How To Create Your Retirement Budget

I get incredibly excited about the idea of creating a retirement budget. It is a chance to imagine my life at a point when I no longer have to work and can fill my time as I choose. I think about my retirement budget as a “financial freedom budget;" I aim to stop working a traditional job (or before) I reach the age of 45. Those that know about my goal of financial freedom ask about my budget. In this post, I’ll share how I think about my future spending.

I created my first financial freedom budget in 2013 when I started exploring the FIRE community (Financially Independent, Retired Early). Before that, I'd always thought, “Retirement is so far away, I can’t imagine what my budget will look like.” I had never considered how I’d be living when I stopped working; it was always “off in the future” and so “far away.” I could figure it out later, right?

My thinking changed once I was bitten by the bug to achieve financial independence. I became inspired to figure out exactly how much Mr. Financier and I would need to save to become financially free. A key part of that is how much we’d be spending, so modeling our future budget became critically important. 

At first, thinking about the expenses we’d incur for the rest of our lives was overwhelming. There are so many variables and assumptions. So, I began in the most obvious place - with our current household budget. I reviewed our annual expenses from 2012 and began making adjustments from there. The first adjustment was easy; I immediately deleted my two largest monthly expenditures. These were our mortgage (which we plan to pay off before we stop working) and our retirement savings. That change immediately reduced our monthly expenses by 59%.

Are you surprised that we were spending nearly 60% of our income on retirement and our mortgage?  Two things to keep in mind: First, we refinanced our generously-sized home (and associated generously-sized mortgage) into a 15-year loan that we pay extra on each month. Second, in 2011 and 2012 we had already optimized our budget to remove extra expenses in order to invest more our income.

Note that many mortgage payments include property taxes and homeowners insurance payments; these won’t disappear once your loan is paid off. If you plan to pay off your mortgage before retirement, include your taxes and insurance payments in your retirement budget.

Next, we reviewed our entire budget and made adjustments to reflect what we expected to spend once in the future. Like any budget, ours is a best guess and a living document that we keep coming back to and modifying over time. Here is a summary of the major changes we made.

Home Maintenance Saving: We added a dedicated line item equivalent to 1% of our home’s value to save each month for repairs, since we would not have salary and bonuses to help pay for any big expenses out of upcoming cash flows.

Health Insurance and Healthcare: We increased costs for health and dental insurance for us both, estimated based on visiting online sites and getting quotes (pretending we were 55.) We assumed we’d be paying more for healthcare as we age and increased spending in that category.

Auto Insurance: This line item decreased, as we’d sell one of our two cars in retirement (no more dual commuting) and we’d also be driving fewer miles annually, without the daily trip to work.

Travel: I love exploring, so this line item went up significantly. I increased our travel expenses three-fold. Right now, Mr. Financier and I are very time constrained and don’t travel as much as we’d like given our careers. I look forward to “slow travel” when we’re financially free - weeks or months in one location, living more like a local.

Clothes & Dry Cleaning: This went WAY down, as we wouldn’t need to be in our professional work gear every day. I still plan to buy shoes, but perhaps not quite as many new pairs each year!

Food, Wine, Dining: We increased these slightly; business travel subsidizes some of our fine dining today and we do plan to enjoy going out weekly in our financially free days. I’m also a wine enthusiast, and I’d like to explore it even more in the future.

Hobbies: We increased our hobby expenses, though not by much as we have pretty inexpensive hobbies (reading, running, hiking, camping, and yoga). I did add in additional costs for classes and seminars; there are so many amazing programs in the D.C. area and I regularly can’t participate because of my work schedule.

With these adjustments, Mr. Financier and ended up with a total monthly requirement that is far lower than our expenses today. When I did the math, I was stunned that we could have the lifestyle reflected in this retirement budget, for so much less than we were living on.

What about inflation? Many prefer to include inflation in their modeling. I do all of my calculations in today’s dollars.  Yes, inflation is real, but we never intend to move our entire portfolio out of the market, so we expect that keeping our money in the market will combat inflation - just like it does for us today.

Is my retirement budget perfect? Like any model, I know it isn’t. However, it is a starting point that allows me to explore how much income I’ll likely need to replace when I stop working full time. Many that approach financial freedom begin to live on their post-retirement budget a few years before they stop working. I like this idea as a way to reality-check and pressure-test the budget.

Have you built a budget that reflects your expenses post-career? If so, how did you do it? What feedback or suggestions do you have for me?

xoxo, Ms. Financier