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January 27, 2022

How To Create A Retirement Budget

While planning your retirement, you’ve probably asked yourself, “Will my money last for the rest of my life?”

While planning your retirement, you’ve probably asked yourself, “Will my money last for the rest of my life?”

In fact, this question might even keep you awake at night. Since you can’t consult a crystal ball to find out exactly how much money you’ll need, the next best option is creating a robust retirement budget with the help of the Retirement Budget Calculator.

The calculator can help you design your spending plan in retirement and determine if your current nest egg will cover your needs. Here’s how to use the Retirement Budget Calculator to create and maintain a budget in retirement:

Retirement Budgeting Basics

At its core, budgeting is about ensuring you spend less money than you bring in. This is why it’s smart to start your retirement budget with a solid understanding of your expenses.

On the Retirement Budget Calculator, you can get into granular detail of how you spend your money on a monthly and annual basis. There are seven broad spending categories to track on the RBC:

  • Housing
  • Loans & Liabilities
  • Food & Personal Care
  • Insurance & Medical
  • Vehicles & Transportation
  • Travel & Entertainment
  • Giving & Miscellaneous

Under each spending category, the calculator suggests common expenditures to include (such as your mortgage payment, HOA dues, electricity and other utilities, etc, under Housing), and also allows you to add your own expenditures. You can also indicate whether any expenditure is essential or discretionary, which can help you figure out what to cut if you can’t make the budget balance. The calculator will add up all of these expenses to determine your projected spending in retirement.

From there, you will enter your guaranteed retirement income into the calculator in the income portion of the Budget Data tab.

Guaranteed retirement income will include any income from the following sources:

  • Social Security
  • Pension income
  • Annuity income
  • Any other retirement income that you feel confident you can count on, such as rental income, part-time employment, etc

This information will help the retirement calculator create a baseline retirement income for you, so you know the shortfall between your guaranteed income and your projected spending. You’ll cover that shortfall with money from your retirement accounts, and the Retirement Budget Calculator can calculate how long those accounts will last.

To calculate that, enter your assets and liabilities into the calculator. These are again separated into several broad categories:

  • Liquid Investable Assets (this will include things like your checking and savings accounts, as well as your 401(k) and IRA, and your taxable investment accounts)
  • Real Estate & Property
  • Personal Property
  • Other Assets
  • Liabilities

Based on this information, the calculator will determine your net worth, and calculate your Future View, which indicates in a year-by-year breakdown of just how long your money will last in retirement.

Common Retirement Budgeting Pitfalls

Even the savviest of retirement budgeters can be surprised by some common budgeting problems, including inflation, taxes, and healthcare costs. Each of these issues can make a retirement budget more precarious. This is why the Retirement Budget Calculator allows you to plan ahead for these issues so you’re not caught flat-footed once you’ve retired.

Handling Inflation

The calculator recognizes how big a bite inflation can take from your retirement income, and provides an easy way to plan for it. For each spending category in the Budget Data section, there is a toggle switch asking if the expenditure is inflation adjusted. If you click “Yes,” you can indicate what level of annual inflation you expect—typically about 3%.

You can also indicate in the Income section of the Budget Data if any of your guaranteed income will adjust for inflation. For instance, Social Security provides cost of living adjustments (COLA) each year. These COLA increases have historically averaged out to 2% per year, which helps maintain your benefits’ buying power, but does not guarantee it.

Including the inflation adjustment on both your expenditures and your income helps make the Future View much more accurate, so you can feel confident that your money will last as long as the Retirement Budget Calculator determines it will.

The Facts on Taxes

There are a number of ways that taxes can surprise a retiree. For instance, you may be unaware of the fact that Social Security benefits can be subject to taxes. Also, the annual required

minimum distributions (RMDs) that tax-deferred retirement account holders must take as of age 72 might sneak up on a retiree who hasn’t been planning ahead for them.

The RBC can help you budget for these taxes now and in the future. When you enter your income into Budget Data, you will specify the income type, and enter the amount of your tax withholding, the type of tax, and how often the tax is withheld. The RBC will estimate your taxes for the year, including the amount of taxable Social Security income. This information can help you plan ahead so you are not overwhelmed at tax time.

Similarly, the Future View portion of the RBC calculates your RMDs for you. The chart showing your annual retirement budget indicates how much you need to take and when, so you can stay on top of that IRS requirement.

Healthcare Costs

According to Fidelity, the average 65-year-old couple retiring in 2021 will need $300,000 saved for healthcare costs for the rest of their lives. This can be a nasty surprise for retirees, especially since it is nearly impossible to shop around for cheaper healthcare.

This is another place where the Retirement Budget Calculator’s inflation adjustment option can really shine. Since you do not have to choose a static inflation factor for any expenditure, you can input a different inflation factor for each expense. Healthcare costs have seen an average annual inflation of 5% over the past ten years. Using realistic healthcare inflation numbers in your budgeting calculation allows the calculator to give you a clearer view of how long your money will last.

Making a Retirement Budget You Can Live On

The Retirement Budget Calculator can help you uncover the potential pitfalls of your retirement budget, before you stumble into them. Using this tool can help you figure out what to do to ensure your money will last a lifetime.

Click Here to sign up free and start creating your very own retirement budget.

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