Learn How to Estimate Your Retirement Expenses Budget

retirement budget

Setting your retirement budget: how much money will you need to retire?

You may see people claim that you should plan to replace a certain percentage of your pre-retirement income or expenses, like 70%-80%. Do not use these rules of thumb for your planning, because they’re not taking into account the main factor that matters — the lifestyle that you plan to live once you’re retire! If you’re planning to semi-retire early, your post-retirement life may look very different than you’re full-time working life. Yet, it’s important to know how to estimate your retirement expenses budget.

In the liberating calculations post, we made the assumption that Jim and Pam each planned to live on $35,000 each year in retirement. It’s important to have an estimate of your expenses so that you can put your savings plan together, but I really skipped an important step by just jumping to that number.

After all, living a quiet life in a small paid off home, traveling internationally full-time, or living in a converted van will all involve different types of expenses. Plus, if you have a very high income and savings rate during your working life, you won’t necessarily have proportionately high expenses in retirement.

Dream about your retirement. 

The first step, no matter where you are presently in the saving and planning process, is to decide what you want your retirement life to look like. A great way to do this is to ask the question “What would I do with my time if money wasn’t a factor?” If your answer includes some type of work or productivity, semi-retirement could be a perfect fit for you.

Even things that you might view as just hobbies can end up generating income for you and facilitate semi-retirement. Managing rental homes, blogging, teaching guitar lessons, tutoring a subject you love, doing carpentry, working with children, or cooking are all activities you might enjoy that could be good options.

For example, for my wife and I, the dream is to live in a paid off home. I would like to teach at a community college part-time in the spring and fall, the SR Wife would like to write freelance, and we would have the summer open to rest and travel extensively.

Set your retirement budget category by category.

Next, you’ll want to consider each of the below expense categories, and make a moderate-to-high estimate on how much money you will need for each.

Housing

  • Will you be a homeowner? Will you have a mortgage payment when you enter semi-retirement? Do you plan to downsize or move to a lower cost of living area? Don’t forget about taxes, maintenance costs, and possible occasional updates.
  • Will you rent? Don’t forget to account for rent increases over time or varying rent costs if you plan to move around. If you plan to travel extensively for long periods of time, renting for a portion or all of your retirement could be a great option.
  • Are you interested in non-traditional housing options, like living in a renovated van or on a boat?

Food

  • What are your food habits and preferences now while you’re working full-time?
  • Would you cook at home more often if you were working fewer hours?
  • Note: many people may find that their food cost actually go down in retirement, especially while not traveling.

Transportation

  • How many cars does your family own now?
  • Will you still need as many when the kids are grown and if you and your spouse are not working full time?
  • How important is having a new car to you? How often do you plan to replace it in retirement?

Health insurance

This is a big one, and in a future post I will explore this in detail. For now, try to estimate by considering the following options. Which would be the best fit for your family?

  • One spouse could continue working full-time for a while, and that can be your source of insurance.
  • Once you’re 65 or older, Medicare will be an option.
  • You could find part-time work that offers health insurance as a benefit.
  • Purchase insurance through Healthcare.gov.
  • Purchase private health insurance.
  • Consider a healthcare sharing program.
  • Move to another country that offers healthcare to residents.

Other insurance needs

I recommend reviewing your insurance needs on your own occasionally, as well as with your fiduciary financial advisor.

  • Will you need life insurance? You may be able to self-insure once you reach retirement. Until you can self-insure, I recommend term life insurance.
  • Will you need automotive insurance or home insurance? Will you own a second home or rental property? Account for those taxes and insurance costs.
  • Is an umbrella insurance policy right for you?
  • You may also want to consider long-term care insurance once you reach a certain age. Dave Ramsey (I generally like his advice but don’t agree 100% of the time) recommends carrying long-term care insurance once you reach age 60.

Travel and other interests

Many people express an interest in traveling during retirement. What will that look like for you and your family though? Occasional weekend road trips, for example, will be less costly than traveling through Europe 9 months out of the year.

Try to project your interest in traveling throughout your retirement years though. Many people find that they travel extensively initially, but then don’t travel as much as they expected for the remainder of their retired years.

Do you have other hobbies that should be accounted for as well? Boating, golfing, riding motorcycles, gardening, or other activities can be fulfilling in retirement, but are also costs that can be planned for.

Giving and legacy

Are there any other large expenses or gifts you have planned for the future? Consider if you want to save for your kids’ college costs or help them with other expenses like purchasing a car.

  • Is giving a big part of your life now?
  • Is it important to you to do in the future?
  • Would you like to be able to leave a large inheritance to your heirs?

These are all very personal decisions, of course, but could be major factors in how much you’ll want to have saved.

Should you count on Social Security during your retirement?

You’ve probably seen in the news that the Social Security system is on track to not have funds to pay full benefits by around 2035. How do we account for that? There’s essentially no way to know for sure, so any calculation involving the time period past 2035 is conjecture.

In my opinion, if you’re in your 50s or early 60s, you’re likely to receive nearly full benefits for your lifetime. So I think it’s reasonable to account for Social Security income when planning your retirement.

If you’re younger, I think you’re likely to receive some benefits. Beyond that, who knows! The government will need to either tax working people more, decrease benefits, give benefits to fewer people, or some combination of those options.

If you’re in your 40s or younger, I encourage you to not include Social Security benefits in your retirement income calculations. I do not think it’s wise to count on receiving the full benefits that far into the future, especially with the current state of Social Security funding. If you do receive some benefits (which I think is likely), that will just give you some extra flexibility in your golden years.

It’s personal.

Your retirement expenses should only be calculated based on your family’s retirement plans and future goals.

From there, you’ll just need to estimate your part-time work income in retirement, your total nest egg needed, then how long it will take to save up that nest egg!

I recommend saving in tax-advantaged accounts for any long-term savings, even if you’ll need some of those funds before you’re 59½.

Only you have a good understanding of your retirement plans and potential expenses. I want to encourage you to use the outline above to estimate your retirement expenses and set a budget as you save and invest for your future.

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