Follow these three steps to plan the retirement lifestyle you want.
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Key takeaways for planning your retirement lifestyle:
- Retirees typically need 55-80% of their pre-retirement income, though actual costs vary based on lifestyle, location, and healthcare needs.
- The largest expenses in retirement can be where you live, travel and activities, and healthcare.
- It’s important to understand your income sources and create a plan for withdrawals from retirement accounts.
- A flexible three-category budget system can help retirees plan ahead and should include: fixed essential costs, discretionary expenses, and irregular one-off expenses. Don’t forget to factor in inflation when budgeting for expenses during retirement.
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What is the average spending in retirement?
Retirement spending varies, but the average is almost $59,000 per year for a retired household, according to the Federal Reserve Bank of St. Louis. Keep in mind, that’s just an average. Your retirement spending could be higher or lower depending on your lifestyle choices, where you live, and your health needs.
Planning tip: If you know your annual income today as a preretiree, expect to spend between 55 percent and 80 percent of that amount every year throughout retirement. That range is intended to be an estimate for planning purposes and can help you quickly gauge if you’re savings and Social Security income is large enough to cover retirement.
Three steps to retirement-lifestyle planning
- Understand your retirement expenses.
- Plan your retirement income.
- Establish your baseline retirement budget.
We’ll walk through each, then give you a simple checklist at the end.
Step 1: Understand your retirement expenses
It’s common for the following three items to be the largest expenses in retirement:
- Where you live: Housing is often one of the biggest expenses. You may need to consider downsizing or moving to a lower-cost area depending on your needs and the amount you have saved.
- Travel and activities: Retirement is the perfect time to explore new places and hobbies. Consider creating a “fun fund” (or a goal on Betterment’s platform) for trips and activities with a spending ceiling you can dial up/down based on markets.
- Healthcare: Healthcare costs can rise with age. You’ll need to factor in Medicare premiums, out-of-pocket expenses, and potential long-term care needs. (For tips, read: 5 tips to plan for healthcare costs in retirement.)
In addition to housing, travel, and healthcare, you’ll want to take into account your daily living expenses for things like food, clothing, and transportation.
Step 2: Plan your retirement income
Income in retirement can come from many different sources. Review what is available to you and how to combine income from different sources to make your funds last as long as possible. This can get complex pretty quickly, so it could be good to work with a financial planner.
- Social Security payments: Social Security is a reliable income source. Decide when to start claiming benefits to maximize your payout. (See the 7 questions every retiree should ask about claiming Social Security.)
- Annuities: Annuities can provide a steady income stream. Consider fixed or indexed annuities to supplement your retirement income. If you’re uncertain, talk to your financial advisor to see if annuities make sense for you.
- Pensions: If you have a pension, understand how it fits into your retirement income. You’ll need to know your payout options and any spousal benefits.
- Create fixed income ladders: Use CDs, T-bills, or bond ladders to avoid selling stocks in a downturn. Laddering is an investment strategy that entails purchasing multiple financial products with different maturity dates to deliver income over time.
- Plan withdrawals from retirement savings: Use a retirement withdrawal strategy that balances income, taxes, and asset preservation. The right strategy can help your savings last longer and reduce your tax burden. (For more info, read: How to make tax-efficient withdrawals in retirement.)
Step 3: Establish your retirement budget
Now that you know your retirement cost drivers and income sources, you can create a budget to fit your lifestyle.
To start, separate your retirement costs into three buckets using the table below. Begin with your fixed essential costs to make sure you can cover must-have expenses.Each year, take the time to review your three budget buckets to make sure your retirement income aligns with your expense needs and expectations.
Budget pro tips: Keep these in mind to get the most out of your budget.
- When calculating expenses, remember to factor in inflation of around 2 to 3 percent.
- Consider keeping a “cash buffer” in cash-like assets (CDs, T-bills, short-term bonds), or a Cash Reserve account, that is large enough to cover 1 to 2 years of living expenses.
- Be flexible and adjust your discretionary spending based on markets—it’s okay to spend a bit more in good years and cut back when the market underperforms.
- Create a three-year plan for large travel activities to ensure your trips have funding ahead of time.
- Conduct an annual “retirement lifestyle audit” to refresh next year’s budget and consider potential changes to your long-term needs.
Plan today to enjoy tomorrow
Retirement lifestyle planning is about creating a sustainable and enjoyable future. By estimating your expenses, planning your income, and establishing a solid budget, you can navigate this new chapter with confidence.
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