Do You Need A Pre-Retirement Budget?

Creating a budget is about as fun as getting your wisdom teeth pulled. Budgeting is a painful task for most people, and most would instead do anything else besides figuring out where their money is going.  However, to ensure a successful retirement, it’s imperative to spend some time reviewing your spending habits.

According to the American Psychological Association, 72% of Americans say money is the number one reason for the cause of stress – usually the result of less money coming in versus money going out.[1] It’s possible to control the former but much easier to manage the latter. In the world of finance, you can regulate how much you spend and how much you save. Everything else is pretty much out of your hands.

The best way to budget for your retirement expenses is to review where you’ve spent your money. What financial footprints have you left? A deep dive into your spending habits from the past two to three years will help you paint a picture of where your future expenses may land. By identifying how you’ve spent your money, it will be easier to adjust your future spending. After your review, can you find expenses to prune or eliminate?  By reducing your overhead, you’ll be in a better position to save and plan for retirement. And, the lower your expenses, the less money you’ll need for retirement.

As you get closer to retirement, I recommend reviewing your budget each quarter to better understand your spending habits. It’s not uncommon to see a spike in spending before retirement due to several factors like buying a car or remodeling your kitchen, so don’t be alarmed with a short-term increase.

It’s prudent to add a black swan, or random event, category to your budget as there’s always an unforeseen spending expense during the year like a home repair or medical expense. A suggested amount for this category is 5% of your total budget. For example, if your annual spending is $100,000, a recommended amount for your black swan category is $5,000.

In retirement, housing will account for most of your annual expenses. According to the Consumer Expenditure Survey,[2] housing accounted for 32.8% of a person’s budget. Transportation came in second at 17%, food items were third at 13%, and healthcare items were fourth at 8.2%.  Housing is a considerable expense in retirement, even if you don’t have a mortgage. Utilities, property taxes, and repairs are ongoing costs that will always attack your budget. Since the late fifties, consumer spending has increased 6.5% per year.

What about the US savings rate? The annual savings rate averaged 6.22% over the same time – about the same level as personal spending.

How does your spending compare to the national average? The numbers below represent how much consumers spend on various categories as a percentage of their income. For example, Americans spend 13% on food, so if your annual income is $100,000, you’ll pay $13,000 per year.[3] 

Housing = 32.8%

Transportation = 17%

Food = 13%

Healthcare = 8.2%

Entertainment = 4.9%

Apparel = 3%

Education = 2.3%

A spending budget will also help develop a plan for controlling your debt. What is a “good” level of debt? Your total debt payments should be less than 36% of your gross income. If your annual income is $100,000, your total debt payments should be less than $36,000 per year or $3,000 per month. If possible, try to eliminate all your debt before you leave the workforce for good.

Also, if you don’t know where your money is going, how do you know how much to save?  People who invest first, spend second will see their assets grow over time. How much money should you save? As much as you can! If you’re not sure, start with 10% of your gross income.

With technology, it has never been easier to create a budget through programs like, PocketGuard, or Honeydue. After you determine where your money is going, you can turn your attention to planning a profitable retirement.

Happy Budgeting!

Budget: A mathematical confirmation of your suspicions. ~ A.A. Latimer

September 13, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1], accessed 8/14/16


[3] Ibid

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