How Much Does It Cost to Live in Retirement? Revisiting My Budget
11July 14, 2015 by Jean
One of the big unknowns for most people facing retirement is how much it will cost to live from month to month. Of course, how much it will cost to live depends a lot on lifestyle and how you want to live; there is no one-size-fits-all retirement budget.
I was in a better position than most to estimate my retirement living expenses; I am a life-long budgeter and have been tracking my monthly spending my entire adult life. To estimate my retirement living costs, I began with my pre-retirement monthly budget, subtracted some expenses that I would no longer have (e.g., rent and utilities for my Gettysburg townhouse), reduced some items that I thought I would spend less on in retirement (e.g., clothing), and increased some items that I thought I would spend more on in retirement (e.g., property and excise taxes). I ended up with a monthly budget of $2600 ($31,200 per year), which includes regular expenses like food, clothing, utilities, household items and entertainment; periodic expenses like insurance payments and property taxes; and occasional expenses like travel and house repairs.
June 30 marked six months since I received my last paycheck and began living on my retirement savings. (I have made the decision to delay taking Social Security as long as possible in favor of the higher monthly payment.) This seems a good time to stop and assess how I am doing.
Of the 19 expense categories in my budget, only three were overspent at the six-month mark, and none of these seems like a cause for concern. My grocery budget is in the red as a result of my up-front expenditure for CSA shares in May; this should even out as I redeem my investment with farm-fresh food through the summer and fall. Snow removal is also in the red because my big plowing bill for last winter came due in April; this line item will be back in the black by the end of the calendar year. Health insurance costs had also been more than expected, but I think this is just an artifact of a big up-front Medicare quarterly payment in January. I see no reason to increase any of these lines in my budget.
Happily, many lines in my budget have been underspent as of July 1. Some of these are essentially savings lines that I expect to accumulate and then get used up in big chunks for major expenditures. These expense categories include house maintenance and repairs, travel savings, and gifts (which mostly gets used for Christmas gifts). There are a few other categories where I have been spending less than expected in the first half of the year, but will probably spend more in the months to come. One of these categories is clothing; I need new clothes, but I am waiting to set up my new sewing room and then will spend money on fabric and patterns. I have also underspent my budget for gardening, but that money will get spent in the late summer and fall as I buy plants for my new front garden. Charitable contributions is a category that I tend to spend funds from periodically; the fact that I have several hundred dollars accumulated here means that it is time to sit down and write some checks to charities I support.
Some other underspent line items indicate expenses that I overestimated. One of these is house insurance. I just switched my insurance to a different company which is providing better coverage at a much lower cost; I can reduce my budget for this line by $35 per month. Automobile expenses are a similar story. I have only spent half the amount budgeted because I have a new car that has few expenses and because gas prices have been lower than expected; I can also reduce my budget in this category. A third underspent category, taxes, can be reduced temporarily because I will have little taxable income for 2015 and 2016. (I am living primarily on after-tax savings while I let my retirement investments grow.)
What will I do with the money that I don’t need for these line items? I could reduce my entire monthly budget, say from $2600 to $2500. But I’m comfortable that I can afford to spend $2600 per month and there are two line items where, although I have not overspent my budget in the first 6 months, I am feeling constrained. The first is the category of electricity and wood. (It may seem odd to put these together, but an electric heat pump and a wood stove are my primary sources of heat). My electric bills this year have been higher than expected. (Some of this may be because my electric hot water heater is running inefficiently and needs to be replaced – an expense to come out of that house repairs line.) As a result, I will not have enough money accumulated here to pay for September’s big delivery of firewood for the winter. I should probably increase this line item by about $40 per month. I would also like to increase my budget amount for entertainment. I am pretty close to even on this, but I have found myself turning down some invitations for events that seem too expensive. It would be good to feel freer about these expenses.
All in all, this review of my budget has left me feeling good about my spending. So far, it is costing me about what I expected to live in retirement.
Stepping Into The Future 
I’ve been trying to get a better handle on what it costs me to live. If I’m going to move, I need to know this. All I know for sure is that I always have plenty of money left in the checking account at the end of the month. I’ve been spoiled, not really needing to live withing a budget although in my defense, I never spend beyond my ability to pay as I go. You inspire me.
Jean, The trick is to write down every dollar you spend for at least one month. I do it in a spreadsheet, but it doesn’t need to be that fancy; in my pre-computer days, I used a budget book that had predetermined categories. I find having a budget very reassuring; it’s kind of a financial security blanket for me.
Thanks. I’ll try that.
This is such a straightforward approach to the financial concerns of retirement (and living while working as well). I know you said that you’ve always done this sort of accounting for yourself, but did any of the books you read give this kind of advice for someone approaching retirement? It gives such a clear picture. I know several colleagues who never seemed to know where their money went while employed. When they retired, they were so upended by the change in their finances, that they took on part-time employment they didn’t much care for in order to feel more secure. But the fact was that their lack of this kind of record-keeping has kept them in flux.
Emily, A lot of the personal finance books and pundits advise people to track their monthly spending and then use this information as the basis of a monthly budget — but surprisingly few people seem to actually do it. I’m not sure why; maybe it just seems too daunting. My parents were budgeters and I grew up watching my father sit down at the desk on payday after he had cashed his paycheck and divide dollar bills and change among budget envelopes, so it just seemed normal to me to follow in this tradition. The man I married while i was still in college was also a budgeter, which reinforced the idea.
A few years ago, I attended a financial planning session sponsored by my employer for pre-retirees. The financial planner running the session said that if anyone could ever give him a detailed 10-year record of how they had spent their money, he could give them a great financial plan. There were two of us there (out of about 30) who volunteered that we could give him several decades worth of such information.
I have always worried about not having enough money, and budgeting and tracking my spending have been ways to reassure myself that I’m fine. One of my New Year’s rituals is to sit down and review the previous year’s spending record and then make adjustments as I set up my budget for the new year.
Thanks, Jean, for a great post. We too, are delaying social security until we hit 70. It’s hard to beat a guaranteed return of 8%!
When I first retired, my husband had already been retired for 8 years. Even though we had carefully planned and budgeted, I was a little nervous about our finances. Intellectually I knew we were fine, but my gut wasn’t as confident. Two years have passed since I retired, and finally I am feeling good about our finances.
We’ve budgeted more for travel over the next 2 years. I want to make sure we hit our travel bucket list before age-related infirmities prevent us from doing so.
Carole, I have that same experience of what I know intellectually vs. how my gut feels. Budgeting has always been my way to deal with the gut-level anxiety about money. Budgeting more for travel in the earlier years of retirement makes complete sense to me.
Great post. I chose to take my Social Security pmt at the earliest point. For me to wait one year to collect it meant I’d receive $120 more each month, $1,440 for the year. But I’d be giving up $21,000 for the one year I delayed collecting social security. That is true for every year of delay. As for budgeting, amen to that. Very important to do! Love your sensible and down to earth blog. Ann in IL (no wesite or blog)
Ann, Thanks so much for your comment. You are right that the decision about when to take Social Security payments is more about when you think you’ll need the money rather than how much you’ll get overall. There are some financial calculators online to help people figure out the break-even age when they will end up with more overall by delaying; whether or not delaying pays off depends on how long you live. In my case, because I don’t have a spouse or children or anyone else who can pick up the slack if I run out of money, I worry more about living beyond my income than about having less to live on now, so delaying made sense for me. I was also lucky in having a well-paid job that allowed me to save enough money in my last few years of working to live on for the first couple of years of retirement.
It’s always nice to hear from another budgeter. I’m always surprised that more people don’t use a monthly budget; without the reassurance of my budget, I’d be a nervous wreck worrying about money.
That is great news Jean…here we are dealing with household expenses we didn’t count on, money for family things we didn’t count on and insurance bills that are out of whack…health insurance takes a big bite out of our budget.
Donna, I think one of the shocks for those of us who had good employer-provided health insurance is how much higher insurance costs are in retirement. I had some clue about this because I paid my mother’s bills for her during the last year of her life and was aware of the costs for her health insurance. Even so, it still surprises me.