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How to Rethink Your Budget in Retirement How to Rethink Your Budget in Retirement
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How to Rethink Your Budget in Retirement

Rebekah Barsch •  April 19, 2016 | Enjoying Retirement


During your working years, the money you bring in each month typically gets spent in some combination of the following three categories: saving and investing, essential (must-have) expenses and discretionary (nice-to-have) expenses.

From a financial planning perspective, we typically think about these categories in terms of a 20/60/20 rule. Likely:

  • 20 percent of your income for saving and investing.
  • 60 percent of your income for essential expenses, such as housing, utilities, transportation, insurance, health care, food, student loans and existing credit card debt.
  • 20 percent of your income for discretionary expenses, such as clothing, dining out, gifts and charitable contributions.

As you transition into retirement, these percentages will change. Taking the time to understand what to expect before you actually reach retirement will help alleviate some of the anxiety that comes with learning to manage your money in retirement.

How Your 20 Percent Allocation to Saving and Investing Will Change

Once you retire, you’ll likely no longer be contributing to your 401(k) or other retirement accounts, so you won’t have to set aside 20 percent of your income for saving and investing. But that doesn’t necessarily mean you’ll have 20 percent more to spend elsewhere.

When you retire, it’s possible that you may not be able to fully replace the income you earned during your working years. So you may not even be in a position to reallocate the 20 percent in this category.

If you’re lucky enough to be able to replace enough income to have dollars left in this category, don’t assume this means you’ll have lots of money left over. You’ll likely find that expenses in the other two categories will rise.

How Your 60 Percent Allocation to Essential Expenses May (or May Not) Change

Many people assume their essential expenses will be lower in retirement, especially if they no longer have to cover a mortgage, college tuition or work-related expenses such as gas, parking, dry cleaning and lunches. But those savings could easily be offset by new “must-have” expenses in retirement.

In retirement, you’ll likely be responsible for more of your health care costs: insurance premiums, co-pays, deductibles and dental visits, for example. You may find yourself providing financial support or caring for an aging loved one. You may need to hire people to help with work around the house, such as mowing the lawn or clearing snow. And taxes will continue to be a consideration, too. While you might assume you’ll be in a lower tax bracket in retirement, that isn’t always the case.

How Your 20 Percent Allocation to Discretionary Expenses May Change

During your working years, you dedicate a significant amount of time to your job and, likely, less time than you would prefer pursuing activities that cost money. In retirement the opposite is true. Much of the way you fill your time is likely to cost money. That could include paying for hobbies, additional travel or the cost associated with spending more time with family and friends.

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Before you retire, it’s important to think through how you plan to spend your time in retirement and what those activities will cost. You’ll probably find that what you spend will increase simply because you have more time.

What Steps Can You Take?

Of course, the extent to which your essential and discretionary expenses change in retirement will vary widely depending on your health, where you live and how you plan to spend your time. But you can begin to get a sense of what to expect by taking a new look at your current spending.

Go through your budget line by line, and ask yourself:

  • Will I still have this expense in retirement, or can I eliminate it?
  • If I will continue to have the expense, will it cost more or less in retirement than it does today?
  • What new expenses might I need to consider?

Once you see how your income will net out each month in retirement, do a gut-check. Does your current level of saving and investing put you on track to cover your projected monthly expenses in retirement? If not, the sooner you can change course, the greater the chance that you’ll have the kind of lifestyle you envision in retirement. 

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