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To Budget or Not?

Richard Quinn

I’VE NEVER BUDGETED, meaning I’ve never planned every expense in detail. But I know many people do, especially as they look ahead to retirement.

This doesn’t mean I don’t know what I spend. My utility bill is $127 a month, my homeowners’ association fee is $870, my property taxes are $3,117 a quarter and my BritBox subscription is $5.99 a month. Or is it $6.99?

By the end of each month, our two credit cards are paid in full. There may or may not be much left in our checking accounts, but our spending never exceeds what’s in the bank. Our “budget” is set for us.

I didn’t retire until age 67 because I wanted to be sure I could generate income equal to 100% of my base salary, while also keeping up with inflation. Sure, I may have a shorter retirement than others who retired earlier, but mine is financially less stressful.

Many of those who are obsessed with keeping a budget are seeking to retire in their 50s. They’re trying to stretch their savings over a retirement that could be longer than the years they worked. I fear that may prove impossible.

Some people say they need a detailed budget to determine how much they can save. For example, according to Frugalwoods.com, “Without a holistic picture of how much you spend every month, theres no way to set savings, debt repayment, or investment goals. It’s a must, folks.”

Sorry, that’s backward. You save first and then see what you can spend.

Listening to a Retire with Style podcast, the commentators took two different approaches. One favored a very detailed budget. The other favored my formula of NE-S=S, meaning net earnings minus savings equals spending. This formula gives you your de facto budget.

Why stress over budgeting? If you’re about to retire, I maintain your overall spending will be the same as before, unless you’ve just paid off the mortgage. I hear someone saying, “Wait, once you’re retired, you’ll no longer be saving for retirement, right? Can’t you live on less income?”

Yes, if you’re one of those folks who saves 30% to 40% of your income, you may have a point. But for the great majority of Americans who save far less, you’ll still need to save something when retired because your spending will rise each year, thanks to inflation.

I’m prepared to be criticized for repeating myself. But I feel my approach is the safe one. Our monthly “spending” includes saving something each month, plus an allowance for discretionary spending such as travel, plus a provision for surprise expenses like the two new tires I recently bought, several thousand dollars in car repairs and $8,000 in dental bills.

Your spending will change over time. But I firmly believe there won’t be a significant decline. Keep in mind that many unforeseen expenses aren’t linked to your income. The cost of a new furnace will keep rising, no matter how much income you receive this year.

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A 2014 survey claims that, after three years, retirees are living on 66% of pre-retirement income, on average, with more than half saying they live as well or better than when they were working. Is that possible? I’d like to see their pre- and post-retirement budgets.

Thoughts on budgeting vary widely. A comment from a friend has me bumfuzzled: “I started keeping a budget for one main reason. Financial advice websites kept saying we needed to have $X in annual income. I knew that wasn’t true since we lived on much less than our income for many years and lived comfortably, while putting away quite a bit. So, to determine if we could afford to retire early, I needed to figure out our real expenses/spending.”

No website can accurately say that you need $X in income. At best, it can estimate the financial resources you need to generate $X in income.

I just read a comment on a retirement blog. The commenter had $550,000 in savings, plus Social Security, and asked if that was sufficient to retire. What kind of question is that? Maybe yes, maybe no.

If, at the end of the month, there’s no money left in the bank, or if credit card balances can’t be paid off in full, an assessment of spending is necessary. That’s when a detailed look at where the money goes is important. Make adjustments and move on.

If that’s not your situation, you don’t need to spend hours constructing a detailed budget. That’s especially true if you’re trying to predict spending over decades of retirement—unless you just like playing with numbers.

My oft-maligned notion is that you start retirement with income equal to 100% of your base salary. For most people, Social Security will get them to 40% of that target. That 100% income replacement will provide the financial cushion necessary for a less-stressful retirement—but you might have to work past age 60 to achieve it.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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Paul phelps
Paul phelps
3 months ago

It is very simple to look at your bills that you know are always there and figure out close to what you will be spending. You don’t need fancy software or spreadsheets. I can do it in 5 or 10 minutes off the top of my head.I always add in something for unexpected expenses and project things will cost more down the road.
I keep 30K in our checking account and if it falls below I transfer some in from our brokerage.
We have about 500 a month in Muni bond interest and our SS added in every month and the last 2 years our checking account has stayed around 32 to 36K.
We are lucky because our SS covers our basic expenses.
‘With the 2023 increase our combined SS will be 75,000. Never in my wildest dreams 10 or 15 years ago did I expect that from SS.

mytimetotravel
mytimetotravel
3 months ago

I repeat what I said the last time you advocated replacing 100% of pre-retirement income. What counts is replacing 100% of pre-retirement spending, perhaps with something extra for travel and medical expenses. When I retired I finished paying off my mortgage, I stopped saving for retirement, and my taxes decreased considerably. If I had insisted on replacing 100% of my income I would not have retired, and I would have missed out on over fifteen years of extensive travel (before I was grounded by rheumatoid arthritis and Covid). My pension was 40% of my final-year salary, and I supplemented it with a few years of part-time contract work and later a divorced spouse’s Social Security before drawing my own at 70. It is now almost twenty-two years since I retired, and I have yet to touch my portfolio for more than a few thousand in interest/dividends every few years.

I have not been stressed about my finances, and I have been very thankful that I retired early while I was still healthy. Next year, when I move to a CCRC, I will start drawing on my portfolio, but that’s what it’s there for.

John Redfield
John Redfield
3 months ago
Reply to  mytimetotravel

I’ve always enjoyed Richard’s columns, of course some more than others. I agree that replacing 100% of pre-retirement spending is a better goal than 100% of pre-retirement base salary, but I think they’re basically the same – depending on your individual situation. My pre-retirement base salary was about 25% of my total income due to oil and gas royalty income. I retired 7 years ago at 59 with no significant pension. I consider myself very fortunate that the royalties have continued and will continue for several years, although with high variability. To Richard’s point, the costs I incurred pre-retirement are very similar to those post-retirement. If I was basing my retirement decision by only having a steady pre-retirement income stream, I would have found a balance between income and costs in harmony with years of my personal spending, saving and gifting habits. In my case, income and spending were not well correlated due to the high variability of the royalties (+/- 100% for any given month). Pre-retirement spending is a more general measure for estimating future retirement costs and income needs. BTW, my current detailed budget is 10% for charity, 30% for taxes and 60% other.

Paul Trayers
Paul Trayers
3 months ago

Rich,(your quite a contributor @ HD!)

A lot of great contributors here!
Best2All….
– my simple musings

Last edited 3 months ago by Paul Trayers
August West
August West
3 months ago

I do not budget but I do have a spreadsheet to track some of my monthly expenses. I use it to get a history on what I pay for utilities, car insurance, car repairs, medical bills etc… throughout the year/ years. It comes in handy – like if see jumps in car, home or umbrella insurance, it signals me to maybe spend some time and shop around for better rates. I find it beneficial that way and has help me save some $$$.
And it involves very little of my time to input data in the spreadsheet.

Philip Morgan
Philip Morgan
3 months ago

What you describe as an alternative to budgeting is called “Pay yourself first” and is an accepted method of handling your money. There are many books about it! I’ve always thought that the Pay Yourself First method is far superior than tracking every bagel I buy.

As for the rest, if working an extra 10 years and generating a large nest egg reduces your fear and therefore makes your life more enjoyable, then you have made a good choice. For, me, I would much rather be retired in my 50s and enjoy a decade of good health with no work responsibilities, if all I have to do is some expense projections to enjoy it.

I’m also not sure if you have to save in retirement to account for inflation. Your retirement nest egg should not be in cash – it should still be invested, in securities that outpace inflation. This ensures you can increase your withdrawals each year to keep up, without having to actually save any money in retirement.

R Quinn
R Quinn
3 months ago
Reply to  Philip Morgan

if all I have to do is some expense projections to enjoy it.” I’m thinking to enjoy 35-40 years of retirement financial worry free, and maintain a desired lifestyle there is a lot more to it than doing expense projections. There is making it all work and covering every contingency.

I guess my fault is living nearly 13 years in actual retirement and dealing with the unexpected large bills, the children who need a helping hand on occasion, the loss of medical coverage from a former employer, a major accident incurred by my wife … you know stuff in life that happens and probably is not on a spreadsheet. And I’m lucky, I live on a pension.

It’s no doubt my outlook on things, trying to cover every contingency, but I think many of those average folks planning, but not yet retired, are way too optimistic in their view of the future.

Richard Gore
Richard Gore
3 months ago
Reply to  Philip Morgan

I agree with the ‘pay yourself first’ approach to budgeting. And then as far determining when you have enough, it seems that it depends on so many factors that it is hard to imagine a single rule of thumb is workable for everyone. There are several sensible ways to approach the nest egg question.

I don’t know why some people want to keep telling us that we should follow his example. Is he trying to convince us or himself.

R Quinn
R Quinn
3 months ago
Reply to  Richard Gore

If you mean me, not trying to convince anyone. I’m happy, and anything that makes others happy if fine too.

M Plate
M Plate
3 months ago

No budget, I track monthly.
During much of my working years I had a mortgage and retirement savings contributions. Now I don’t have either. I didn’t feel I needed to replace 100% of my gross income. It is financially safer to work till age 67. It’s even safer to work till the day we drop.

For me, the math added up by age 57. I worked till age 59 to boost my cushion and my pension. Then called it a career. I feel confident, but outside of working till the day we die, no one can know if their finances will stand the test of time.

wtfwjtd
wtfwjtd
3 months ago

Those “one-time”, “emergency” expenses have a nasty habit of popping up again and again and again, often in the same year, no less. That’s why I’ve come to favor a “look at the overall expenses from several years” approach to a month-to-month budget-style approach. The bigger picture gives me more accurate, usable information, and if the overall up-trend after a few years is uncomfortably high, I can take a closer look and make adustments if needed.
I guess that’s one reason why high inflation can be somewhat distressing, as even the long-term data can look like spending has crept higher when a deeper look at the actual data (for us) shows that spending patterns haven’t actually changed at all.

Last edited 3 months ago by wtfwjtd
Richard Gore
Richard Gore
3 months ago
Reply to  wtfwjtd

I also like the multi year approach for spending and investment returns. A single year can be misleading. For example in 2021 I made 350K in the stock market and this year I’ve lost 200K. The long term average is a much better predictor than single year. Much the same for spending. For instance I only buy a new car every 10 years or so.

Boss Hogg
Boss Hogg
3 months ago

I feel similar to Richard. I don’t budget but as a monitor I watch my retirement and non-retirement account balances over the long term. If they trend up, and they have allowing for dips around 2008 and now, I’m fine. If they go flat, I’ll go on yellow alert. If they ever trend down, I’ll make major adjustments. My lifeboats include Social Security, which I’m holding off drawing on, and my house, which I could sell and move to something less expensive.

I track expenses. I like seeing where the money is going and if it seems it’s going too much to one category i’ll look closer at that spending.

Last edited 3 months ago by Boss Hogg
John Yeigh
John Yeigh
3 months ago

We are aligned in approach. My wife and I don’t track every expense but are fully cognizant of our big-picture budget. We likewise delayed retirement until confident of 100% income replacement. Since we always control spending below income no matter what, savings continue to creep.
In contrast, three friends have tracked every expense for decades through Quicken. They regularly tease me that they can quickly advise their annual or monthly ice cream cone or road toll expenditures for any given year – can I? Nope, but I know we spend maybe $15/year on cones and $2,000/year on tolls.

Chazooo
Chazooo
3 months ago
Reply to  John Yeigh

Is there some value to knowing exactly to the penny why you are impoverished or not? Either you is or you ain’t.

R Quinn
R Quinn
3 months ago
Reply to  John Yeigh

Well, John, at least there are two of us of similar minds on this. I just don’t get trying to budget for years in the future during retirement. Seems more stress than value.

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