Retirement Expenses: Managing Your Finances After Retirement

After years spent working in a job, it's time to start thinking about life after retirement. While retirement will bring new adventures and opportunities, it may also come with some additional expenses. Creating a budget to manage your retirement expenses is a key part of planning for your life after leaving the workforce. Use this guide to start making a budget that can help you achieve financial security in your golden years.

Determine your income

Knowing the income you'll receive during retirement can help you plan your budget effectively. While you may no longer get a paycheck from an employer, you can have several retirement income streams, such as Social Security, annuities, and other sources.

Social Security

You can start receiving Social Security benefits at age 62, though you will get reduced benefits if you collect payments before you reach full retirement age. The Social Security Administration offers a chart showing your full retirement age based on the year you were born.

It's essential to consider when you want to start receiving Social Security benefits, as both collecting early and delaying payments can have their advantages. If you delay benefits until you turn 70, you can increase the amount you receive. Conversely, collecting Social Security before your retirement age will allow you to receive those benefits for a longer time. However, you may get a reduced amount.

For example, if you were born in 1960 or later, you can start getting Social Security payments at age 62 or wait until your full retirement age, which is 67. If you receive benefits before you turn 67, your monthly retirement payments will be reduced by as much as 30%, according to the SSA.

If you expect to live well past your 70th birthday, it might be worth waiting until then to start claiming Social Security so you can maximize the amount you receive each month. However, if you want to retire before that time and need money for everyday expenses, collecting Social Security at the full retirement age or earlier can be beneficial for your budget.

Pensions

Pensions continue to provide income for many older people entering retirement. In 2022, the annual median private pension payment for people 65 and older was $11,040, according to the Pension Rights Center. If you have a pension from an employer, the government, or a labor union, check your plan to determine when you'll start receiving payments. You may also need to determine how you want to receive your pension benefits, such as in monthly installments or as a lump sum.

Annuities

If you contribute to an annuity, you can receive payments from the annuity during your retirement. As an insurance product, annuities can provide a source of income, helping you to stretch your retirement savings. If you're nearing retirement, you might consider purchasing an immediate annuity, which allows you to start receiving income payments within a year. However, if you have several years or more before your retirement, a longevity annuity may provide higher payments since you're delaying your benefits until a later date, usually between two and 40 years.

Retirement accounts

After contributing to retirement accounts, such as a 401(k) or an IRA, you can start to withdraw this money in retirement. The IRS allows you to make penalty-free withdrawals beginning at age 59.5. Before that age, early withdrawals are subject to an additional 10% tax penalty. You must begin making withdrawals, known as required minimum distributions, at age 73 if you turned 72 after Dec. 31, 2022.

When taking money from your retirement accounts, it's essential to consider your expenses and other sources of income to know how much to withdraw. A popular guideline known as the 4% rule suggests you can withdraw this amount from your retirement savings each year to live comfortably. However, the exact amount you choose to withdraw will depend on various factors. It's a good idea to consult with a financial adviser about your retirement savings and goals.

Know your expenses

Once you have an idea of your income, it's time to calculate your retirement expenses. These expenses may look different for everyone, but in general, you should budget for:

• Housing: Whether you plan to move or stay in your home, consider the costs of housing, such as rent or a mortgage.
• Utilities: Factor utilities, such as electricity, gas, and internet, into your monthly budget. If you're home more, you may see some of your utility bills go up in retirement.
• Food and groceries: Food is an essential expense to consider, especially if you plan to eat at home more often. On the other hand, if you plan to stop cooking and eat out for most of your meals, include those dining expenses in your budget.
• Insurance: You may be able to decrease some insurance costs in retirement. For example, you may reduce your life insurance coverage if you have grown children. However, you may also choose to add other types of insurance, such as long-term care coverage.
• Taxes: Don't forget to account for taxes, such as property tax and income tax on your withdrawals from retirement accounts.
• Health care: While Medicare will cover some of your medical needs, budget for additional health care expenses, including premiums, deductibles, and services such as dental care or eye exams.
• Other expenses: While you want to make sure you have enough money for necessary expenses, you may also want to budget for some fun in retirement. Whether you plan to travel more, join a golf club, or take a cooking class, leave some room in your budget for these fun (but no less worthy) expenses.

As you make a list of your monthly expenses, review your bank accounts and credit card statements. Doing so can help you see where you typically spend the most money so you can determine whether you need to adjust in some areas.

Tips for budgeting retirement expenses

Making a retirement budget can help you feel confident about managing your income and expenses after you leave the workforce. Here are some other tips to help you budget retirement expenses.

Create an emergency fund

An emergency fund isn't unique to a retirement budget, but it can be especially helpful when you're no longer earning a steady paycheck. You might use emergency funds for unexpected medical expenses or major home repairs. Establish a separate account, such as a high-yield savings account or a money market account, to protect your emergency fund.

Prioritize your expenses

On a fixed income, it's essential to prioritize your expenses so you're not spending money unnecessarily. Consider how you want to spend your retirement. Do you want to visit new countries or take your grandchildren on fun excursions? Focus on these expenses and consider other areas where you can cut back. For example, perhaps you and your spouse can share one car instead of paying for maintenance, insurance, and registration on two vehicles.

Give yourself a paycheck

After creating a budget, determine a set amount you can pay yourself each month. Think of it as a retirement paycheck you can use to manage your monthly expenses. For example, if you decide you can live on $1,000 each month, plan to set aside this amount at the beginning of the month. If you have an annuity, you can also use your payouts to supplement your monthly retirement paycheck.

Consider a side job

Not everyone wants to work during their retirement, but for some people, a side gig can be a great way to earn some extra income. If you're worried about managing your expenses, consider whether a side job might be right for you. There are many options you can pursue for side work. For example, you could become a substitute teacher in your local school district, do some online bookkeeping for small businesses, or offer consulting services in your former field.

Review your budget

Although you're now living on a fixed income, your budget can still change throughout your retirement. Review your budget regularly so you can determine whether it's working for you. You may need to adjust some expenses to continue living comfortably, or you may want to rework your budget to account for inflation. If you need additional help to continue budgeting for retirement, meet with a financial adviser who can provide input and guidance.

Managing your retirement budget

Creating a budget for retirement takes work, but it's worth the effort to ensure you can manage your expenses and live comfortably after you exit the workforce. When budgeting for retirement, make sure to account for planned expenses, including housing, food, utilities, and health care. Leave some room in your budget for activities and hobbies you enjoy as well. By following these tips, you can plan a retirement budget that works for your needs and lifestyle.

If you're considering whether to purchase an annuity for income during retirement, consult our guide to compare annuity rates and choose the right one for you. You can also schedule a call with an annuity consultant at Blueprint Income to discuss whether an annuity might be right for your retirement goals.

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