What Is a Good Monthly Retirement Budget?
Written by
John Csiszar
Edited by
Zuri Anderson
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The specifics of a “good” monthly retirement budget will vary from person to person. However, all appropriate spendings plans share similar characteristics.
The key is to take a baseline retirement budget and tailor it to your own personal lifestyle, health and longevity, location and legacy needs, among other variables.
At the end of the day, you’re looking for a budget that covers all of your basic necessities with room to spare for discretionary spending and unexpected emergencies. Here’s how to do it.
Start With the Generic Advisor Suggestion
The general rule of thumb is that retirees spend about 70% to 80% of their pre-retirement income. Part of the reason for the decline is that certain costs diminish greatly or even disappear in retirement. By default, for example, retirement savings contributions vanish, while commuting and clothing costs also typically decline sharply.
What this means is that if you earned $100,000 per year as a worker, you should target spending $70,000 to $80,000 in retirement. This breaks down to about $5,800 to $6,700 per month.
Of course, not many workers earn exactly $100,000 per year, and different retirees have different income needs. But using the 70% to 80% estimate as a model is a good place to start determining how much monthly income you will need personally.
List Your Major Spending Categories
To create a budget, you’ll have to itemize your spending. The easiest way to do this is to list out your largest spending categories. Although your specific categories may vary, here are some of the most common monthly expenses for retirees:
- Housing, including utilities: $2,200
- Groceries: $700
- Transportation: $500
- Health care, including Medicare, prescriptions, vitamins: $800
- Entertainment, travel, and dining out: $900
- Taxes and insurance: $400
- Emergency fund, reserves: $300
- Miscellaneous: $700
- Total: $6,500
These are just sample amounts, based on a scenario in which a retiree is living off roughly 78% of a $100,000 pre-retirement income.
Tailor the Estimate to Your Lifestyle and Personal Characteristics
Where you choose to live is one of the biggest factors when it comes to calculating how much income you’ll need in retirement. If you live in the heart of San Francisco or Manhattan, for example, your rent alone could eat up more than the entire retirement budget of someone from Mississippi. But even if you’ve paid off your residence, the price of everyday living in these high-cost areas could still easily top $8,000 to $10,000 per month.
How you live your life is another important variable. Even if you live in a low-cost area, such as many areas of the South or Midwest, if you devote your retirement life to traveling, for example, you might spend just as much as a stay-at-home retiree on the Upper West Side.
You’ll also have to factor in how much spending can change in retirement. For starters, you’ll have to assume that your spending will increase over time. Inflation generally runs at least 2% to 3% in normal years in America, meaning 10 years down the road you might be spending 20% or more than you were when you first retired.
But this is countered by the fact that as seniors age, their spending tends to decrease over time. According to a Corebridge Financial analysis of Bureau of Labor Statistics data, seniors 75 and older spend about 19% less on average than those aged 64 to 74. The biggest drops, from 37% to 56%, came in personal insurance spending, transportation, entertainment, and apparel and services.
The Bottom Line
The key to a good monthly retirement budget isn’t necessarily deciding on a specific number — it’s about building flexibility into your plan so that it ebb and flow along with your life.
Remember, you might spend 20, 30 or even more years in retirement, so by definition your spending patterns are going to change over time. Start with a solid estimate of 70% to 80% of your pre-retirement spending and tailor it to your personal needs and lifestyle. Adjust it regularly over time and you’ll be ahead of the game when it comes to computing a “good” monthly retirement budget.
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