The cost of living has surged. These tips will help in budgeting in retirement, as you assess your finances and budget for the times.
It’s no secret that U.S. consumers are worried about their wallets. Annual inflation exploded to a 40-year high of 9.1% in June 2022 and is still a half-point above the Federal Reserve’s two-percent target rate. Homes cost about 1.5 times what they did in 2020, while bills for groceries and cars have skyrocketed by 30%. See-sawing tariffs levied by the administration have ramped up global uncertainty and sparked fears of further price increases—and these are just a few top-of-mind concerns.
While wages have largely kept pace with cost of living, these pressures are effecting people with fixed incomes and retirees in a different way, argues CBS News Managing Your Money senior editor, Matt Richardson. If seniors aren’t taking a close look at their finances and reassessing their budgets, they should be.
These four, expert-approved tips and tricks will help you and yours assess your financial situation and improve your budgeting in retirement.
Know your expenses
Nearly three-quarters of Americans keep a monthly budget, yet a NerdWallet survey found 84% consistently overspend. “A lot of people are not honest with themselves about how much [they spend],” Real World Financial Planning founder, Linda Bentley Gillespie told AARP. The problem can have outsized impacts on retirees – especially in times of high inflation where prices are rising.
She says it’s crucial for seniors to have a strong understanding of baseline monthly costs. That means you’ll need to survey at least six months of expenditures and calculate monthly averages for the three primary types of expenses.
Start with fixed bills like utilities, car payments, homeowner’s association fees, and insurance. Next, survey credit card statements or receipts to tally discretionary spending for categories like groceries, clothes, subscription services, restaurants, and vacations. Finally, estimate realistic figures for unavoidable periodic outlays such as home maintenance or car repairs.
Future costs and savings
Now that you have a grasp of your current spending habits, you’ll want to consider potential expenses or savings windfalls that may come in the future. These can vary considerably from person to person and shift as you enter different life phases.
Maybe you and your wife just retired and plan to ramp up travel? Perhaps that transition cuts the need for two cars and related insurance bills? Are you ready to trade your four-bedroom home for a smaller condo? Is declining mobility making it harder to take big vacations?
Compile estimates for total amounts and note an approximate date or timeframe for when you think they’ll take effect.
You’ll also want to think about healthcare. Fidelity Investments’ 2025 Retiree Health Care Cost Estimate report says the average 65-year-old will spend $172,500 to cover health care expenses in retirement. That number, says Hoff, could rise or fall depending on how healthy you are, but it’s a good guideline to keep in mind.
Assess your income plan
According to Fidelity Investments’ Viewpoints learning center, “a well-designed retirement income plan should be backed by an investing strategy that provides opportunities for your assets to generate earnings and helps your income keep pace with inflation.” But markets go up and down with time, so returns will vary. Factor in unexpected expenses and build some degree of flexibility into your budget. Exactly how much depends on your situation.
Current research suggests Americans who retire at age 65 can expect to live for at least another 20 years. That means you’ll “need to find the right balance between drawing down your savings for income and making your money last,” says DFCU Financial member education counselor Charles Hoff. He suggests using the “four percent rule” as a benchmark guideline and adjusting as needed from there.
The rule advises retirees to withdraw four percent of their investment portfolio in their first year of retirement, then adjust that amount for inflation annually. For example, if you retire with $1 million, you’ll take out $40,000 in year one. If inflation is at three percent, you’ll add $1,200 to your withdrawal amount in year two. And so on.
Reports from investment research company Morningstar find that 90% of retirees that use the method have funds left after 30 years. That said, Hoff adds that it’s important to remember that the vast majority of retirees “don’t spend in a straight line.” Expenditures typically rise early on, taper off in the middle, then rise again toward the end of retirement.
Make adjustments for budgeting in retirement
Now that you have a firm grasp of your total monthly spending, how that rate should change moving forward, and your income withdrawal strategy, it’s time to consider potential adjustments. If sailing looks smooth, break out the champagne and toast yourself.
But if your analysis has sparked concerns, don’t worry, there are solutions. The first stop, says Hoff, is discretionary spending. Small cuts like excess subscriptions to streaming services, paying off credit debt, and cutting back on restaurant visits can go a long way. Grander gestures like swapping yearly Caribbean vacations for domestic trips or downsizing from a costly 5,000-square-foot home to a studio apartment could change the game entirely.
Younger retirees may also want to consider a side-hustle, says Hoff. Working as a consultant in your field of expertise could bring flexible hours and nice cash infusions. Another option could be renting out your home a few times a year on a site like VRBO while you visit friends and family. Both options can help curb financial worries and buoy your retirement savings.
Related: Trim Your Monthly Budget
