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How to Set a Retirement Budget

When you’re saving for retirement, you have to make assumptions about your future expenses in order to come up with a realistic savings target.

According to the U.S. Bureau of Labor Statistics, the biggest essential expense for retirees is housing, followed by transportation, food, and health care. Let’s drill down on these four key categories to help you evaluate what you’ll truly spend in retirement—and ways to trim those expenses, if necessary.

1. Housing

Housing accounts for one-third of the average retiree’s total expenses. If that seems high, consider your current expenses:

  • If you own your home, factor in all related costs, including homeowners association fees, insurance, maintenance, taxes, and the occasional capital improvement like a new roof or sewer line.

  • If you have an adjustable-rate mortgage, consider refinancing to a fixed-rate mortgage for the peace of mind that comes with a set payment (or account for potentially higher rates, if you choose to keep the adjustable rate).

  • If you are a renter, factor in potential rent increases or costs you might incur if you’re forced to move.

How you can save

If you’re not planning on paying off your mortgage before you retire, consider making extra payments toward principal while you’re still working to help pay it off sooner, or refinancing with a shorter term. Downsizing can also reduce or eliminate your mortgage, and relocating to an area with a lower cost of living can save money across the board, from groceries to health care costs.

2. Transportation

Roughly 15% of the average retiree’s budget goes to transportation. If you own a car (or two), make sure you budget for gas, road tax, insurance, monthly payments, registration fees, and maintenance and repair costs, which may rise as your car ages.

Also determine whether you might need a new car at some point. If so, consider saving now so you can pay cash when the time comes, thereby avoiding interest charges and another line item on your budget.

How you can save

If you live in an area with reliable public transportation and/or with access to car- and ride-sharing services (think Zipcar and Uber), you may be able to forego car ownership altogether. If your lifestyle or location necessitates a car, make sure to shop around for insurance quotes—the range of premiums can be staggering.

3. Food

Figuring out your food budget in retirement is all about knowing what you currently spend. For example, how much do you spend on dining out, whether it’s your morning cup of coffee or regular date nights at your favorite restaurant? Unless you make a concerted effort to eat out less frequently or at less expensive restaurants now, your habits and tastes are unlikely to change in retirement—so budget accordingly.

How you can save

Many office workers spend a significant amount of money on coffee runs and lunch with coworkers. If this is something you currently do that will go away in retirement, be sure to account for that, too. You may be able to find money in your budget without giving up dinner at your favorite restaurant.

4. Health care

For many Americans, reaching age 65 is when retirement becomes possible—because that’s when they become eligible for Medicare. Covering medical costs in retirement isn’t easy, and retirees should plan to spend at least $450 to $600 a month per person. Your budget should consider:

  • Monthly Medicare premiums: In 2020, most people will pay $145 per month for Part B coverage (there’s no premium for Part A if you paid Medicare tax for a certain amount of time). If you add Part D—the optional prescription drug benefit—your out-of-pocket costs will be capped on covered drugs. We recommend that you research your plan carefully given that the list of covered drugs may differ between insurance providers.

  • Medigap: This supplements Original Medicare insurance (Part A and B) by covering different copays, coinsurance, and certain deductibles.

  • Out-of-pocket costs: Even if you purchase additional plans, you may still have to pay out of pocket for dental and vision care, which are not usually covered by Medicare and Medigap insurance.

How you can save

If you’re in good health, one possibility is to choose a Medicare Advantage plan over Original Medicare and supplemental Medigap insurance. Such plans will restrict you to certain doctors and hospitals but also tend to be less expensive and could have additional services (like vision, dental, and drug coverage). If you prefer not to get Medicare Advantage, you can also purchase separate vision and dental insurance.

What about discretionary expenses?

Of course, retirement isn’t just about getting by—it’s about enjoying the fruits of many years of hard work. You should absolutely plan for nice-to-have expenses like entertainment, gifts, gym memberships, and travel. Just be aware that discretionary expenses are the first place you should cut back should your financial situation change.

Important Disclosures

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.


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