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Retirement Planning

Budgeting in retirement

Most people want to make sure that they can live comfortably during retirement. That’s why it’s important to have a budget and the tools to build one.

Budgeting for retirement is an important step toward securing your financial future. It differs from budgeting before retirement in that you’ll have to plan for a whole new set of expenses and consider new sources of income. You’ll also have to consider that some expenses may cost more as you get older, like healthcare and long-term care.

Before retirement, you probably have a steady income from an employer, and your budget is primarily focused on managing your expenses and saving for the future. However, in retirement, your income typically comes from personal savings and retirement benefits like Social Security, pensions, and investments. This means it's essential to have a plan in place to manage your expenses and make sure you have enough money to last throughout your retirement.

You may also have to budget for new expenses that you likely didn't have before. Long-term care costs, in-home care expenses, and increased healthcare costs can all add up quickly and make a big impact on your budget. These costs can be significant and should be considered when creating your budget for retirement.

How to create a retirement budget

Creating a retirement budget is important because it can help you plan and manage your expenses so you can make your savings last throughout your retirement years. A budget will also help you identify areas where you can cut back on spending, if necessary, to meet your financial goals. It's very similar to the way you budget before you retire, but with a few exceptions, like how income in retirement will come mostly from personal savings instead of from a job.

A typical budget works by listing all your income and expenses and then subtracting your expenses from your income to see what you have left. Your income can come from a variety of sources, including retirement savings, pensions, Social Security, rental income, and more. Your expenses can include things like housing, food, transportation, healthcare, and entertainment. Once you have a clear picture of your income and expenses, you can adjust as needed to ensure that you have enough money to last throughout your retirement.

You can review your budget regularly to make sure it's still working for you and your situation. As your expenses and needs change, your budget can be adjusted accordingly. There are resources that can help you create a customized and detailed budget that considers all your income and expenses.

Determining your retirement income

When creating your retirement budget, one of the first steps is determining your retirement income. This income can come from a variety of sources, including:

  • 401(k) is a retirement savings plan sponsored by an employer that allows you to save and invest a portion of your income on a pre-tax basis and potentially receive matching contributions from your employer.
  • Individual Retirement Account (IRA) is an investment account that lets you save for retirement on a tax-advantaged basis. Two popular examples are the Roth and Traditional IRA's which each offer unique tax benefits.
  • A pension plan is a retirement savings plan offered by some employers that pays a set amount of money to employees upon retirement based on factors like length of service and salary.
  • Social Security is a federal program that provides retirement, disability, and survivor benefits to eligible individuals and their families, funded through payroll taxes.
  • A Health Savings Account (HSA) is a savings account that allows you to put pre-tax money aside to pay for qualified medical expenses and can potentially be used in conjunction with a high-deductible health plan (HDHP) to help manage healthcare costs.
  • Investment income is the money earned from investments like stocks, bonds, and real estate, which can be used as a source of income in retirement.
  • Rental income is the money earned from renting out a property, which can be used as a source of income in retirement.
  • Part-time work income is the money earned from working part-time either as a salaried or self-employed individual, which can be used as a source of income in retirement.

It's important to understand all the sources of your retirement income and to take them into account when creating your budget. There are financial resources that can help you to identify all your retirement income sources and plan for them.

Expenses to consider in a retirement budget

When creating a budget for retirement, you should consider all of your expenses, including the ones you had before you retired, like housing, food, transportation, etc. There may be some additional costs in retirement that you didn't have to budget for before like increased healthcare costs, long-term care costs, travel expenses, and entertainment expenses. These things can drastically affect your budget in retirement.

Healthcare expenses in retirement

Healthcare costs in retirement can increase due to factors such as age and chronic health conditions. According to a study from HealthView Financial, a 65-year old couple will spend more than $660,000 on healthcare in their retirement years.1 It's estimated that a retiree can expect to spend around $5,000 to $10,000 a year on healthcare in retirement. Depending on your health condition, location, and lifestyle, this cost can vary.

Once you turn 65, you’re typically covered by Medicare. Medicare is a health insurance program paid for by the federal government for people 65 or older, younger people with certain disabilities, and people with End-Stage Renal Disease (ESRD). It’s important that you understand exactly how Medicare works, its benefits, and its costs. You could also consider supplementing your Medicare coverage with an additional plan to help cover costs that Medicare doesn't.

Reducing healthcare expenses in retirement

There are different accounts and policies that can help with reducing healthcare expenses in retirement like health savings accounts (HSAs), health reimbursement arrangements (HRAs), and flexible spending accounts (FSAs).

HSAs and HRAs are tax-advantaged accounts that can be used to pay for qualifying medical expenses, including ones that aren't covered by your insurance. They can also help you save money on healthcare costs and reduce your out-of-pocket expenses.

Another option to consider for reducing healthcare expenses in retirement is purchasing long-term care insurance. This type of insurance can help with the cost of home health care and nursing home expenses. It can provide financial protection for you and your family from the high costs associated with long-term care. It’s important to note that these accounts and policies have different regulations, requirements, and limitations to stay up to date on.

Revisiting your retirement budget

Learning how to live on a budget requires you to regularly check in with your finances and make sure that it's still working for you and your situation. As your expenses and needs change, your budget can be adjusted accordingly. For example, if you run into unexpected medical expenses or decide to travel more, you can adjust your budget to account for these changes. Another reason to review your budget regularly is to make sure you're on track to maintain your financial goals and adjust for your current expenses or any changes in your income. This can help you stay on top of your finances and determine if you have enough money to last throughout your retirement.

Frequently asked questions about budgeting in retirement

Figuring out your budget for retirement can be challenging. Here are some frequently asked questions about budgeting in retirement.

What’s the biggest expense in retirement?

One major expense in retirement is healthcare. As you get older, you may require more medical care, which can get expensive. Other expenses you may have to consider during retirement include housing, food, transportation, taxes, and entertainment. It's important to factor these costs in when you plan and budget for your retirement to make sure you have enough to cover them. It's also important to consider long-term care expenses and have a plan in place for them.

How much does the average retired person spend a month?

It's difficult to give an exact number for how much the average retired person spends per month. It varies depending on things like lifestyle, location, and health. According to the Bureau of Labor Statistics, on average, people ages 65 and older spent $4,345 per month in 2021.2 Remember, these are just averages, and your own spending in retirement will depend on you. It's important to plan for your retirement and create a budget that’s personalized for you and your lifestyle.

Why is it important to have a budget in retirement?

Having a budget in retirement is important because it can help you plan and manage your expenses so you can make your savings last throughout your retirement years. A budget can also help you find areas where you can cut back on spending, if necessary, to meet your financial goals. Having a budget can also help you anticipate and plan for unexpected expenses, like healthcare costs, which can get pretty expensive in retirement. Overall, having a budget will give you a better sense of control over your finances in retirement so that you can feel more secure and financially stable.

What’s a good budget for retirement?

What counts as a “good” budget really depends on how you want to live out your retirement years. Many people try to save at least 15% of their income to maintain their standard of living in their later years. However, consider factors such as your age, income, and retirement goals to determine a budget that’s right for you. As you get older, don't forget to factor in other costs, like health insurance and long-term care expenses.

1.HealthView Services, “Retirement Healthcare Costs Data Report Brief: The Long-Term Impact of Short-Term Inflation,” 2022.

2.Bureau of Labor Statistics, “Consumer Expenditures 2021,” 2021.



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