health care costs may be the biggest expense you can expect to increase in retirement, but they’re not the only increase to think about. You’ll still have monthly bills. How you budget for these will depend on what you want to do when you have more time and more money than ever before. Here are some expenses to think about:

• Utilities—If you plan on sticking close to home, you’ll probably use more electricity, water, heat, cooling, etc.
• Recreation—If you plan to travel, this expense will definitely increase.
• Property taxes—Most go up but seldom go down.
• Hobbies—This could go up, especially if you choose to golf seven days a week or start car collecting! Even more moderate hobbies can be costly, so budget accordingly.

What Costs Might Go Down or Go Away

The biggest thing you shouldn’t have in retirement is debt. Hopefully, you’ve done the Baby Steps and said goodbye to your mortgage, student loans and other debt. Why? Because debt is retirement quicksand. It will delay your retirement dream, no matter what all those commercials say. Those ads are sponsored by companies who make money off of debt!

Remember, retirement is not an age. It’s a financial number! But there are some financial benefits as we hit certain age milestones. For instance, you can take advantage of the senior prices at restaurants—and lots of places offer them. Be sure to ask. There are other perks too. Think about these:

• Entertainment—Lots of movie theaters, sports venues and fun centers offer senior discounts.
• Travel—Some airlines, hotels and rental cars offer a senior rate for those 65 or older—if you ask for it!
• Clothing—If you don’t have to dress professionally, you can lower this category in your budget. And as a bonus, some retailers will offer senior discounts on a particular day of the week.
• Groceries—Yep, lots of stores knock down the prices on a weekday, so you can benefit from that!
• Gasoline—If you’re no longer commuting, you can lower this budget amount. But if you plan on lots of trips to see grandkids, your gas budget may actually go up!
• Memberships/subscriptions—Again, some companies offer senior discounts. Ask!

What Costs You Can’t Forget

You’ll probably remember to list in your retirement budget things like cable and cell phone. But, you may overlook other items that don’t hit your budget every month. Don’t forget:

• Tithing and charitable donations
• Car registration
• Insurance premiums
• Pet care (including annual visits)
• Home repairs and renovation
• Birthdays and anniversaries (if you have lots of grandkids, this could be a big budget item!)
• Taxes
• Car repair and replacement

Even if you’re in your 20s, you need to be thinking about your retirement budget. As you get older, you can adjust it to match your dreams as they change (and they probably will). Once you retire and settle into your new lifestyle, you’ll need to tweak your budget just like you did when you were working.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

The key is to continue to make a monthly budget even in retirement. If you don’t, you’ll spend too much too soon. And that may just turn your retirement dream into a huge headache.

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.