Skip to main content
CFP Board LMAP Logo
Search Let's Make a Plan
Find a CFP® Professional
Please select a location from the dropdown.

By executing a search, I agree to Terms and Conditions for the Find a CERTIFIED FINANCIAL PLANNER™ Professional Search

Provided By CFP Board

Budgeting During Retirement

Congratulations on making it to retirement! Now you have the time that you always wanted to do whatever you choose and focus on what brings you happiness.

But the way your retirement looks to you at the beginning is not how it will look over time. Your retirement will evolve in phases as your priorities change. One of the most important things you can do right now is understand how your retirement will change and budget for those different phases.

The three phases of retirement spending. I typically break retirement down into three distinct phases, each with its own priorities and financial considerations. But it’s certainly not a straight line for spending or budgeting.

  1. Early retirement. These are the go-go years when you’re free of the responsibilities of work and child-rearing to do what you want. Many clients tend to spend more on travel and other activities in this early phase.
  2. Mid retirement. This phase marks a transition from the “go - go” years to the “go slow” years. Here, your priorities may be dictated by your health, mobility, legacy and your overall goals. At this phase, travel, for instance, may not be as important as it once was.
  3. Late retirement. This could be called the “no go” years when health and other issues take center stage.

Sources of retirement income. If you’re like most people, once you stop working, you’ll be on a fixed income with three potential sources to draw on: savings, investments and Social Security. If you’re one of the 21% of people in the U.S. who have a pension, that’s even better.

But no matter how many income sources you have, you should stick to a financial plan and budget right from the start. Sticking to a plan is important because you now have to convert all those savings and investments into a replacement for your paycheck for the rest of your life.

One of the first decisions to make is how and when to withdraw from your retirement accounts. While most clients take monthly distributions, you can also choose to take your money annually, semi-annually, quarterly; just make sure you set up an orderly withdrawal plan.

Create a retirement budget before you retire. While a solid budget will be fluid, it should be built into your financial plan. Well before my clients are ready to retire, I like to work with them to create a budget, because the last thing anyone wants is to run out of money in retirement.

There are a number of expenses that every budget should include, even though some costs often get left out. Most of us will naturally budget for basics such as housing, transportation and food. And many people will also want to set aside money for fun stuff such as travel since you now have unlimited vacation time. But, you also have to consider and plan for unexpected retirement expenses that could quickly drain your savings and may even affect your financial legacy.

A few of these often-overlooked expenses include:

Taxes in retirement. Typically, you will pay taxes on retirement account withdrawals. I know this sounds basic, but many clients forget this fact, and it can be a big hit. My rule of thumb is to withhold at least 20% to 25% of a withdrawal. If you need $10,000 a month, for instance, I tend to add an extra $2,000 for taxes, so $10,000 in expenses means a $12,000 withdrawal. If you’re lucky enough to have a Roth IRA, withdrawals are tax-free. However, I tend to put off Roth withdrawals as long as possible, so the money has as much time as possible to grow. Of course, such decisions are different for every client and are based on your circumstances and personal preferences. I recommend that you always check with your tax professional to see what’s right for you.

One question I hear often is, “Will my Social Security be taxed?” More than 40% of beneficiaries pay income taxes on a portion of their benefits. Social Security benefits are subject to federal income taxes, and while most states don’t tax Social Security benefits, there are some states that do. If you are subject to paying federal and/or state income tax on your benefits, how much tax you will owe typically depends on your total retirement income. A number of tax management strategies might help mitigate your tax bill, so working with a tax professional can help ensure that taxes don’t drain your retirement account.

Medical expenses. By some estimates, you’ll need an average of $295,000 per person to cover medical expenses in retirement. Women often require more than men because they live longer. I have some clients who’ve set up a medical savings account or earmark some of their investments specifically for medical expenses.

It’s also important to know that Medicare won’t necessarily cover all of your health care expenses in retirement. Fortunately, you have several options when dealing with health care expenses in retirement. To help cover medical costs, you might consider these options:

  • Medigap plans
  • Medicare prescription drug coverage
  • Health Savings Accounts
  • Long-Term Care Insurance

One of the most important and often overlooked needs is preparing for long-term care as you age. The U.S. Department of Health and Human Services estimates that 70% of older Americans will need some kind of long-term care. This can include assistance attending to personal needs such as bathing, dressing, eating, taking medications and more. Medicare usually doesn’t cover these expenses, and the government estimates the average duration of long-term care services is two years with an average total cost of $138,000. So it’s important to plan ahead.

Caring for adult children. Dubbed the “boomerang” generation by some observers, young adults are staying in school longer and delaying marriage. Currently more than one in three adults age 18 to 34 are living in their parent’s home, according to U.S. Census Bureau data from 2017.

Certainly, there are some benefits. After all, moving back in with Mom and Dad can provide millennials with an opportunity to start saving money toward their own financial independence.

But it’s not just adult children moving in with retirees. The Pew Research Center found that 14% of adults living in a shared household in 2018 were parents who moved in with their adult children. For an elderly parent, moving back in with family may be a preferred option if they didn’t plan adequately for long-term care.

Whether your children move back in with you or you move in with your children, it could affect your retirement spending, and it’s something to consider as you plan your budget.

Prepare for the unexpected. Even the best plans can change, and some events, such as divorce or bringing grandkids into the house full time, could mean rethinking retirement completely. Divorce could mean a smaller pool of retirement funds, which means less money to invest and less time for it to grow. It could also mean a new budget for housing, food and health care expenses. And it happens more frequently than you might imagine. “Gray divorce” is now the largest-growing segment for divorce lawyers.

Some of my clients also face the responsibility of raising a grandchild, which often adds a major financial stress. According to U.S. Department of Agriculture data from 2020, the cost for a middle-income family to raise a child until age 18 is $233,610 ¬— and that doesn’t even include the cost of college.

Finish the job you started. If you’re like most of my clients, you’ve been working toward this moment for 30 or 40 years. But in many respects, saving and investing was the easy part. Now, creating a budget and transitioning to retirement may well be the most important part, because how you budget your income sources will determine the kind of retirement you’ll have.

That’s just one reason it’s so important to work with a CERTIFIED FINANCIAL PLANNER™ professional. There are few things more critical as you transition into retirement than to keep your retirement budget expectations and projections in line.

This is the time you have waited for, and getting the budget part right will allow you to truly enjoy the fruits of all your labor.

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC (“GS&Co.”) and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization. Advisory services are offered through United Capital Financial Advisers, LLC and brokerage services are offered through GS& Co., member FINRA/SIPC.

GS PFM makes recommendations based on the specific needs and circumstances of each client. Clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. Investing involves risk, and investments may lose value. There are no investment strategies that guarantee a profit or protect against loss.

GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. The material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such. The information, data, analyses, and opinions contained herein include confidential and proprietary portfolio information of GS PFM, may not be copied or redistributed for noncommercial or personal purpose without GS PFM’s expressed permission.

All names, logos, and slogans identifying GS PFM or GS PFM’s products and services (including, without limitation, HonestConversations®, MoneyMind®, FinLife®, Financial Control Scorecard®, Live Richly℠, We Help You Live Richly℠, Helping People Live Richly®, One Best Financial Life®, Ideal Life Index®, GuideCenter®, InvestmentViewfinder℠, GS PFM Financial Life Management®, and Financial Years of Freedom℠) are trademarks and service marks or registered trademarks and service marks of GS PFM or its affiliates in the United States and/or other countries.

© 2021 United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management. All Rights Reserved.

Get started on securing your financial future today
Find a CFP® professional
Budgeting Retirement Planning Retirement Income Near Retirement