Dave Ramsey’s 5-Step Retirement Budget

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Between high cost of living, inflation and the wide vanishing of pension plans, a comfortable retirement in the U.S. can be incredibly expensive. In order to ensure you have enough for your golden years, it’s essential that you budget.

Easier said than done, right? Well, not necessarily. If you follow financial guru Dave Ramsey’s advice, budgeting for retirement is actually fairly simple. 

In a recent blog post on his site, Ramsey Solutions, Ramsey laid out the five steps to create a retirement budget, highlighting that a budget “isn’t a killjoy” but rather what “sets you up for success.”

Let’s explore Ramsey’s recommended five-step retirement budget system. 

Step 1: Tally Up All Retirement Income 

Are you a full-time employee who also works a side hustle? Or maybe you’re self-employed and running your own business. Whatever your job situation, you need to sit down and assess what will provide you income after your working years. 

Some examples of what you’ll want to factor in (though not all may apply): 

• All tax-advantaged retirement accounts. This includes 401(k) plans, 403(b) plans and Roth IRAs. 
• Social Security benefits. You may not know what your exact Social Security benefits will be once you retire, but most likely it won’t be enough to comfortably live on. Still, you should factor in a broad estimate. Consider that the average Social Security retirement payment in 2024 is $1,919 per month. 
• Pensions. Pensions aren’t nearly as common as they once were and it’s unlikely they’ll make a comeback. If you’re one of the lucky ones who has a pension plan, factor this in. Ramsey said you can get the details of your pension plan from your company’s HR department. 
• Side hustles. Many retirees choose to work part time in retirement. If you intend to do this, estimate how much you plan to make annually from your side gig and plug that number in.  
• Taxable investments. This one mostly pertains to high-income earners. If you’ve got money stashed away in a brokerage account that you can begin to withdraw once retired, factor that amount in. 
• Real estate. If you own real estate that won’t have a mortgage left on it once you retire, congrats. This can be a lucrative income stream in your golden years. Factor in how much it is worth, or how much you can earn from it every year if renting it out. 
• Annuities. Ramsey noted that he does not recommend insurance products to fund your retirement. But if you have any, factor them in, too. 

Step 2: Itemize Anticipated Expenses in Retirement 

Many of the expenses you have now you will also have in retirement. For example, you’ll still need to buy groceries, pay for utilities and pay for healthcare (even if you retire at your full retirement age, Medicare doesn’t cover everything). 

Ramsey recommended listing all of the regular expenses you will have in retirement. He provided a list of most of what can be expected, but definitely do your homework here as your situation may be unique.

First, the essentials. These are the most important: 

• Groceries
• Utilities
• Transportation
• Healthcare 
• Personal care, such as hygiene products 
• Home repair and maintenance
• Charitable giving 

Now, the nonessential expenses. These are more in the “wants” than “needs” category, but they still matter if you want a comfortable retirement. 

• Subscription services
• Travel
• Gyms
• Hobbies
• Gifts
• Clothing
• Pet care (if applicable) 

Now let’s look at common seasonal expenses, as noted by Ramsey:

• Property taxes
• Insurance premiums
• Auto registration
• Holidays and events that call for spending 

“Once you’ve listed out your expenses, use them as your retirement budget starting point,” Ramsey wrote. “Have a brainstorming session about what you currently spend on each of those line items. Then consider which expenses will likely increase or decrease in retirement.” 

Step 3: Embrace the Zero-Based Monthly Budget Method 

Ramsey is a fan of the zero-based monthly budget method. What does this mean? To an extent, the name says it all. 

“Zero-based budgeting is when your income minus your expenses equals — you guessed it — zero,” Ramsey wrote. “If all your retirement income streams total $5,000 per month, then everything you give, spend and save should add up to $5,000. Every dollar should have a purpose — a job to do for the month.” 

Keep in mind that if you’re brand new to this budgeting method, it may take a little bit of time to adjust to, but it can work highly in your favor when budgeting for retirement. Think of it as making your money literally work for you. 

Step 4: Develop a Smart Plan for Your Retirement Distributions

Once you retire, you can start tapping into retirement funds such as 401(k) plans and Roth IRAs. This is a time to practice caution and frugality. You don’t want to blow through this hard-earned money. Your best bet is to work with a financial advisor or retirement planner to engineer the best plan of attack for handling distributions. 

Ramsey pointed out that if you have a tax-deferred retirement account such as a traditional 401(k) or IRA, you’ll be responsible for taking out required minimum distributions (RMDs) at the age of 72 or 73, depending on your birth year. Make sure you can pay the taxes on these withdrawals. 

Step 5: Aggressively Track All Spending

Hopefully you are already doing this, but if you’re not, start immediately: Track all of your spending. This will give you clarity on your needs versus wants and better inform you as to exactly how much you’ll need to comfortably retire.

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