Every day, people delay retirement because they fear running out of money once they don’t have a steady income from a full-time job. However, with planning and preparation, you can take several actions to make sure that doesn’t happen.

Creating a retirement budget allows you to think about how much you’ll spend in retirement vs. how much you’ll have coming in, and create a plan for spending on both needs and wants. Read on to learn tips for retiring on a budget, as well as how much you should have saved before you retire.

How to retire on a budget

When creating a retirement budget, you’ll want to follow these tips and steps:

1. Estimate the income you’ll need

Typically, it’s a good estimate that in retirement, you’ll spend between 75-80% of your current income. So, if your current salary is $100,000 per year, you’ll likely need an estimated $70,000 - $80,000 in retirement. This can definitely be a starting point and you can adjust as you figure out your estimated spending.

Another way is to divide your annual income by 12 to determine an approximate monthly budget. You’ll want to work through Step 1 and Step 2 together as how much you’ll be spending will help determine your exact needed income.

2. List your expected spending and determine what will change

Some of your expenses will stay the same in retirement, and some will change. For example, you will no longer have to pay for travel expenses related to a work commute. Perhaps you decide to downsize and your monthly mortgage will be a smaller payment. Or, maybe you plan on traveling more for leisure so your travel expenses will increase.

Start by analyzing current costs related to things like:

• Housing
• Groceries
• Insurance
• Debt
• Family care
• Medical care
• Leisure activities (like travel) and hobbies
• Utility and other bills (like phone)

Determine whether those costs will change or not during retirement. Think about what types of spending may change, such as expenses related to clothing or eating out (since you’ll no longer be working at an office). Consider lifestyle changes or hobbies that will increase or decrease expenses in certain areas.

Don’t forget to factor in large lifestyle changes, such as moving or traveling. Be sure to also clarify which expenses are essential and which are non-essential so you know where you can cut back if necessary.

Finally, consider that you’ll likely be losing your employer health coverage, so factor in costs for Medicare or other health insurance. Don’t forget dental, vision and hearing care as those often aren’t included in traditional health care or Medicare plans.

To get started, gather your:

• Bank and credit card statements from the last 12 months
• Your last two pay stubs
• Last year’s tax return
• Recurring monthly, quarterly and/or annual payments
• Health care expenses from the past year

3. Estimate retirement income

When retired, you’ll likely be dealing with several sources of income. For example, Social Security payments, a pension, 401(k) or other retirement plan payments, etc.

First, you can get an estimate of your Social Security retirement benefit by creating a my Social Security account. Then, if you have a retirement savings account, review the amount you have saved in the plan and determine how much you’ll be able to withdraw monthly.

Experts suggest limiting withdrawals from retirement savings accounts to 4-5% during the first year of retirement, and adjusting for inflation in subsequent years. Take this into consideration when determining your monthly retirement income.

Finally, consider and add up any other sources of income, such as savings accounts, rental income, or side job income you may have while in retirement.

4. Create a spending plan

After estimating how much you’ll be spending and how much income you have, it’s time to create a spending plan. Be sure to create a system that allows for tracking, such as an online or mobile app budgeting tool or software. Or, you can use a spreadsheet or pen and paper.

Add up your expected household income, and compare it to your estimated spending and expenses. Subtract the expenses from the income. If the number is negative, you may have to find a way to cut expenses or increase income. If it’s positive, you’re on the right track to meeting your financial goals.

5. Start now

Even if you aren’t ready to retire just yet, you may want to consider trying out your spending plan while you’re still working. Set a new monthly budget and continue to work, and direct any income that exceeds that monthly budget into your retirement savings plan. If you spend more than you planned, make adjustments to the budget to get it closer to where you need to be.

By doing this before retiring, you can get a good sense of what you’ll need to live on during retirement, and can better understand where you need to make adjustments to your plan to be better prepared.

7 tips for retiring on a budget

Here are a few more tips to retiring on a budget and meeting your financial goals.

• Keep an emergency fund. Set money aside in a separate savings account designated for unexpected expenses. If you don’t have a fund, it may be a good idea to start one. Experts suggest having at least six months of expenses saved in the emergency fund.
• Meal plan. Put together a plan before you shop and stick to your list. Think about breakfasts, lunches and dinners, as well as any snacks. Try to go to the store once a week instead of several trips for a few items at a time, as that often leads to higher bills.
• Consider where you live. Some places have a higher cost of living than others. If you live somewhere with a high cost of living, such as in a large city, consider moving away from the urban area and into a suburban or even rural location. In addition to lower housing costs, you may also find lower-cost entertainment options and even save on taxes.
• Buy and sell second hand. If you have clothes or items you no longer need, consider selling them on sites like Craigslist, Facebook Marketplace, Let go, etc. Also try shopping for items at secondhand stores or online as you can often get new or gently used items for much cheaper.
• Take care of your health. By eating well, exercising regularly, and prioritizing good sleep, you’re taking care of your body and health so in the long run, you can help prevent unexpected or high medical bills.
• Plan for flexible spending. Consider having a certain amount of money on the side for “fun” spending like shopping, eating out and other entertainment. These can be the “extras” you don’t plan ahead for.
• Pay off your debt. The more you pay off before retiring, the less you’ll have to spend in retirement. Not all debt is bad, but it can be a hefty expense on a limited income. Try to pay off credit cards, auto loans and student loan debts. Then, you can focus on your mortgage.

What does semi-retired mean?

Semi-retired means you are retired or have withdrawn from employment but are continuing to work part-time or occasionally. It’s estimated that more than 11% of those who are retired consider themselves semi-retired, as they continue to work part time. This could be because they find themselves bored in retirement and want to continue to contribute to a workplace, or they find that they need (or want) the extra income.

How much does the average person retire with?

According to the Bureau of Labor Statistics, a household run by someone 65 or older spends an average of about $46,000 per year, though this can vary widely depending on your lifestyle and other essential and non-essential expenses.

A great rule of thumb is retiring with between 7-10 times your annual salary, depending on when you want to retire. For example, if you make $100,000 per year and are retiring in your 60s, you should have close to $1 million saved in your retirement account. Again, a good estimate is annual spending of about 80% of your pre-retirement income, so you’ll want to calculate how much that is for you, and then multiply it by the number of years you're wanting to be retired.

Retiring without a pension

A pension plan is a type of retirement plan that requires your employer to make contributions to a pool of funds to set aside for your future benefits. The earnings of these investments generate income to you upon retirement. There are a few types of pension plans, but essentially it means you continue to earn a steady income paycheck from your employer even in retirement. While it’s lower than your traditional income when you were working, it can still be a great income source in retirement.

You do not need to have a pension to retire. If your job doesn’t have a pension, follow the steps above to create a retirement plan and spending budget. Without a pension, it’s also particularly important to regularly contribute to the retirement plans available to you, or put money in a savings account designated for retirement.