How do I build a budget for my first year of retirement?
Start from what actually lands in your bank account: your pension after tax withholding and health insurance premiums, plus any Social Security or savings withdrawals. Then list spending, noting what goes up or down once you stop working. Plan carefully for the gap years before Medicare at 65 and before Social Security, and keep an emergency fund so one big bill doesn't force a bad decision.
Step 1: Find your net monthly income
Your pension estimate shows a gross (before-deduction) amount. The deposit you actually receive is smaller. Work down from the gross figure:
- Gross pension, after any reduction for a survivor option (see single-life or survivor pension).
- Minus federal income tax withholding.
- Minus state income tax withholding, if your state taxes pensions (see state tax on public pensions).
- Minus health, dental and vision premiums if your plan deducts them from your check. Federal retirees' FEHB premiums, for example, come out of the annuity.
- Minus any other deductions, such as union or retiree association dues or life insurance.
Add your other income on the same net basis: Social Security after any Medicare Part B premium and tax withheld, and any regular withdrawals from a 457, 403(b), TSP, IAP or IRA after tax.
Ask your retirement system for an estimate that shows deductions. Oregon PERS, Washington DRS and OPM can all show what will be withheld once you choose your options.
Step 2: Set your tax withholding
No employer is withholding tax from a paycheck anymore, so you set it yourself:
- Pensions: file Form W-4P with your retirement system. If you don't, the plan withholds as if you were single with no adjustments (IRS Publication 505). A married couple with two pensions or a pension plus Social Security may need more withheld than that.
- Federal retirees: change withholding through OPM's Services Online.
- Social Security: nothing is withheld unless you ask. File Form W-4V to withhold 7%, 10%, 12% or 22% of each payment (SSA: Request to withhold taxes).
If withholding falls short, you may owe estimated tax payments. Our guide to how pensions are taxed covers the rules.
Step 3: List spending that changes
Use your last 12 months of bank and card statements as the starting point. Then adjust the categories that usually shift in retirement:
| Often goes down | Often goes up |
|---|---|
| Commuting, parking, gas | Health insurance and out-of-pocket care |
| Work clothes and lunches out | Travel and hobbies, especially early on |
| Retirement contributions | Home utilities (you're home more) |
| Social Security and Medicare payroll tax | Home repairs and car replacement |
| Union dues (sometimes) | Help for adult children or parents |
Split your list into essentials (housing, food, insurance, utilities, transportation, taxes) and flexible spending (travel, gifts, dining out). A common goal is for guaranteed income (pension and Social Security) to cover the essentials, so market swings only affect the flexible list.
Don't forget yearly and irregular costs. Property tax, car insurance, holidays and gifts come once or twice a year. Divide each by 12 and add it to the monthly budget.
Step 4: Plan for the gap years
Many public employees retire before 65, and many wait to start Social Security. Those choices create gap years that need their own budget.
Before Medicare
Medicare starts at 65 for most people. Until then you need other coverage: retiree coverage through your system (often at a higher premium than when you worked), a spouse's employer plan, COBRA, or a marketplace plan. This can be the largest single cost in the gap years. See health insurance before Medicare for your options.
Once you are on Medicare, budget for the Part B premium. In 2026 the standard premium is $202.90 a month and the deductible is $283; people with higher incomes pay more (CMS: 2026 Medicare Parts A and B premiums and deductibles). Add any supplemental, Advantage or drug plan premiums on top.
Before Social Security
If you delay Social Security to get a bigger benefit, your pension and savings must cover the years in between. Write down the age each income source starts and build a budget for each stage. If you take Social Security before full retirement age and keep working, part of your benefit can be held back: in 2027, $1 for every $2 earned over $25,560 (SSA: 2027 COLA fact sheet). See when to start Social Security.
FERS supplement
Some FERS retirees under 62 get a FERS supplement that stops at 62. Budget for that drop. See FERS retirement age.
A worked monthly example
Jordan and Casey are a made-up Oregon couple. Jordan retires from a school district at 62 with a PERS pension; Casey is 60 and still working. All numbers below are invented for illustration.
- Jordan's gross PERS pension (after the survivor option): $3,800.
- Federal withholding from a W-4P: minus $330.
- Oregon withholding: minus $260.
- Pre-Medicare health premium deducted for Jordan: minus $900.
- Net pension deposit: $2,310.
- Casey's take-home pay: $3,400. Household net income: $5,710.
| Monthly spending | Amount |
|---|---|
| Mortgage, property tax, home insurance | $1,750 |
| Groceries and household | $900 |
| Utilities, phone, internet | $400 |
| Cars: gas, insurance, repairs, saving for next car | $650 |
| Out-of-pocket medical and dental | $250 |
| Travel and hobbies | $600 |
| Gifts, dining, other | $450 |
| Home repairs (yearly cost divided by 12) | $200 |
| Total | $5,200 |
The couple has about $510 a month left over. But when Casey retires, the household loses $3,400 of pay, and they will need Social Security, savings withdrawals or lower spending to fill it. A second budget for that stage, and a third for when both are on Medicare, shows whether the plan holds.
Emergency fund
A pension arrives every month, but a new roof, a car or a big medical bill does not fit into one month's budget. Without cash set aside, retirees may pull a large sum from a 457 or IRA in a single year, which can raise taxes and Medicare premiums. Many planners suggest keeping several months of essential spending in a savings account; the right amount depends on how much of your income is guaranteed and how old your house and cars are. Refill the fund after you use it.
Inflation and COLAs
Your first-year budget will not hold for 25 years. Prices rise, and each income source adjusts differently:
| Income | Yearly adjustment |
|---|---|
| Social Security | Full COLA; 3.6% for 2027 |
| FERS annuity | Same as CPI up to 2%; 2% if CPI is 2% to 3%; CPI minus 1 point above 3%; most retirees start getting it at 62 |
| Oregon PERS | Up to 2% a year, with a blended rate for Tier One service after October 1, 2013 |
| Washington DRS Plans 2 and 3 | Up to 3% a year; Plan 1 only if chosen at retirement |
| Savings | Depends on investments |
Sources: SSA: 2027 COLA fact sheet, OPM: How the COLA is determined, Oregon PERS: Benefit component comparisons, DRS: COLA. CalPERS and other systems set COLAs by plan or contract, so ask your system.
A capped COLA means your pension slowly loses buying power when inflation runs above the cap. Revisit your budget every year, and expect health costs to rise faster than the rest.
What to do next
- Get a net estimate. Ask your retirement system for an estimate that shows tax and premium deductions.
- Price health coverage for each stage. Before 65 and after 65, for both spouses.
- Make a budget for each stage. Before Social Security, after Social Security, and after the second spouse retires.
- Work through the checklist. Our retirement checklist lists forms and deadlines.
Our planner lays out your pension, Social Security and a spouse's income by year, so you can see each stage of your budget.
Open the plannerCommon questions
How much less will my pension deposit be than the gross amount?
It depends on your tax withholding, state of residence and health premiums. Before Medicare, health premiums alone can take a large share. Ask your system for an estimate with deductions.
Is Social Security tax withheld automatically?
No. You must file Form W-4V and choose 7%, 10%, 12% or 22%.
What does Medicare Part B cost in 2026?
The standard premium is $202.90 a month, with a $283 yearly deductible. People with higher incomes pay more.
Do people spend less in retirement?
Some costs drop, such as commuting and retirement saving, but health care, travel and home costs often rise. Build your budget from your own records rather than a rule of thumb.
How big should my emergency fund be?
There is no official figure. Many planners suggest several months of essential spending, more if your house or cars are older or your income depends on investments.
Will my pension keep up with inflation?
Partly. Most public pensions have a capped COLA (up to 2% for Oregon PERS, up to 3% for DRS Plans 2 and 3), so buying power can slip when inflation runs higher.
General information, not advice. We aren't part of any retirement system, the IRS, SSA or Medicare. For official income figures, ask your retirement system and Social Security; for taxes, a tax professional.