How to create a retirement budget that works for you

If you’re approaching retirement – or already retired – you probably spend a good deal of time thinking about finances. Will your assets go the distance? Will you outlive your money? Most retirees share your concerns. Fortunately, some advance planning can help ensure a retirement with less financial stress and anxiety. At the top of the to do list? Creating a sustainable retirement budget. In just a few minutes, we’ll take you through the basics, including how to:

1. Project your retirement income

2. Estimate your expenses in retirement

3. Balance a retirement budget

4. Draw down retirement savings

Why is budgeting important?

A retirement budget can help provide a clear and structured financial roadmap for your post-working years, and a strategy that can help you to maintain your desired lifestyle. It helps you set realistic financial goals so you can adjust your financial strategy as needed. And perhaps most importantly, a retirement budget can help reduce the financial uncertainty that causes anxiety and keeps you from truly enjoying your years in retirement.

1. How to estimate your retirement income

How much income can you expect during retirement?

Will it be more or less than your pre-retirement income? By how much?

These are key questions that will help you to start the retirement budgeting process and – equally important – help you to determine whether you are on track to financial confidence or need to adjust your savings strategy. While it’s impossible to come up with an exact number, anybody with a calculator can start to come up with a ballpark estimate. Here’s how:

• Total your expected income from Social Security and pensions

• Estimate your total savings and investments at retirement based on your current balances and savings rate. Include your 401(k), Individual Retirement Accounts (IRAs), and taxable accounts (like savings and brokerage accounts).¹

• Estimate your retirement income from savings and investments using a moderate rate of interest

• Estimate income you might generate from other sources such as rental income or part time work

• Deduct estimated taxes.

• Total your estimated annual income (divide by 12 to find your estimated monthly income)

2. How to estimate your retirement spending

According to a popular rule of thumb, most people in retirement should plan on spending approximately 70-80% of what they were spending pre-retirement. And in fact, one study of typical retirement expenses found that spending in retirement ranges from 54% to 87%, with most retirees using 70% or less of their former income.² That said, while you may want to use these figures as a starting point to come up with a ballpark number, you may want to take a deeper dive to generate a more accurate estimate.

Estimating how much you will spend during retirement will take more than a few minutes, but it’s central to the planning process. So be sure to set aside some time to go through the following steps.

• Start by recording your average monthly expenses. Start with living expenses and other essential expenses. This will serve as a baseline for estimating your spending in retirement.

• Consider the impact of inflation. Generally, you should consider assuming at least an average inflation rate of about 3% per year.

• Consider any anticipated lifestyle changes – such as downsizing or, conversely, relocating to a more expensive location – and how they might affect your spending, including property taxes and your mortgage payment.

• Add in health care expenses, which tend to increase with age. How much will you spend on insurance premiums, deductibles and out-of-pocket costs?

• Evaluate your outstanding debts – including mortgage payments – and determine whether they'll be paid off by retirement. If not, calculate your ongoing monthly expenses, including annual property taxes owed after your mortgage is paid off.

• Think about any plans you have for retirement - such as extensive travel or costly hobbies – and include these discretionary expenses in your calculations.

• Consider likely purchases, unexpected expenses, emergencies, and other financial obligations, from helping to support an adult child to buying or leasing a new car.

3. How to balance your retirement budget

The next step is to determine approximately how much retirement income you'll have to generate via your savings and investments to balance your retirement budget. Begin by subtracting your expected income (from Social Security, pensions etc.) from your estimated expenses.

For instance, if you estimate your expenses at $90,000 per year, and you expect to earn a total of $45,000 from Social Security benefits, pension and part-time employment, you'll have to generate $45,000 in income (after taxes) from your retirement nest egg to make up the difference.

Of course, any money you “draw down” from your savings will reduce the amount of income you’ll have to generate. As a general rule, many professionals feel that one can withdraw 4% of their total savings per year and still minimize the risk of outliving their money.³

Adjusting your budget in different stages of retirement

For planning purposes, many professionals break retirement into four stages: pre-retirement, early retirement, middle retirement and late retirement. While your personal circumstances may differ somewhat from the timing and stages below, you can assume that your needs will change in different stages, which will, in turn, affect your retirement budget.

• Pre-Retirement (age 50-62)
  During this period, it’s important to pay close attention to your retirement savings and begin to delve deeper into the nuts and bolts of retirement finances – including developing a retirement budget. If your savings are lagging, you may use this time to cut back your spending and ramp up your saving, or to make catch-up contributions to an Individual Retirement Account. And, if you're still carrying a lot of debt, you may want to develop a plan that can help you to retire debt-free, or close to it.

• Early Retirement (age 62-70)
  Except for high-worth individuals and those with generous pension benefits, the early retirement stage is usually characterized by major changes in one's financial situation, and many stop working full time. In addition to reduced income, people who've lost their employer-sponsored health insurance but are still too young to begin Medicare may have to pay private health insurance premiums. Still others may have the added financial burden of relocating to a new home or a retirement community. Whatever your situation, the early retirement stage will probably offer the first real glimpse of what your living expenses and financial life will look like moving forward. As such, it's a good time to revisit your retirement budgeting and make any changes that can boost your financial confidence.

• Middle Retirement (ages 70-80)
  By age 70, everyone who's entitled to Social Security will be receiving it, and by age 73, many people will have to begin taking required minimum distributions from their retirement accounts. Equally important, middle retirement may be a time when expenses decrease. Work-related expenses for commuting and wardrobe may no longer be an issue. Some people may reduce travel, dining out, and other activities that boost discretionary spending. Those who've been helping children or grandchildren may be freed from those obligations as their dependents get older. Bottom line? For many people, middle retirement may be a time of higher income, lower expenses, and enhanced financial stability.

• Late Retirement (age 80 and up)
  Late retirement may present financial challenges for which some people may not be fully prepared. Generally speaking, medical expenses are highest during these later years. And while Medicare may pay the bulk of your bills, the 20% copay can be disastrous for those without supplemental coverage. However, such a plan can be a substantial expense in and of itself. In addition, there is always the possibility that health issues will make it necessary for one to move to an assisted living facility or a nursing home, or to hire a home health aide. All of these options can be quite costly and may quickly deplete one's savings. That's why it's important to try to conserve assets for as long as possible, either by limiting spending or finding ways to increase income earlier in retirement.

4. How to draw down retirement savings and make your money last

How you manage your savings – and other key financial decisions – can have a tremendous impact on whether or not you can adhere to your retirement budget, maintain your lifestyle, and make your money last. While every person’s financial situation is different, here are a few guidelines to keep in mind:

Make sure you draw down in the right order. The order in which you withdraw funds from your retirement savings accounts can make a big difference in how much you will pay in taxes and, most importantly, how long your assets last. Many professionals say you should consider taking initial withdrawals from taxable sources, such as a brokerage account. Next, consider tapping into tax-deferred accounts, such as traditional IRAs (Individual Retirement Accounts) and 401(k) plans. Tax-free withdrawal accounts, such as a Roth IRA, should generally be tapped into last. But remember, this is just a guideline, and there may be minimum distribution requirements or other factors that influence your optimal withdrawal strategy.

Consider delaying Social Security benefits. If you're eligible for Social Security, you can begin taking benefits as early as age 62 or as late as age 70.⁴ Which route is best for you depends on your individual circumstances and needs, but many people try to delay collecting for as long as possible. The longer you delay, the more you will receive each month. You may want to consult the Social Security Administration and a financial professional who can help you pinpoint the age that’s appropriate for you to start collecting.

Think about following the 4% rule. One of the most widely-used retirement "rules" is the 4% rule, which says that you can typically withdraw up to 4% of your total assets per year without outliving all your savings. As with every other rule of thumb, the 4% spending rule is not carved in stone, nor is it appropriate for everyone, so think about discussing it with a financial professional.

Find out if you’re on track

Whether retirement is still on the horizon or you’re already there, it's always a good idea to know where you stand. Use this retirement calculator to see whether you're on target, pretty close, or have veered off course.

Guardian Can Help

These guidelines can inform your retirement budgeting decisions and help you get started. However, as you get deeper into the planning process you may want to consult a financial professional with specialized knowledge.

If you don’t currently have someone who can guide you, Guardian can help. A Guardian financial professional will listen to your needs, help define your goals, and help you to better understand the retirement planning process and make the right decisions for you. Here’s how to find someone near you: