Editor's Note: This story originally appeared on The Penny Hoarder.
You’ve spent decades in the workforce earning a living, your schedule dictated by the demands of the job. All the while, you’ve been steadily adding to your savings so that one day you could get to this point: retirement.
You finally have time to cross items off your bucket list — or simply catch a midweek matinee movie.
The possibilities are endless.
Life may feel more relaxed and carefree, but financial responsibilities remain front and center. In fact, now’s the time you might need to be even more diligent about budgeting your money.
Living on What You Have Saved
When you say goodbye to your 9-to-5, you also say goodbye to your regular paycheck.
You’ll rely on Social Security benefits, funds in your retirement accounts and any additional income, like pensions, to cover your expenses.
Sticking to a budget is vital so your retirement savings last. That money you’ve squirreled away in your working years has to stretch for decades.
Remember, life on a fixed income means there are no bonuses, overtime or promotions to increase your cash flow.
How Much Should You Have Saved?
If you’re already retired or nearing retirement age, hopefully you’ve done the math to determine whether you’ll have enough money to keep you afloat.
One popular rule of thumb is to have 25 times your average annual expenses saved up.
But how much money you need in retirement depends on many factors, like your age, where you live and the retirement lifestyle you want to enjoy.
Consider Your Costs
If you intend to retire early at 60, rent a highrise in New York City and travel every couple of months, you’ll need considerably more money than a retiree who leaves the workforce at 70, lives in a paid-off home in rural North Dakota and stays home to spend time with family.
There are also a lot of unknowns in retirement — like what medical conditions you could develop and exactly how many years you’ll need your funds to stretch.
That’s why it’s important to have robust retirement savings and be cognizant of your spending in your golden years.
How to Make the Most of Your Nest Egg
To make your savings last, you’ve got to be prudent about how much you withdraw each year.
“The gold standard has always been 4%, but new research has revealed a different number,” said Chuck Czajka, a certified estate planner and owner of Macro Money Concepts in Stuart, Florida.
He said withdrawing 3% a year instead gives you a 90% success rate to last through a 25-year retirement.
Keep in mind, once you’ve determined how much you can withdraw from your retirement plans each year, you’ll want to divide that amount by 12 to come up with how much to withdraw each month.
Czajka recommends withdrawing money from your retirement accounts on a monthly basis rather than taking out a year’s worth of expenses.
Talk to an Expert
Meeting with a financial adviser can help you come up with a personalized plan to fit your individual situation and financial goals.
“As people approach retirement, they should work with a retirement professional to determine their expected retirement income,” said Lisa Bamburg, a registered investment adviser and owner of Insurance Advantage in Jacksonville, Arkansas.
Factoring in Income Beyond Your Savings
In addition to the money you’ve saved in your 401(k), individual retirement account (IRA) or other investment accounts, a portion of your retirement finances will come from Social Security benefits.
You can start collecting Social Security benefits as early as age 62, but you’ll receive less money per month than if you waited until full retirement age — 66 or 67, depending on when you were born.
If you delay claiming benefits past your full retirement age, you’ll receive even more money each month. However, there’s no additional increase once you hit age 70.
In addition to Social Security, you might have other sources of retirement income, like a pension plan from a former employer or an annuity.
Diversify Your Retirement Income
A report from the National Institute on Retirement Security found that many retirees don’t have a great diversity in their retirement income, though additional income sources provide for a more secure retirement.
The report found less than 7% of older Americans have retirement income that’s made up of a combination of Social Security, a pension plan and a retirement contribution plan like a 401(k). About 40% rely on Social Security alone.
“Social Security benefits typically are not the equivalent of what it takes for most people to maintain their standard of living,” Bamburg said.
The Social Security Administration states its retirement benefits only replace about 40% of pre-retirement income for people with average wages — more for low-income workers and less for those in higher income brackets.
How to Create a Retirement Budget
Once you determine what your retirement income will be, it’s time to make your retirement budget.
If you’ve already been budgeting, you’re off to a great start, though your new retirement budget will likely differ from that of your working days.
Take Stock of Your Essential Expenses in Retirement
First, you’ve got to get an overall look at your current spending.
If you don’t already have a budget or track your spending, pull out the past several months of bank or credit card statements. Dig up old receipts if you tend to pay in cash.
Reviewing the past three months will help you figure out your average monthly expenses, but an even deeper dive — looking at the last six to 12 months — will give you a more accurate picture and will reveal things like your annual car insurance bill and holiday spending.
Group your spending into different categories to see where your money’s going. You’ll have fixed monthly expenses, like your mortgage, where the cost stays the same each month.
Other must-have expenses, like groceries or utilities, will vary. For those, you should estimate your average monthly spending.
Account for Changes
After leaving the workforce, you’ll notice some differences in your spending plan and budgeting process.
You’ll no longer have to pay commuting costs for downtown parking near the office, gas to and from work or pricey lunches with coworkers. Your monthly retirement contributions will be a thing of the past.
However, not everything will be budget cuts. You’ll have to account for new retirement expenses, like health insurance premiums your employer probably covered.
If you’re 65, you can get health insurance through Medicare, but it’s likely you’ll face increased out-of-pocket costs for health care as you age.
After all, Medicare doesn’t cover all your health care needs. You’ll likely need to pay for dental, vision and hearing health care costs. You’ll also need to consider monthly premiums for Medicare Part B and prescription drug coverage, also known as Medicare Part D.
Don’t Forget Taxes
You should also factor taxes into your retirement budget. Aside from paying yearly property taxes if you own a home, you’ll also owe income tax on withdrawals from traditional IRAs and 401(k)s.
Your taxes will vary with your income. Research the tax rates in your area and compare them to your income level so you won’t be surprised when tax bills arrive. Getting tax advice from a financial professional is another smart move.
Housing costs are also important. Your home might be paid off, but budgeting for ongoing home repairs is a good idea. Those unexpected expenses add up quickly.
And of course, now that you have an influx in free time, you can pursue the things you’ve always wanted to do — which means additional expenses in retirement.
Make Room for Fun Things in Your Retirement Budget
A big part of retirement planning is determining what type of lifestyle you want to have when you’re no longer working 40 hours a week.
Do you want to travel? Spend more time with your grandkids? Explore a new hobby? After you’ve covered your essential expenses, how you spend what’s left in your retirement budget is totally up to you.
Don’t forget to include run-of-the-mill discretionary expenses in your retirement plan, like cable, gym memberships, magazine subscriptions and dining out. It won’t all be cruise ships and Broadway plays.
If you’re married, be sure to share your retirement budget with your partner, so you’re both on the same page about how you’ll spend your time and money.
Adjusting Expectations to Reality
As you create your monthly budget, you may discover you have less income than you thought you’d have in retirement. That doesn’t mean you have to live out the rest of your life kicking yourself for not saving more.
You have a few options to get by.
Take another look at your living expenses. Are there any ways you can cut costs? Slash your food spending with these tips to save money on eating in and dining out.
Consider downsizing to a smaller home or getting a roommate to save money on housing.
Find Ways to Cut Expenses
When it comes to your discretionary spending, look for ways to enjoy a more frugal retirement. Take advantage of senior discounts. Check out free activities at your local community center. Find ways to save money on traveling.
Although retirement means leaving your working days behind, you may find it necessary to pick up a side gig or part-time job to supplement your income. Seek out opportunities that match your interests so it doesn’t feel like work.
Don’t forget to enjoy this new stage of life. You worked hard to retire — you deserve it.
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