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15 Tips for Setting Your Budget as a New Retiree

By Christy Bieber - Sep 13, 2022 at 7:00AM
Smiling person takes notes in front of laptop at home.

15 Tips for Setting Your Budget as a New Retiree

If you're new to retirement, you need to get your budget in order

As a retiree, your income sources are going to change and your spending habits likely will as well. You need to make sure you aren't taking too much out of your retirement accounts and you're using your funds wisely -- and a budget can help you do just that.

Not sure how to get started budgeting as a retiree? These 15 tips will guide you through the process.

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1. Decide whether to budget manually or use an app

The first decision you'll need to make is whether to use a budgeting app or to just make a budget with a spreadsheet or even pencil and paper.

Apps can simplify the process but may not all be designed for seniors, who tend to have different income sources and spending habits than most working people.

Pencil and paper or a spreadsheet can force you to be more personally involved in budgeting than if you were just using an app. This could help you end up with a budget that's better for your needs.

ALSO READ: The Best Budgeting Apps for 2022

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Two people sitting on the front of a boat.

2. Get your spouse or partner on board if you have one

If you are married or in a committed relationship, you will want to make sure you work with your partner to make a budget.

This is important to ensure that you're both on the same page when it comes to your spending. You don't want to spend your retirement years fighting over money or find out too late that your spouse drained your nest egg too fast.

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Two people with Social Security over a dollar bill in the background.

3. Calculate your Social Security

Social Security will likely be an important source of income for you as a retiree. Any budget you are making will need to take your benefits into account so you will know how much you have available to spend.

If you're already receiving Social Security, you likely know how much your check amount is. If you aren't getting payments yet and aren't sure how much they will be, you can find out by signing into the my Social Security website.

ALSO READ: 3 Steps to Claiming the $4,194 Max Monthly Social Security Benefit

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Documents and a calculator sitting on a desk.

4. Add up your investment account balances

You can't live solely on Social Security because benefits only replace about 40% of pre-retirement income. You'll need income from savings.

So, you must make sure you know how much savings you have to work with when making your budget. You can find out by checking your account balances for your 401(k), IRA, and other retirement plans.

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401k income statement and pie chart with calculator.

5. Set a safe withdrawal rate to determine income from investments

You don't want to take too much money out of your investment accounts too quickly. So, to determine how much income you'll actually have as a retiree in order to make your budget, you will need to decide on a safe withdrawal rate.

Many retirees follow the 4% rule, which enables you to withdraw 4% in year one and adjust upward for inflation. If you opt to choose this approach, you can determine easily how much investment income to plan for by calculating 4% of your account balance.

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6. Identify other possible income sources

You want to know about all your income when budgeting. So, if you will have money coming from sources other than Social Security and investments, you should calculate that, too. This could include, for example, a pension if you have one or income from any rental properties you own.

ALSO READ: 6 Unexpected Sources of Retirement Income

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Tax forms laying scattered with a calculator, glasses, some cash, and a pen on top.

7. Find out what tax rules apply to you

You may owe taxes to the IRS on Social Security if your countable income exceeds a specific threshold. Depending where you live, you could also owe state taxes on Social Security as well.

Pensions can sometimes be subject to tax, too, depending on the details. And whether or not you will pay taxes on withdrawals from your investment account is determined by whether you have a traditional or Roth account.

You should find out the details about what your tax bill is going to look like so you can budget for this obligation.

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Person focused while taking notes and looking at paperwork in front of a laptop.

8. Estimate your essential expenses

The next crucial step is to figure out what your essential expenses will cost you. These are things like your housing payment, insurance premiums, utilities, food, and other expenses that you must pay.

Ideally, your payments for these essential necessary expenses will not exceed around 50% of your income. If they do, you may want to look into changes such as downsizing to reduce housing costs.

ALSO READ: These 3 Common Retirement Expenses Are an Unwelcome Surprise to Too Many Seniors

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Medicare enrollment form.

9. Find out what Medicare will cost you

Medicare premiums are most likely going to be taken out of your Social Security check. The amount of these premiums varies depending on your income.

You may also want to pay for a Medicare Advantage Plan or a Medigap plan since traditional Medicare isn't very comprehensive. It's crucial you can afford the healthcare coverage you need, so look into costs and work this into your budget.

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Doctor speaking with patient.

10. Plan for out-of-pocket healthcare spending

Even with a good health plan, you are likely going to face some out-of-pocket expenditures. This is especially true if you use a lot of prescription medications.

You should estimate what types of medical care costs you'll incur throughout the year and make these a budget priority since you never want to scramble to pay for essential health services.

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11. Allocate funds to discretionary spending

Of course, you want to have some fun spending as well. So, once you have budgeted for the essentials, you'll need to decide how much you can devote to spending on entertainment and hobbies.

If you budget for this kind of spending, you can do it guilt-free while making sure you don't spend so much that you risk running out of money later in life.

ALSO READ: This Is How Much You Should Budget for Fun Money

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A plane in flight.

12. Plan for travel and special expenses

Most seniors want to travel, or to indulge in hobbies. But it's easy to forget about these irregular expenses when you make your budget. You don't want to make that mistake.

Figure out what types of special things you want to do in order to enjoy retirement and save each month toward paying for them.

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A red calculator sits on top of a financial statement.

13. Look through credit card statements for one-off expenses

There are many irregular expenses people often forget to budget for. This can include things like birthdays, holidays, and annual car inspections and registrations.

If you look through around six months to a year of credit card statements, you can make a list of these irregular expenses and work them into your budget. It's easier to save for them a little bit each month than to have to come up with the cash all at once, especially when you are on a fixed income as a retiree.

ALSO READ: 7 Irregular Expenses You Can't Forget to Budget For

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A jar labeled Savings filled with coins.

14. Make sure to budget for savings

Just because you are retired now doesn't mean you no longer have to save any money. Although you most likely will not be contributing to your 401(k) or other retirement accounts, you should still be saving for things like emergencies, home repairs, and big purchases.

Saving for these things is crucial to avoid ending up in debt, so be sure to build in some money each month when making your retirement budget.

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Person calculating expenses and bills at home.

15. Track your spending

Finally, once you have made your budget, you should track your spending -- at least for a while. This will enable you to ensure you've been realistic.

If you can't or don't want to live on your spending limits you've set for yourself, you'll need to make changes so you don't run into financial trouble later on in your retirement years.

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These tips will help you make a budget that works for you

Retirement changes every aspect of your life, and it's crucial you have a budget that matches your new reality.

By following these 15 tips, you can make that happen so you can spend your money guilt-free in your later years without worrying about running short of cash.

The Motley Fool has a disclosure policy.

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