A Practical Guide To Creating a Budget for Retired Couples
Creating a budget for a retired couple can feel challenging.
Since you don't know what life will look like, you may feel like you're guessing at many of your expenses.
Fortunately, with careful planning and a little insight, you can understand the most common retirement costs to help you build a successful retirement budget. These costs include the average housing costs, medical expenses, insurance premiums, and entertainment expenses,
How Much Does It Cost To Retire?
The cost of retiring will vary by couple because it depends on many factors, such as where you'll live, the type of lifestyle you'll have, whether either partner will work part-time, and the health care costs you endure.
It also depends on the type of debt you have, such as whether you still have a mortgage, credit card debt, or help your kids with their student loan debt. Hopefully, each of these debts will be paid off before you retire, but if not, you'll need more money to retire than the average couple.
A couple of general rules of thumb to determine how much money you need for retirement expenses include:
10 to 12 times your annual income: This is a general gauge of how much you need in retirement savings, but is easy to calculate. For example, if you make $125,000 a year, you'd need $1.25 to $1.5 million in your retirement accounts.
80% of pre-retirement income: If you withdraw the standard 4% from your retirement account annually, saving 80% of your income before retirement should help you cover your retirement spending.
25x rule: This is a play on the 4% withdrawal standard and states that you should have 25 times your annual expenses saved for retirement. However, this doesn't always work since most retirement expenses are lower without a mortgage payment, the cost of raising kids, and other miscellaneous expenses.
Typical Expenses in Retirement
While every couple is different, there are average retirement expenses most people have or anticipate having when creating a retirement budget. The key is to estimate your expenses accurately so you can be financially stable during retirement.
Here are the most common expenses:
Housing and Utilities
Housing costs are often some of the largest expenses any couple has in retirement. At this point, hopefully, you no longer have a mortgage payment, but some couples still have a small balance left. Other housing expenses include:
Property taxes
Homeowner's insurance premiums
Utilities
Home repairs and maintenance
Don't forget, if your county offers senior discounts on property taxes, request it. This could help you save money on one of a couple's largest expenses.
Health Care
Healthcare costs can be as much as the average 65-year-old needs $165,000 in after-tax savings for healthcare costs. This includes things like:
Health insurance premiums
Co-pays and deductibles
Medications
Out-of-pocket medical costs
Emergency medical costs
You should also consider healthcare as you age, including hiring a medical aide, moving to a full-time nursing home, or hiring other specialized medical care.
Transportation
Transportation costs aren't typically a large part of a retirement budget but should still be considered. While you're driving less without a daily commute, you still need to go places, which means covering costs like:
Car payments
Car insurance premiums
Gasoline
Car maintenance and repair
Food
Your food costs may be lower in retirement than you're used to paying, especially if you and your spouse live alone, but it's still a significant expense to include in your retirement budget.
Consider weekly groceries, dining out, and food while traveling if that's in your retirement plans.
Travel and Entertainment
Travel and entertainment may not be a part of every retiree's budget, but millions of retired couples plan trips or enjoy entertainment in their golden years. If you and your spouse decide that's the type of lifestyle you will live in retirement, be sure to include the costs in your budget.
Creating a Retirement Budget
Creating a retirement budget can feel a lot like starting over again. Your living expenses, income, and miscellaneous expenses will differ when you retire, but using your current budget as a guide can help.
Here are the steps to creating the best overall retirement budget:
Estimate Your Income
When estimating your retirement income, consider all sources. You may pull income from various places, unlike while you're working and live mostly off your paychecks. Everyone has different income sources, but here are some common types:
401K or IRA: If you saved money for retirement while working, chances are you opened a 401K with your employer or an IRA yourself. You may have multiple accounts across different brokerages, so be sure you know all your accounts.
Pension: Most companies no longer offer defined benefit plans, but if you're one of the lucky ones with a pension plan, include the future income in your budget. If you don't know the details of your plan, you contact your administrator.
Social Security income: No one should rely on living on Social Security benefits, but you can use the funds as a supplement. In 2024, the average person gets $1,907 a month, but that could change throughout the years.
Taxable accounts: If you saved money in other areas, not just tax-advantaged accounts, include the income in your budget. Just remember, you'll pay taxes on any capital gains, so be sure to account for that.
Employment income: If either you or your spouse plan to work part-time while retired, you can include the income in your retirement budget. Just estimate the number of hours you think you'd work.
Track and Estimate Your Expenses
Estimating your expenses can be the hard part.
As I said, your monthly expenses will likely be lower or at least different than what you've been used to paying while you worked and raised a family. Estimate your monthly bills as best as possible and track them as you go to see how you need to adjust.
When estimating your expenses, remember things like travel and entertainment expenses, especially if you and your spouse plan to live a different lifestyle than you do now.
Allocate Funds To Essential Expenses
I suggest creating a retirement budget that focuses on your essential expenses first and then allocating any remaining funds to other non-essential expenses.
Remember to account for unexpected costs. Keep a fully stocked emergency fund to cover any major expenses that pop up that you didn't anticipate to avoid going over your budget.
Plan Your Distributions Carefully
Before withdrawing funds in retirement, consult your financial advisor or tax professional to ensure you don't withdraw from the wrong accounts and create too much tax debt.
You can create a plan to strategically withdraw funds from tax-advantaged and taxable accounts to minimize your tax burden, especially during retirement.
Don't forget that you may have to meet the required minimum distributions if you have a traditional 401K or IRA. RMDs are a minimum amount you must withdraw each year and pay the applicable taxes.
When you work with a tax professional, you'll get a strategy to best use your funds to avoid excessive RMDs and high tax burdens during retirement.
Ready To Build a Solid Budget for Your Retirement?
If you're ready to build a solid budget for retired couples, contact me today! I can help you and your spouse understand what retirement may look like, what to expect, and how to plan for the unexpected.
It's always best to prepare ahead of time and adjust as you go. Contact me for your consultation to help you and your spouse get the most out of retirement.
Want to level up your game around money in your relationship? My free quiz will help you learn your Couple’s Money Personality Type AND how you can grow from there!
Adam Kol is The Couples Financial Coach. He helps couples go from financial overwhelm or fighting to clarity, teamwork, and peace of mind.
Adam is a Certified Financial Therapist™, Certified Mediator, and Tax Attorney with a Duke Law degree and a Master's in Tax Law from NYU. He is a husband, dad, and musician, as well.
Adam's wisdom has been shared with The Wall Street Journal, the Baltimore Ravens, CNBC, NewsNation, and more.
