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How to Make a Retirement Budget

How much you can spend in retirement is an age-old question that doesn't have a clear answer. However, one clear thing is that spending without a budget or a spending plan can be hazardous. Budgeting can tell you if you're ready for retirement and can help you manage your money so you can live comfortably without running out of money. It is an essential component of a comprehensive retirement income plan. That said, there isn't a surefire way to build a budget because no two people will spend alike. It's best to start with some general guidelines to get in the ballpark of a realistic budget and adjust to your needs to arrive at a reasonable monthly amount.

That said, budgeting can be a complex matter. It's time-consuming and tedious, but the rewards can be substantial. To help you get started, here are four common approaches to determine your income needs to support a target retirement lifestyle and ensure financial security.


It is a simple method that avoids making a budget by following a replacement rule for retirement spending. Estimate income based on a percentage of the pre-retirement income you are likely to need to maintain a similar standard of living in retirement. The ratio most commonly cited is 70 to 85 percent of pre-retirement income to account for the absence of retirement savings, some taxes, and work-related expenses (commuting costs, meals, and work apparel).


Retirement budgeting requires tracking what you have spent and then planning how those expenses will likely change. This may be the most accurate of the three, but it requires a thorough analysis of the expenses and goals to include and exclude. Start with an estimate of the income you think you'll need focusing on essential, discretionary, one-time expenses and taxes. Then consider expenses that will change in retirement and factor in significant lifestyle changes.


This method bases retirement spending on current and projected savings to arrive at a sustainable spending amount. Start by adding up the retirement balances you expect to have at retirement. Multiply the amount by 0.04 (4%). If your investment total is $500,000, your 4% = $20,000. Divide 4% by 12 months. In this example, $20,000 divided by 12 is $1,666 per month. Add your 4% to your other projected sources of income (Social Security, pensions, annuities) and compare it to your projected expenses. Ask yourself: Is this enough to live on? It might be a good starting point, but it requires a thorough financial analysis of your projected expenses.


The last method bases retirement income needs on your paycheck. It starts with current after-tax income and refines the amount needed to determine an income need. Here's an eight-step process to get you started.

  1. Start with a paystub
  2. Identify take-home pay after deductions
  3. Calculate monthly take-home pay (bimonthly)
  4. Identify whether take-home pay satisfies income needs
  5. Reduce income needs when mortgage and other debts are paid off
  6. Do you want to maintain the same standard of living in retirement
  7. Are you going to maintain the same level of spending
  8. Add an inflation factor to account for rising costs (2%-3%)


Paying for retirement starts with knowing how much it costs. Setting and sticking to a budget is crucial to maintaining a desired standard of living and financial security. Whatever approach or method you use, find one that best resonates with you and your retirement.