How To Create A Retirement Budget

Running out of money ranks among retirees’ biggest concerns. In fact, an Allianz Center survey found that 67% of the polled Americans worry about it more than death. The future is unpredictable, but a realistic budget can help individuals prepare for changing expenses and make informed decisions about their resources.

A retirement budget should account for income, expected and unexpected expenses, and lifestyle choices. Living within the budget can be harder than drafting it, so the financial plan should be sustainable. The insights that follow can help create a framework for responsible spending and money management throughout retirement.

Set an Income Goal 

Because income sets the parameters of a retirement budget, estimating monthly needs provides a practical starting point. A common rule of thumb sets retirement income at about 80% of pre-retirement income, and assumes that some expenses will decline. Spending does typically change throughout retirement as needs and priorities evolve. The “retirement spending smile” describes a pattern of higher spending in the early years, lower spending in mid-retirement, and rising expenses later in life. However, recent research suggests the median household spending may instead decline and then level off at older ages.

Still, housing, healthcare, travel, and other costs can keep spending near or even above pre-retirement levels. Individuals approaching retirement may benefit from comparing the 80% benchmark with their actual monthly spending rather than assuming they will need less income.

Identify Income Streams

With an income goal established, the next step is identifying the sources available to meet it and any potential shortfall. Social Security provides an important source of retirement income, with benefits varying according to earnings history and claiming age. The Social Security Administration provides personalized benefit estimates through my Social Security account.

Most retirees also draw income from private sources. According to the Federal Reserve, 81% of retirees had at least one source of private income in 2024, including pensions, investment income, and earnings from work. Typical retirement income sources include:

• Social Security
• Pensions
• Retirement accounts
• Investments
• Part-time work

Estimate Expenses

Retirees may enter retirement with fewer bills and less debt, but major expenses can continue for decades. Ongoing costs such as housing and healthcare, combined with taxes, inflation, location, and lifestyle choices, can consume a significant portion of the household budget. Separating expenses into essential and discretionary categories can clarify how much income retirees need for necessities and how much they can allocate elsewhere.

Essential expenses may include:

• Housing: Mortgage or rent, utilities, maintenance, property taxes, and insurance
• Healthcare and insurance: Medicare or other health insurance premiums, out-of-pocket medical costs, prescriptions, life insurance, and long-term care coverage
• Food: Groceries and household staples
• Personal expenses: Clothing and personal care
• Transportation: Car payments, insurance, fuel, maintenance, and public transportation
• Taxes: Income, property, and other applicable taxes

A realistic budget should also reserve money for discretionary spending, such as:

• Travel: Vacations, weekend trips, and family visits
• Hobbies: Golf, gardening, crafting, and other activities
• Entertainment: Dining out, movies, concerts, museums, and recreation
• Gifts and donations: Family gifts and charitable contributions
• Fitness: Gym, recreation center, and club memberships
• Subscriptions: Streaming services, meal kits, news, and apps

Individuals can organize these expenses using a zero-based budget, which assigns every dollar a purpose, or a percentage-based model such as 50/30/20, which divides income among needs, wants, and savings. These formulas may require adjustments in retirement, but any budget should incorporate accessible reserves for unexpected costs. In 2025, 59% of adults experienced at least one major unexpected expense, according to the Federal Reserve.

Create a Budget

With income and expense information in hand, individuals can create a budget using a spreadsheet, budgeting app, template, or even a notebook. Those planning to draw from retirement and investment accounts should coordinate withdrawals with income needs, taxes, and portfolio strategy. Excessive withdrawals, particularly during market downturns, can increase the risk of depleting assets too quickly. A financial advisor can help develop a sustainable distribution strategy while identifying opportunities to manage taxes.

Test the Budget

Those who are approaching retirement can test their proposed budget before leaving the workforce. Living on the projected monthly amount for several months can reveal overlooked expenses, unrealistic spending assumptions, or categories that need adjustment. The exercise may also provide an opportunity to direct unspent employment income toward savings before retirement. Testing the numbers in advance can produce a budget based on actual spending rather than estimates alone. Here are several strategies for keeping expenses within the budget:

• Prioritize needs over wants: Cover essential expenses such as housing, healthcare, food, and transportation before discretionary purchases. 
• Consider downsizing: Moving to a smaller home or a lower cost-of-living area can reduce expenses and free up money for other priorities.
• Spend selectively: Employ cost-saving methods such as senior discounts, comparison shopping, and cooking or entertaining at home to reduce everyday expenses without eliminating enjoyable activities.
• Plan major purchases: Set aside money for significant purchases rather than relying on credit or making an unplanned portfolio withdrawal.
• Protect your health: Incorporate regular exercise, a balanced diet, preventive care, and routine medical visits to support overall health and may help manage some healthcare costs.
• Plan for inflation: Account for rising prices in long-term spending projections and periodically review whether income and investments can support changing expenses.

Seek Professional Advice

A thoughtful retirement budget can provide greater confidence to spend, save, and enjoy the years ahead. At SHP Financial, we evaluate income and spending needs as part of a comprehensive plan that coordinates the five worlds of retirement planning: income, investment, tax, healthcare, and legacy. Bringing these areas together can help individuals use their resources effectively while preparing for expected needs and unexpected expenses. Click here to schedule a complimentary review with an SHP Financial advisor and create a plan that supports your income needs, priorities, and long-term goals.