How to Create a Retirement Budget

Executive Summary

Alex Call goes over how to go about creating a retirement budget. He specifically covers budgets regarding for Healthcare, hobbies, housing, and taxes. Follow along with the transcript below.

Welcome to the Webinar

Alex Call: Hey everybody, we’ll go ahead and get started, it’s about 12 o’clock.

And so as we get started today, I just want to let everybody know that Daniel, he is another advisor here at the firm. He’s going to be taking any questions that you have.

So while I’m presenting, go ahead and chat any questions that you have to him and he’ll get back to you and he’ll respond.

So before we get started with the ‘How to Create a Retirement Budget’ I just want to introduce myself, I’m Alex Call. I’m one of the Senior Advisors here at the firm and we’re just starting, this is going to be the first kind of virtual lunch and learn that we’re doing.

And these are different from the previous webinars that we’ve done in the past where these are just going to be shorter quicker topics that we have that don’t really justify a full hour-plus type of webinar.

And so I hope you like it and as always we love any feedback that you have. And at the end, you’ll actually be asked to take a survey to provide any of that feedback and for how it went and also for any future topics that you’d like to discuss as well.

So with that being said, let’s go ahead and jump right in.

So really the goal of the webinar, or the goal of the lunch and learn today is really going to be two different goals.

For those who currently have a budget and are very good at kind of itemizing, this is exactly what we spend, this is how it is, this is going to hopefully give you some insight into how and what expenses will change as you transition into retirement. Because it will be different during your working years and during retirement how that budget looks like.

And then the second goal is going to be for those who don’t really have a budget or aren’t good at making and creating budgets for themselves. This is to give you a framework of how to estimate what those expenses might be when it comes time to retire.

And so what we want to talk about first is the insight, it’s going to be broken into four categories: Healthcare, housing, hobbies, and taxes that we’ll talk briefly on.

And then as far as the framework goes, there’s two different types of methods when it comes to building a budget that we’ll talk about.

One is the top-down and one is the bottom-up. And it just depends, do you want to start with your budget to determine how much income you need or do you start with your income to determine what your budget is going to be?


So with that said, the first thing is Healthcare. And this is probably, this could be a topic in and of itself that could require multiple webinars when we talk about Medicare and what to do with health insurance if you retire before 65 before you’re eligible for Medicare.

So I just want to give, I’ll give you an idea of what you can expect when it comes to this. And so when it comes to pre-Medicare or if you retire pre-65, your Healthcare expenses will fall into, you know, most people what we see get on the Marketplace.

And for a lot of people, you get some type of subsidy once you retire and you’re on the Marketplace. And so let me just kind of take a step back and explain how that works.

When you apply for health insurance no longer through your employer, you go through the open Marketplace. And these are going to be plans that if you have no government subsidy, you’re going to be spending probably close to $1,000 for a very high deductible, pretty poor health insurance plan. And that’s $1,000 a month for the premium. And so that would be if there’s no subsidy.

What we found is that most people, not most, but many people get some type of subsidy when it comes to this. And right now as your income approaches about $100,000 to $150,000 you start to phase out of any type of government subsidy.

But if you’re income is right around that $100,000 and you might be getting, your insurance might be close to, you might not be paying anything for a monthly premium.

And so this is something that we’ll want to estimate what your income is going to be, just kind of get an idea to see what type of subsidy you would get before turning 65, before being on Medicare.

And then once you’re on Medicare, how this works is, I typically estimate about $200-$400 per person is what their Medicare health insurance is going to be per month. And more of what that premium will be.

And why the disparity, that $200 is going to start off on the low end, that’s going to be what you pay for Medicare Part B. Just to kind of get into Medicare you have to pay that, just about $200.

And then that $400 if you go on the more expensive end, that’s going to be if you want a supplement plan. And the supplement plan is just going to be kind of a, it just supplements your Medicare to make some of those copays and deductibles less expensive.

And so that’s where the low end $200, the high end $400, so I always think of if you’re a couple, estimate somewhere between $500 to $800 dollars a month in Healthcare expenses when you retire.


And so the next one I want to talk about is housing. So the first question is that a lot of people, not everybody, but many people when they retire they have their mortgage paid off.

And so that’s the first question you ask yourself is, will you have a mortgage? Because if you don’t, if it’s paid off, then obviously that’s going to impact your budget quite a bit.

And then also the next question is do you plan to downsize in retirement?

Let’s say you do have a mortgage, but you plan to sell your home that you raised your kids in and downsize into something that maybe is a little more manageable as far as yard work and there’s less taking care of it, there’s not as much to take care of.

And so these are just a couple of questions that you need to be asking yourself as you approach retirement. Where do you fall in here? Or will you continue to have a mortgage and it’s just going to continue to pay that? And if that’s the case, your housing expenses won’t change much.

And then just remember that even if you don’t have a mortgage, you will still be on the hook to pay insurance and property tax.


So after housing, next are hobbies, and this is what a lot of people are hoping to do when it comes to retirement is to have more hobbies. And the biggest one would be traveling and seeing the world but also traveling to see grandkids or to see family.

And so that is what we have found is that it’s usually a pretty good tick up in people’s expenses around travel when it comes time to retire.

Also, not just traveling but also other hobbies such as whether it’s golf or whether it’s different activities, now that you have more time, you may be putting more money into these types of hobbies.

And so, you don’t want to just kind of take a step back and just kind of think through how much it is that you’ll be spending on your hobbies when it comes time to retire.


Then the last one is going to be from a tax perspective. And this isn’t exact, this is kind of giving you a pretty good idea of kind of these ballpark figures of what you could expect your effective tax rate to be when you retire.

So just to take it to walk you through this chart, this is based on someone taking $40,000 a year from Social Security and then the rest of their annual income coming from whether it be pensions or IRA distributions.

So you can see here, and this is, I know some people are out of state, are not in Utah, but this is based on Utah state taxes. If you’re in a place like Nevada, Wyoming, you can just completely take out the state tax because you don’t have it.

But if you’re in a place like California, then this state tax would likely be a little bit more than what we’re showing here.

But just to give you an idea, if you make about $180,000 a year about $15,000 a month, you can see your state tax just under 5% in Utah, Federal 13%. So your total tax would be just under 18%, is what you’d be on the hook for taxes.

I know we can work with that to try to lower it, but this just gives you a pretty conservative idea of what that would be. And then just broken down, if you expect your income to be more about $120,000, then that total tax would be about 13%. Then comes $80,000, you’re effective tax rate would be about 8%.

And so your taxes are going to be less in retirement than they were during your working years most likely because you’re no longer paying into Social Security, you’re not paying into Medicare as well.

So those are just a couple insights and things to be thinking about when you’re thinking of okay, how am I going to be building out this? What expenses might be different or might change when it comes to retirement?

The next thing I want to talk about is more building out this budget, what’s that framework for this budget in retirement?

Rule of Thumb

Well during your working years, you may have seen this just kind of a rule of thumb, about a 50/30/20. And what that means is that this is your after-tax income that’s in your checking account. About 50% of that goes towards your fixed expenses, 30% towards your flex expenses, which we’ll talk about in just a second, and then 20% towards savings whether it be saving for your retirement or putting some money aside for an emergency fund.

And then when it comes to when you’re actually in retirement, we’ve seen it change like this, and this is assuming that you no longer have a mortgage, that your home is paid off.

And that’s where about 30% would go towards that fixed, 40% towards the flex, and then 30% towards the savings. And the savings again is a little bit different in retirement because you’re no longer saving for retirement with this money, but this is going to be saving for things like travel or other types of savings that you would like to do.

This is how we’ve seen it, just kind of a rule of thumb of what it breaks down to.

And so when it comes to what these effects fixed, flex, and savings looks like, the fixed, I think of the fix is this is the money that it’s the same amount every month to the same vendor.

And so I think of these expenses are tithes and charitable giving, utilities, health insurance, property tax, debt payments, things like that. This also could be considered any subscriptions that you have because it’s that set amount such as a Netflix or something along those lines.

And then the flex spending is going to be more your day-to-day lifestyle expenses. So there’s some of these that are non-discretionary, you have to buy groceries, you have to buy clothes and put gas in the car, but it’s variable. It changes from week to week and month to month.

And so the flex would come here. And sometimes what I like to do is break down you have the monthly number of okay, the flex spending it might be $3,000 a month that you have for this.

Well if you break that down into a monthly, into a weekly amount, that gives you about $700 a week to spend on this flex spending amount.

And then you have more of this savings. And the savings I think of it, it’s more of these we call them non-monthly expenses. And these are the expenses that we know pop up throughout the year, but not on a monthly basis.

And so this would be insurance premiums, home and car maintenance. These are necessary but they don’t happen monthly or exact. And then also ones that are a bit more fun, think of these big these big trips for travel like Christmas. You want to spend a lot of money on Christmas for kids, grandkids, and so forth.

And what we do here is we look at what’s the annual amount that you would be spending on these types of expenses and then dividing it by 12 to get the monthly amount that you would be spending.

And then recommend just putting that monthly savings into a separate checking account or savings account. And I know a lot of times now you have these sub-accounts as well that you can have in your savings to help you save for these specific types of expenses.

And that way as these expenses do come up, you can dip into these smaller savings accounts that you have.

So that’s a little overview of the fixed flex and savings and how we look at that.

Two Methods: Top-Down & Bottom-Up

And then the next is if we look at the two different types, we have the top-down and the bottom-up. And so the top-down is where we determine what income you have and then based on your income, is you build the budget around that.

And then you also have the bottom-up which is the inverse, meaning we start with your budget and then we determine what type of income you need to support that budget, to support that lifestyle.

And today I don’t want to get too much into determining the income. That’s not what we’re going to talk about today. If you would like to know more of what an estimated income would be in retirement, we’re more than happy to build out a Perennial Income Model scenario for you, or a retirement income estimate for you. We’d be happy to do that, just let Daniel know or send us an email after.

So let’s look at a couple different examples of this. So when it comes to the bottom-up you say okay, Rob and Cindy, they’re approaching retirement and they have built out an income. They know that their income will be about $10,000 a month. That’s what they can rely on.

And so of this, we know okay, well 13%, just about 13½% of that is going to go towards taxes. And so they have $8,670 a month to put towards their budget or to estimate what their expenses are going to be.

And that’s where they looked at their fixed expenses, their home is paid off. And so this is going to be their health insurance, utilities, property tax that they’re putting into an escrow account, and these are going to be their fixed expenses of $2,600 a month.

And then they have their flex spending. They want to have about $800 a week or just under $3,500 a month for all their day-to-day lifestyle expenses. And this may include some of these smaller trips to go visit the grandkids and things like that to spend money on the grandkids or go out to eat, and all the more the day-to-day living.

And then when it comes to savings, they put about $2,600 a year, or $2,600 a month towards savings. The necessary savings that they know these expenses that are going to pop up, they have about $6,000 a year which would translate into $500 a month.

And then for fun, they really want to go on a big trip every year so they estimate about $1,600 a month that they put into these savings for their big annual trip, about $19,000 a year that they can set aside for that.

So that’s the bottom-up example where you start with your income, you know what the income is, and then you build a budget based off of that. And then the next example is going to be the top-down. And this is where John and Amy, they want to say, thus is the lifestyle that we want. So we want to build the budget on the lifestyle that we want and then we’ll determine what type of income we need based off of that.

And so that’s where after taxes they need $10,000 a month and then you can see the based on their fixed flex and that savings amount. And this is the lifestyle that they hope to have in retirement.

And so if we add estimated taxes to that, $10,000 and this is again, it’s just an estimate, we don’t know for sure. It’s about 15% which is pretty conservative. That’ll give them, what they will need is about $11,800 a month. That’s the income that they will need to support their lifestyle when they retire.

And so that’s when we’re looking to build this out, I always want to say if you’re doing it this way where you just want to look at the lifestyle you want, I would say this flex spending number, take what you think that you want and then I would say add 10-20% as a buffer for that.

And that way you can help get a more realistic idea of what the income will be that you’ll need when it comes to retirement.

And then when we’re thinking about okay, well, how do we produce this income? Then this is where to determine to get to that type of income that you need. It’s going to be that balance where some people might look at it and we can build out that income scenario and be like oh, we can support $12,000 a month based off of our Social Security, any other income that’s coming in, and also our investments. We can support that, so we’re good.

Other people might look at this and be like well, you know, we want to retire right now and we can only have, this is the lifestyle we want in retirement, but the income that we can produce is only $9,000 a month.

So then you need to ask the question okay, what things are you willing to cut out from a lifestyle if you want to retire now to quit with the income that you can afford, verse maybe it makes sense to wait a couple more years and to wait a few more years so that your income in retirement will grow.

And there’s just that fine balance between trying to figure out time in retirement verse lifestyle in retirement and trying to find that balance.

So as a review, I wanted to go into the insights of the things that will likely change the most with your expenses in retirement, which are going to be the Healthcare, housing, hobbies, and taxes.

And then also just determining what type of framework you want to have to help build out that budget in retirement to really give an idea of what those expenses will be for you and that’s where you either start with your income and they determine what budget you need to have to support that will support that income or you start with your budget first and determine what type of income you will need to have to support that lifestyle.

Question and Answer

So thank you very much for watching this and going over it. And I’m just going to ask Daniel if there are any questions to have right now.

Daniel Ruske: Yeah, so I got a couple questions.

Alex Call: And also you can always just call in or send me an email as well if you have any questions.

Daniel Ruske: Can you hear me okay Alex?

Alex Call: Yeah Daniel, what was the question?

Daniel Ruske: Okay, maybe I don’t think you’re hearing me very clear. I’m going to put it in the chat and you can read it and then maybe answer it.

Alex Call: Sorry, Daniel. Sorry, sorry, I didn’t quite hear that.

Daniel Ruske: Okay Alex, let’s try again. If you can hear me, if not, it’s in the chat. But I think the audience can hear us. Just a second everybody, thanks.

Alex Call: Okay, thank you for your patience there as we got this, I have one question that talked about determining what retirement income might be and what was the recommendation.

So when it comes to determining what your retirement income is, if you’re familiar with the Perennial Income Model™ which is what we use to help people determine what type of income they have, that’s where we organize all of the different, we call it mailbox money that people have. The mailbox money meaning what’s the income that’s coming to you in retirement that’s going to come regardless of your investments.

So think of Pensions, rental properties, Social Security, and any other thing like that. And we take we add up all of those and then also look at your investments and then segment out your investments to help provide income for you in retirement.

And if that’s something that if you’re interested in, we’d be more than happy to set up a time and to build one of those out for you.

Another question, do you have any estimate of a range or average for medical expenses outside of Medicare premiums?

Yeah, so when it comes to outside of Medicare premiums, there will be certain deductibles that people have. And those deductibles range about probably about $3,000-$5,000 a year on the Medicare deductibles that people may have and also co-pays and things like that for doctor visits.

But some of that will also help determine whether or not you have a supplement plan. If you have a supplement plan those deductibles will likely decrease but it will be a higher monthly premium similar to what your insurance would be like today. Where if you have a higher premium, you’ll have a lower deductible.

So, I think that’s all the questions that we had, and so we’ll go ahead and oh, so does Medicare or the Medicare supplement cover vision or dental?

So how it works, you’ll have the Medicare supplement that likely does cover vision or dental depending on the one that you enroll in. You also have a Medicare Advantage plan that you can get, in where bundles that Medicare that is less expensive that would help with vision and dental that you could look into.

So Medicare itself does not but the supplemental plans, or the advantage plans could cover vision and dental.

And then I think this is a great question to end off of, is what is a comfortable retirement income to work toward? And that is it totally depends.

We have some people that say they want $20,000 a month and that’s a comfortable retirement income and other people that say they want $2,500 a month and that’s a comfortable retirement income. And so it’s very dependent on what you want and that’s the purpose of this webinar is to help you get an idea of what those expenses would be in retirement.

So, thank you again very much for coming out and please take that survey to let us know your thoughts. Bye.

About the Author

Alex Call is a Certified Financial Planner™ at Peterson Wealth Advisors. He graduated from Utah Valley University where he majored in Personal Financial Planning and minored in Finance.

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