Managing Your Retirement Budget with YNAB

So, you’re living the dream. Through hard work, diligent saving, and solid financial planning, you’ve reached the long term financial goal that so many strive to achieve: the golden years of retirement.

Now what?

Well, your daily life is going to look a little different (in a good way!), but so is your monthly budget. Making your retirement savings last for the long haul is a priority and having a solid spending plan is essential, but what’s the best strategy for setting up and managing a retirement budget?

Let’s get some real world advice based on the real life situation of a YNAB user named Beth, who wrote into the podcast to ask Jesse Mecham, YNAB founder, author, and podcast host, for personal finance advice about her retirement budget.

Prefer to listen to the episode? Find it here: Ask Jesse: How Do You Budget After Retirement?

Budgeting During Retirement

Beth and her husband have been using the YNAB Method to manage their money for two years now and have recently retired. They have a nice little nest egg in the form of a  savings account and a retirement account, but opted to delay receiving their social security benefits until age 70 since deferring your social security boosts your payments a bit. So, they have the funds to cover their living expenses out-of-pocket until then, but aren’t used to budgeting with a pile of money versus the regular sources of income they’ve had in the past.

When living on her pre-retirement income, Beth found a lot of peace of mind using YNAB’s Four Rules to guide their spending decisions:

Rule One: Give Every Dollar a Job

Decide how to allocate each and every dollar you have. To accomplish this, think of your budget categories like envelopes labeled with the different jobs your dollars have to do (Mortgage, Groceries, Car Payment, etc.) and then assign your dollars to each budget category (just like you’d stick cash in an envelope) based on their priority or importance until you’re all out of unassigned money. Repeat the process every time you get more dollars.

Rule Two: Embrace Your True Expenses

Be realistic about irregular, infrequent expenses that feel unexpected but really aren’t. Holidays, home repairs, health insurance premiums, property taxes, annual membership fees—they’re going to happen, so prepare accordingly by breaking those anticipated expenses into manageable monthly chunks so that you’re ready when they’re due.

Rule Three: Roll With the Punches

Life happens. And it will continue to happen. Even the “best” budgeter experiences unexpected expenses, so adjust your spending plan as needed by moving money from one budget category to another without feeling guilt or shame about doing so.

Rule Four: Age Your Money

Your ultimate goal is to build up a buffer of time between when you earn your money and when you spend it. As you start paying closer attention to your finances, you’ll start spending less and saving more. This gives you some breathing room when it comes to making spending decisions. Eventually you’re paying next month’s bills with last month’s money.

Once she hit retirement age, Beth realized that she wasn’t sure how to incorporate the first two rules of the YNAB Method into a retirement budget:

“My question for you is how would you approach drawing money out of the retirement accounts to fill up the categories each month? Part of what I love about YNAB is budgeting for True Expenses (non-monthly expenses), but I’m wondering if it makes sense to pull money out of higher earning accounts into my checking account for things like a future car?  That’s probably, what, a five or ten-year horizon expense. Or an unknown but inevitable house repair—a  roof would be 20 years at the longest, right? A water heater—eight, right? If I don’t pull it out and assign those dollars to specific jobs, I feel like I lose the joy and peace that comes from having planned.

This is a valid question from Beth—let’s look at how this might work for ultimate joy and peace.

How to Use YNAB for Your Retirement Budget

Having a clearly defined plan to cover essential expenses empowers you to feel in control of your future and your finances, but how do you enjoy that without losing some of the advantages of keeping that cash  in your retirement account? Jesse thought of a couple of different ways to approach it:

For Monthly Expenses:

If you didn’t really care about maximizing the passive earnings, you could do quarterly withdrawals. So, on January first, you’d draw for the next three months and assign that month to three months’ worth of categories and any upcoming irregular expenses. Then on April first, you would do another quarterly draw.

If you want to maximize a little more, you could pull money out every month or even every two weeks.

Either way, you’d put it all on autopilot, so it’s an automatic withdrawal to your checking account from the retirement account. It almost functions just like a regular paycheck, only, you’re paying yourself from your nest egg. Once the money hits your liquid account, the amount will appear in Ready to Assign and you can give every dollar a job as you fill up your categories.

Planning for Large Expenses:

Although convenient, the solutions above aren’t the best strategy when it comes to funding those larger irregular expenses. If we’re setting aside money for a roof repair that may happen nine years from now, we’re pulling money out of a retirement account for an average of four and a half years before you actually need it, and four and a half years out of any interest-bearing asset is a pretty long time.

So, for the big stuff, like a new car, leave that money where it is—just make sure that you’re invested in something that isn’t very volatile.

Then how do you earmark money for the far-in-the-future expenses, like a new car or roof?  

Even if you know (or think) you have enough money for that stuff in your pile of retirement expense dollars, the comfort that comes from being able to see that those funds have a plan that aligns with the future you hope to have is a significant benefit. That was the root of Beth’s question—how to keep that peace of mind without sacrificing the appreciation of her retirement assets.

Budgeting with Retirement Accounts

One possible solution is to add your retirement accounts as unlinked checking accounts in YNAB. (Don’t define these as tracking accounts if you want to incorporate this money into your budget.) It’s not perfect since that asset goes up and down in value—so you won’t have a perfectly accurate balance, but precision isn’t necessary to make this work and you could reconcile that account in YNAB on a quarterly basis, which I’ll explain more later.

So once those retirement accounts are added, create one big category group called something like “Future” or “Long Term Expenses.” Within that category group, create categories that would cover anticipated future needs, like a new car, large home repairs, travel, etc.

You wouldn’t need to get too granular about it; you should also include a catch-all category called Not Yet Allocated in that group. You’re past the point of needing to give every dollar a specific job, but earmarking money for predictable future expenses creates that scarcity mindset that helps guide spending decisions.

The money in that Not Yet Allocated category still has a loosely defined job, and that’s to be available in 10, 15, or 20 years from now. You can still say, “This money is not for the day-to-day expenses. It is not for new boots, it is not for sushi, it is not for golf clubs,” which transforms that undefined pile of money into a plan of action that keeps you in control of your finances.

Reconcile Retirement Accounts

To manage the fluctuations of your retirement account, create a habit around going into that account in your budget on a quarterly basis to hit the Reconcile button. YNAB will ask you if the number shown is your current balance—it won’t be. So hit “No” and add the correct current balance that your actual retirement accounts (wherever they live) show at the moment.

Let’s say your retirement assets appreciated by $10,000 since the last time that balance in YNAB was updated. YNAB will make an automatic adjustment once you reconcile that account, and that money will appear in Ready to Assign.

Move it to the Not Yet Allocated category you created. If your assets depreciated, you’d assign the “overspending” to that category.  Doing this allows that unassigned future money to absorb the fluctuations in the market, while leaving day-to-day spending and anticipated “True Expenses” intact.

By doing the above, you can continue to enjoy the benefits of keeping money for future expenses in a retirement account without losing the peace of mind, clarity, and sense of scarcity that Rule One and Rule Two of the YNAB method help bring to your budget.

No one can answer exactly what a big pile of money will do but we can start to answer what small piles will do, so go ahead and give those dollars their jobs, and enjoy your retirement.

Ready to do some next step retirement planning? If you don’t have a budget yet, set one up for free so that you can see what you’re missing. Our complimentary 34-day trial doesn’t require a credit card or a commitment.

If you’re interested in getting more organized with your money and more clear about your mindset, our free Change Your Money Mindset Workbook is the perfect starting point!