Your First Step Toward Retirement - a Step-by-Step Guide to a Plausible Budget

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Personally, I probably spend way too much time projecting our income and expenses for the years between now and retirement, tweaking our plan, and working on our retirement budget.

If you saw my mondo Excel workbook, your eyes would probably glaze over (my wife's certainly do :)).

Having said that, there’s that well-known quote often attributed to Ben Franklin, “Failing to plan is like planning to fail.

How Much Will You Need in Retirement?

The first step for your retirement plan (since retirement failure is not an option) is figuring out how much you’ll need in retirement.

Conventional wisdom is that you should expect to spend around 80% of your current spending (give or take 5-10%). However, as is often the case with one-size-fits-all advice, it fits most people rather poorly.

Your best bet to get a plausibly accurate number is to build a retirement budget like I did, using these 4 steps:

  1. Start from your current spending levels in each budget category.
  2. Remove those that won’t be there in retirement (think contributions to your IRA or 401(k), child-raising costs, business and/or work-related expenses, commuting costs, life insurance, etc.).
  3. Reduce those that will likely go down (e.g., car expenses due to driving less, health insurance once you’re eligible for Medicare, etc.).
  4. Increase those that will likely go up (travel, gifts to grand-kids, hobbies, charity, medical expenses not covered by Medicare, etc.).

Worried you can’t forecast accurately?

Don’t worry, you can’t. As Nobel-laureate physicist Nils Bohr quipped, “It’s hard to make accurate predictions, especially about the future.

The point isn’t to get it perfect. Just make it good enough to put you on a reasonably good trajectory.

Another Approach – Budget A La Carte

The Wall Street Journal (WSJ) put together a nifty tool that helps to budget for your retirement.

However, it’s not perfect, so I came up with fixes for those shortcomings.

If you’re like the sane majority of people, you know, the ones who don’t love budgeting, the WSJ tool can guide you through the process with minimal pain. Using my tips, you can then improve the accuracy of the resulting budget.

For extra brownie points, use both methods and compare the results as a sanity check.

Potential Retirement-Budget Busters and How to Prepare for Them

There are several big-ticket items that many people forget to address in their retirement planning that could derail your plan. Here are 5 of the biggest:

  • Healthcare costs during retirement can eat up over $200,000 for the average 65-year-old.
  • Property taxes can grow a lot, especially if your neighborhood undergoes gentrification.
  • Home maintenance costs increase as both you and your home age – your home needs more work, and you can do less of it yourself.
  • The good news about retirement is that you have lots of leisure time to do what you enjoy doing, whether that’s travel, fine dining, shows, etc. The bad news is, you have lots of leisure time to fill with potentially expensive things such as travel, fine dining, shows, etc.
  • Depending on where you live in retirement, taxes can be much higher than you’d expect.

Make sure to research these so your retirement budget addresses them properly. Then, add a margin of 10-20% above what you come up with to cover the unexpected.

The Bottom Line

Retirement planning is crucial, and the first step is to know what income you’ll need in retirement. The above gives you two methods to budget for your retirement, including under-appreciated big-ticket items that risk your retirement success.

The best way to prepare for these is to educate yourself about them and implement solid mitigation strategies. Here are 7 risks to your retirement plan and what to do about them, and 3 ways to shock-proof your retirement plan.

Financial strategy is all about setting financial goals like retirement, crafting a plan to reach them, and doing what's needed to start implementing that plan in both your business and personal life. If you'd like to learn what this can help you accomplish, email me and we'll coordinate a free, no-strings-attached phone call to explore that possibility.


This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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