A retirement budget is not just a working-age budget with a smaller income. The whole structure changes — where money comes from, what you spend it on, and what costs appear that did not exist before. Getting this wrong in either direction is costly: too conservative and you sacrifice years of enjoyment you could have afforded; too optimistic and you risk running short in your eighties when options are limited.
Building a realistic retirement budget means accounting for how your income sources shift, which expenses go away, which ones grow, and which ones are harder to predict than most people expect.
Key Takeaways
- Retirement income typically comes from multiple sources — Social Security, savings/investments, pension if applicable, and sometimes part-time work. No single source covers everything for most people.
- Some expenses decrease in retirement (payroll taxes, retirement contributions, commuting); others increase (healthcare, leisure in early years, care costs later).
- Healthcare is usually the largest variable and most underestimated line item — plan for it explicitly, including Medicare premiums and out-of-pocket costs.
- The 4% rule is a useful starting point for estimating how much your portfolio can sustainably provide — but it is not a guarantee, and some planners suggest 3–3.5% for longer retirements.
- A budget built 5–10 years before retirement gives you time to close any savings gap. Starting later is still useful — even a rough draft clarifies your options.
- Testing your budget before you retire — living on it while still working — is one of the most practical ways to find out if it holds up.
Step 1: Map Your Income Sources
Before you can budget expenses, you need to know what income you will actually have. For most retirees, income comes from some combination of:
Social Security
For many retirees, Social Security is the largest single income source. Your benefit amount depends on your earnings history and the age at which you claim — claiming at 62 permanently reduces your benefit by up to 30%, while waiting until 70 increases it by 24% beyond Full Retirement Age (FRA). The difference between claiming at 62 versus 70 can be $800–$1,200 or more per month for the rest of your life.
Get your estimated benefit from ssa.gov/myaccount — the statement there shows what you would receive at 62, FRA, and 70. Use the realistic number, not the best-case scenario, when building your budget.
Retirement Accounts (401(k), IRA, Roth IRA)
Withdrawals from traditional 401(k) and IRA accounts are taxable as ordinary income. Roth IRA withdrawals are generally tax-free if the account has been open at least 5 years and you are over 59½. Required Minimum Distributions (RMDs) from traditional accounts begin at age 73, which can push your taxable income up even if you do not need the money.
When estimating how much your portfolio will provide, be conservative. A common starting point is the 4% rule: in the first year of retirement, withdraw 4% of your portfolio, then adjust for inflation each year. A $600,000 portfolio at 4% provides $24,000 per year, or $2,000 per month — before taxes.
Pension
If you have a defined benefit pension from an employer or government job, it typically provides a fixed monthly payment for life (sometimes with a survivor benefit for a spouse). Know your monthly pension amount and whether it has a cost-of-living adjustment — most private-sector pensions do not, which means inflation erodes its real value over time.
Part-Time Work
Many retirees work part-time in the early years of retirement — both for income and for purpose. If you plan to work, include that income in your budget, but do not rely on it for expenses you cannot cover otherwise. Health can change, making continued work unavailable when you least expect it.
Step 2: Build Your Expense Categories
A retirement budget typically has four layers of expenses, each with different predictability:
Essential Fixed Expenses
These are non-negotiable monthly costs that do not vary much:
- Housing (mortgage or rent, property taxes, homeowner's/renter's insurance)
- Utilities (electricity, gas, water, internet, phone)
- Food and groceries
- Transportation (car payment if applicable, insurance, fuel, maintenance)
- Insurance premiums (health, life, long-term care)
If your mortgage is paid off by retirement, your fixed expense load drops significantly — housing is often the largest line item for working-age adults. If it is not paid off, factor in both the ongoing payment and a realistic timeline for payoff.
Healthcare — Its Own Category
Healthcare deserves its own budget line, not a footnote under fixed expenses. It is both large and unpredictable.
If you retire before age 65, you need coverage until Medicare begins. ACA Marketplace plans are the most common option — premiums vary widely by plan type and income. This can easily run $500–$900 per month or more for a single person, depending on the plan and your subsidy eligibility.
Once on Medicare at 65, you still pay:
- Part B premium (currently $202.90/month in 2026 for most beneficiaries, subject to annual adjustment)
- A Medigap supplement or Medicare Advantage plan premium
- Part D prescription drug coverage
- Out-of-pocket costs not covered by your plan
Higher-income retirees pay more through IRMAA surcharges — income-related adjustments that add to Part B and Part D premiums based on your income from two years prior. These can add hundreds of dollars per month for higher earners.
Budget at least $400–$600 per month per person for Medicare-related costs in a conservative scenario, and plan for it to grow as you age.
Kayla can walk you through your Medicare options and estimate what different coverage choices will cost each month.
Variable and Discretionary Spending
This is the category most people enjoy thinking about — but also one of the easiest to underbudget or overestimate:
- Travel and vacation
- Hobbies, recreation, and entertainment
- Dining out
- Gifts and charitable giving
- Clothing
Many retirees spend more here in the early "go-go" years of retirement, when they are healthy and active, and less in the later "slow-go" and "no-go" years. If you plan to travel extensively in your sixties, budget for it explicitly rather than leaving it as a vague "we'll figure it out."
The Expenses That Tend to Surprise People
A few categories catch retirees off guard more than others:
- Home maintenance and repairs. Older homes need more attention. A new roof, HVAC system, or major appliance replacement can each cost $5,000–$20,000. Budget 1–2% of home value per year for maintenance.
- Helping adult children or grandchildren. Financial support for family is common and rarely planned for. If this is a value you hold, build it into the budget intentionally rather than letting it erode savings unpredictably.
- Inflation over time. At 3% inflation, purchasing power drops by roughly half over 25 years. Costs that seem manageable at 65 can feel very different at 85. Healthcare inflation historically runs faster than general inflation.
- Long-term care. Assisted living, memory care, and in-home support are not covered by Medicare beyond limited circumstances. The national median cost of assisted living is now over $5,000 per month in most markets. This is either a line item in your budget (for long-term care insurance premiums now) or a potential catastrophic expense later.
Step 3: Find the Gap — and Close It
Once you have your income sources and expenses laid out, the math is simple: if projected income exceeds projected expenses, you have a sustainable plan. If expenses exceed income, you have a gap to address.
Closing the gap has a limited number of levers:
- Save more before retirement to build a larger portfolio
- Spend less in retirement by adjusting discretionary categories
- Retire later to accumulate more savings and increase your Social Security benefit
- Claim Social Security later to increase the monthly benefit permanently
- Work part-time in early retirement to reduce portfolio withdrawals in the early years
- Downsize housing to reduce fixed costs and potentially free up equity
The further you are from retirement, the more flexibility you have. Someone who discovers a gap at 55 has many more options than someone who discovers it at 64.
Step 4: Test Your Budget Before You Retire
One of the most underused retirement planning tactics is simple: live on your retirement budget for 6–12 months before you retire, while you still have your full income.
What you cannot spend (the difference between your working income and your retirement budget) goes into savings or investments. This accomplishes three things:
- You find out whether the budget is realistic before you are committed to it
- You add meaningfully to your savings in the final working years
- You make the adjustment to a lower spending level gradually rather than abruptly
If the budget feels too tight, you have time to adjust. If it feels comfortable, you have validation — and a larger cushion.
A Note on the 4% Rule
The 4% rule — withdrawing 4% of your portfolio in year one and adjusting for inflation each year after — comes from research that found this withdrawal rate historically gave retirees a high probability of not outliving a 30-year retirement. It is a useful planning tool, not a guarantee.
Its limitations: it was modeled on historical U.S. stock and bond returns, which may not repeat; it does not account for large lumpy expenses (a new car, a major health event); and it assumes a 30-year horizon, which may not be long enough for someone who retires at 60.
Many planners now suggest using 3–3.5% as a more conservative withdrawal rate, especially if you retire before 65, expect to live into your nineties, or have a portfolio weighted toward bonds. Running a more conservative withdrawal rate means needing more savings — but it also means more financial security late in life when options are fewest.
Kayla can help you understand how Social Security timing, Medicare costs, and insurance decisions affect your retirement budget. No obligation, no cost to you.