Create a retirement budget and spending plan

Getting ready to retire? Find out how to put together a comprehensive budget and spending plan that will help you feel more confident and secure. 

As you get further along in your career, preparing for retirement starts to become more of a focus. Ideally, you will have set aside plenty of money during your working years and have everything you need to enjoy a secure and fulfilling retirement.

For many of us, however, the thought of cracking into our hard-earned nest egg can be unnerving. Spend too much, and you could eventually run out of money. Spend too little, and you could miss out on opportunities and experiences that could make your retirement more rewarding. That’s why it’s so important to create a working budget and retirement spending plan—to give yourself some much-needed reassurance and peace of mind as you enter the next phase of your life.

Know what’s ahead: A list of typical retirement expenses

One of the first things you should do to get ready for your golden years is create a retirement expense list. While it may not be possible to anticipate every expenditure, the following list of average retiree expenses can be a good place to start.

1. Healthcare—According to Forbes, the average American couple will need approximately $413,000 to cover their healthcare needs in retirement.¹ Even if you’re in good shape now, it’s important to remember that healthcare costs typically increase as you age so be prepared to adjust your budget accordingly.

2. Housing—While downsizing may be an option for many retirees, it doesn’t necessarily mean that your housing costs will go down. In fact, housing—which includes the cost of maintenance—is by far the biggest expense most retirees will face.²

3. Utilities—Now that the kids are out of the house, you may not need to use as much electricity, water, gas, and other utilities so there’s a good chance your overall costs will decline.

4. Food—Do you enjoy dining out with friends? If so, you may have to factor the extra cost into your budget. On the other hand, you may be able to spend less on food because you will have more time to prepare meals at home.

5. Transportation—Since you will not be travelling back and forth to work anymore, your initial transportation costs may decline. As you age, however, you may become more reliant on Uber, taxis, and other forms of transportation that could prove more costly.

6. Benefit Replacement—When you leave the workplace, you may lose some benefits—such as life, disability, or dental insurance—that were provided by your employer. If these benefits are important to you, you’ll need to assume the cost of securing them yourself.

7. Travel—When you retire, you may find yourself taking longer, more frequent trips. If travel is a priority for you, be sure to work that into your budget—especially in the early years when people are more active.

8. Entertainment—Let’s face it, we’re all looking forward to having fun in retirement. Whether that means going to concerts, playing golf, or visiting the grandkids, it’s important to earmark some money to pay for these activities.

Tips for retirement budgeting

Now that you have a list of typical expenses in retirement, you need to know how much money (income) you will have to pay them. In the past, most people could count on three sources of income: money taken from personal assets like your savings or 401(k), Social Security, and a pension. Unfortunately, traditional pensions are far less common today and Social Security, while helpful, is often not enough to meet all your retirement needs. As a result, many of us will have to rely heavily on our personal savings to make ends meet Here are three tips that can help you make the most of your assets and create a plan that works for you.

Establish retirement income beyond your personal savings

One of the most stressful things about retirement is knowing that your personal assets will only last so long. That’s why it’s important to convert some of these assets into a source of income that you can count on to be there for you throughout your retirement years. With a New York Life income annuity, for example, you will receive guaranteed monthly payments that last as long as your want—even the rest of your life. That way, it’s easier to budget well into the future and you don’t have to worry as much about outliving your money.³

Build some flexibility into your spending

An important thing to know about retirement spending is that no single formula works for everybody. Many people follow the 4% strategy, where you withdraw 4% of your total savings each year to help cover expenses. While this is an established strategy, it can be too rigid if your retirement lifestyle or spending patterns change—which is often the case.

Retirement spending tends to be uneven because most retirees are more active during the first 15 years of their retirement (traveling, dining out, taking classes), and less active during the later years. Having regular income from annuities allows you to spend more confidently in a way that fits your lifestyle. You may also want to consider adding whole life insurance to your retirement plan so that you can protect your loved ones in case something happens to you, or use the accumulated cash value to help pay overcome an unplanned expense.⁴

Access your savings strategically

Since your retirement could last 20-30 years, you want to withdraw money from your accounts in a way that maximizes their value. Since taxes can have a significant impact on your retirement assets, you may want to plan your withdrawals in the following order*:

First - Taxable resources (regular savings, non-qualified investments, etc.)

Second - Tax-deferred resources (401(k)s, traditional IRAs, annuities. etc.)

Third – Tax-free resources (Roth IRAs, cash value life insurance, etc. )

While this schedule is designed to help you access funds in the most tax-efficient manner, it’s just a guideline and may not be right for your particular circumstances. You may also want to adjust the order based on the economic circumstances at the time. For example: If your CDs and money market accounts are enjoying record interest rates, you might want to sell some riskier or lower performing assets instead.

Example retirement budget

According to the Bureau of Labor Statistics (BLS), the average household income for people ages 65-74 in the U.S. is $5,255 a month (after taxes).⁵ Here’s a rough example of what a break-even monthly budget might look like using that figure:

Of course, it’s wise to build in a little wiggle room when it comes to something as important as retirement. That’s why we made sure to set aside $166 a month in case one (or more) of our expenses is unexpectedly higher.

Retirement budgeting and spending FAQs

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¹“How Much Will You Need to Save for Healthcare in Retirement,” Forbes, March 7, 2024. https://www.forbes.com/sites/davidrae/2024/03/07/how-much-will-you-need-to-save-for-healthcare-in-retirement/
²“This is the No. 1 Expense, By Far, for Retirement-Age Americans—and Pros Say It Shouldn’t Be,” MarketWatch, December 3, 2022. https://www.marketwatch.com/picks/is-your-retirement-spending-normal-heres-exactly-how-much-the-average-retired-household-spends-each-year-on-everything-from-housing-to-clothing-01669923485
³Guarantees associated with an income annuity are based upon the claims-paying ability of the issuing company.
⁴Accessing the cash value of a life insurance policy through loans or withdrawals will decrease the available cash surrender value and death benefit.
⁵“What is a Good Monthly Retirement Income?,” U.S. News, February 21, 2024. https://money.usnews.com/money/retirement/articles/what-is-a-good-monthly-retirement-income

^*Neither New York Life nor its agents offers tax or legal advice. Please contact your tax or legal advisor to find out the personal implications of any concepts in this article.