How Much Money Will You Need in Retirement?

Planning for your retirement can feel a little like gazing into a crystal ball to predict the future. You’re not there yet, so how can you possibly know how much you’ll need? I get that. So much can change between now and then. It seems impossible to figure out.

But let’s look at it from a different angle.

You create a monthly budget now, right? You have monthly expenses, but you also have other costs to budget for, like car repairs or life insurance. The same will be true in retirement, too. You’ll still need a monthly budget. And you’ll still have monthly expenses along with quarterly or yearly ones. The difference is knowing what you’ll need to budget for and how much you’ll need to budget. And that’s a little easier to predict.

The Biggest Expense in Retirement: Health Care

You can count on one major expense in retirement—health care. According to Fidelity, the average couple will need $260,000 to cover health care costs in retirement. And that doesn’t include long-term care, which could add $130,000 or more. That’s a total of $390,000! Why such a high amount? Because people are living longer and medical expenses keep going up.

So how do you break down this huge amount into a manageable number for budgeting? Do a little math.

  • $390,000 divided over 20 years (age 65–85) = $19,500 per year
  • $19,500 divided over 12 months = $1,625 per month

Now, unless you’re going to retire in the next few years, this number won’t be accurate. Think inflation and other factors (like your health). But this gives you a starting point. And as you get closer to retirement, you can do the math again to get a more precise number.

Other Costs in a Retirement Budget

The items you list in your retirement budget will be similar to those in your current monthly budget, so use that as a point of reference. Let’s start with the basics:

1. Food. You’ll still eat in retirement, right? That means you need to keep that item in your budget. If your retirement plans include entertaining people in your home, you might want to increase it. If you plan to travel a lot, then that line item might go down (but it would go up in other areas).

2. Shelter and utilities. Hopefully, you’ve paid off your mortgage (and all your other debt!) and won’t have to worry about that one. But you’ll still have property taxes, so write that down. That cost will probably increase over time, so don’t get caught off guard.

Even though the home is paid off, you’ll still need to repair and renovate it, so set money aside for that. And don’t forget those fun HOA fees. You’ll pay those as long as you’re in that community.

How do you estimate utilities (water, electricity, gas, etc.)? Your current amount is a good place to start. If you plan to travel, you’ll be home less so costs might go down. But if you’re like me and plan on hanging close to home, your utilities will likely go up.

3. Clothing. If you had to wear expensive business suits to work, you can probably lower that monthly cost a little bit. If you wore a uniform provided by your company, then you’ll need to budget for a new wardrobe. If you love shopping for clothes, you’ll have a lot more time for that, so make sure you have money set aside.

4. Transportation. If you enjoy a long retirement, you’ll likely need to replace your vehicle at some point. That means setting aside money every month to buy another car in the future. That’s especially true if you plan on traveling a lot by car. And don’t forget about repairs and maintenance. Hopefully those costs are already in your budget, so you can just use those numbers for now.

You’ll also need gas for your car. Plan for a bigger fuel budget if you’re planning to hit the road. If you want to travel extensively, you’ll need to include money for airfare. If you’ve been commuting every day and don’t plan on traveling much in retirement, you can probably lower this item amount a little. It’s up to you.

5. Entertainment. Do you plan on eating out a lot? Do you want to enjoy doing things around town? Do you want to cut off cable or watch more TV? How many activities will you budget for each month? When you retire, you’ll have more time to catch those plays and ball games, so don’t lowball your budget here.

6. Hobbies. This area of your budget could be expensive, especially if you plan to golf every other day! Maybe you want to take classes, learn a new trade, or turn a hobby into a side business. Do a little research to find out how much those things would impact your budget. Even less expensive hobbies can become costly, so budget carefully or include a little extra in the beginning.

7. Giving. Now, if you’ve saved aggressively for retirement, this can be a whole lot of fun! There’s nothing quite like being able to bless somebody else by helping them out financially. If that’s your plan, increase your giving budget. Even if your retirement budget is modest, don’t skimp on giving.

These are the most common items in a retirement budget, but it’s not an exhaustive list. Here are a few more you might want to add:

  • Birthdays and anniversaries. If you have a bunch of grandkids, you could be buying lots of gifts. Be sure to include a monthly amount in your budget.
  • Car registration. Use the current cost to budget for this in the future. Add a little to account for inflation.
  • Income taxes. Even in retirement, you may still pay taxes. This is especially true when you start taking withdrawals from your 401(k) or IRA.
  • Pet care. This could include food, medicine (flea repellent, for example), and annual visits. If you plan to travel, you’ll need money to board the animals or pay a pet sitter.

Your retirement budget will look familiar because you’ve been paying for similar expenses your whole life! The one thing you don’t want to take into retirement is debt. Why? Because it’s retirement quicksand. Getting rid of debt could be the difference between a great retirement fund and a modest one.

The Bottom Line of Your Budget

No matter your age, you need to be thinking about your retirement plans—and the money it’ll take to live them out. You may only have a fuzzy picture in mind, and that’s okay. The older you get, the more you can give shape to those dreams. As you get closer to retirement, you will need to meet with your investing professional to adjust your plans and protect your wealth.

Once you retire and settle into your new lifestyle, you’ll still need to work on a monthly budget—it’s a lifetime skill. If you don’t, you’ll spend too much too soon. Or forget those yearly expenses. Or pay penalties on withdrawals. And that could turn your retirement dream into a nightmare.

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