The takeaway: The perfect setup for outliving your money is not knowing where it goes. This post handily helps you figure where the money went and provides a juicy look at what others your age are earning and spending. Don’t outlive your money!
Part 3 in the Don’t Outlive Your Money Series. (Updated 3/10/21.)
Greetings! In an earlier post, I described how I was having a family lunch on the craggy coast of Maine. Out of the blue, cousin Vinny (or was it sister Golden Hair?), blurts out: “I just want my financial planner to tell me if I can retire.” When someone asks this, they’re often asking if they’ve saved enough to not outlive their money.
To not outlive your money, ask yourself these three questions
- How long do I need the money to last?
- How much income do I need to cover my expenses?
- How big a nest egg do I need to generate the income I require?
But here’s the thing…
Some of you reckless reprobates don’t know how much income you’ll need because you don’t track your expenses. 😲 (I know these things.) And sadly, the retirement replacement ratio doesn’t tell you how much income you’ll need when you retire, because it doesn’t work for Boomers.
True, you know how much money you’re bringing in, but once it’s in, where does it all go? The truth is, gentle Boomer, when you don’t track your expenses, you don’t know the following:
- where all the money goes;
- which expenses will and won’t carry over into retirement; and
- where you can cut back, or if you’ll even need to.
Before you know it, you’re asking a financial advisor, who barely sees you a couple of times a year, if you can retire. Or worse, you’re asking family! It’s the perfect set-up to outlive your money.
Behold: tidings of comfort and joy.
Although you may not know where the money goes, Uncle Sam does! You can use his data to get an approximation of where your own money goes. Each year, the dear Uncle instructs the Department of Labor to conduct its extensive Consumer Expenditure Survey.
The survey is similar to the U.S. Census Survey, except the Consumer Expenditure Survey asks American households:
- how much their households earn;
- how much they spend; and
- what they spend their money on.
Household size varies by age, but roughly comprises two people as you can see from Table 1 below.
Table 1. Boomer households are roughly 2 people
Boomer household income and expenses
Below, Table 2 shows household income and expenses by age group. Since half the readers of this blog suffer the heartache of being too young to be Boomers, (site stats tell me these things), data for those 45- to 54-years old are included below to ease that heartache. Data are also included for those 75 and over so that you can project your income and expenses for your golden years.
Table 2. Household Income and Expenses by Age Group.
How do you compare? As you can see, the older you are the less income and expenses you have. For you lovable visual learners, here’s an at-a-glance view of the data that were shown above.
Figure 1. Household Income and Expenses by Age Group.
Careful! If your household income is less but your expenses are more than those your age, that could be a red flag. You’re spending more than most. You could run out of money if you aren’t careful.
Major household expenses
Now that we know the juicy data on how much folks earn, let’s check out where they’re spending it. Table 3 shows major household expenses. These expenses will jog your memory for your own expenses.
You can find out what each category includes by clicking on the links in the Appendix table at the end of the post. For example, pets are a subcategory in entertainment. Who knew?
Table 3. Major household expenses
Source: U.S. Department of Labor Consumer Expenditure Survey, 2019 (Table 1300). Data published September 9, 2020 by the Bureau of Labor Statistics.
As you can see from the data above, most expenditures decline with age. In particular, we pay less for housing, transportation, food, and contributions made to both self-employed and employer-sponsored retirement programs, like pensions, Social .Ssecurity, and non-health insurance plans.
The three exceptions are upward expense trends in health care, entertainment, and cash contributions.
Health care is discussed below and has its own separate post.
For entertainment, those expenses peak for party animals between 55 and 64. Cash contributions, which include donations to religious, educational, charitable, and political organizations peak for those age 65 to 74. (Could the 65- to 74-year-olds be atoning for all that rabble-rousing entertainment they enjoyed 10 years earlier? 😉)
Here’s what these data look like for you visual types…
Fig. 2. At a glance – major household expenses
Perhaps because he never had a pet, Uncle Sam includes pet care espenses in the entertainment category (!) “
Consider that, wild ones, when evaluating your entertainment expenses.
Things to consider as you look at these Boomer expenses.
- do I spend money on these same things?
- as a percent of my income, am I spending less or more than others in my age group?
- will these expenses carry over into my retirement?
If your expenses will carry over into retirement, then you know you’ll need income to cover them.
A word about health care.
Because health care expenses continue to rise, we all know that it’s the wild card. As such, it has it’s own post in this series to better help you plan your finances. (Why Health Care Could be Your Biggest Expense in Retirement.) Have a peek.
Other household expenses.
Here are other expenses tracked by Uncle Sam. How do you compare?
Table 4. Other household expenses.
As with the data we saw in the preceding section, expenses generally decline with age. We spend less on education, clothes, alcohol, and personal care services like toiletries, oral hygiene, and hair cuts. Tobacco use declines starting at 65. The same is true for miscellaneous expenses like union dues, legal fees, and banking charges.
The one expense that climbs as we age is the purchase of reading materials–books, newspapers, magazines–we’re all in.
It seems aging brings out our inner bookworm.“
Here’s how these data look visually.
Figure 3. At a glance – other household expenses
Bon voyage, Boomer!
How does this compare to your travel expenses?
(Uncle Sam doesn’t break travel down into a discreet category, which is why the AARP figures are used here.)
Next up: the nest-egg
Boomer, now that you’ve got an idea of your expenses, you know how much income you need to cover those expenses.
Given your newly found income needs, the next post in this series will determine how big your nest-egg has to be to generate enough income to cover your expenses.
Until then, why not take a peek at your statements and try to do a precise accounting of where the money goes? The more accurate your assessment, the easier it will be to determine how much income you need to live on.
Don’t outlive your money.
See you next month!
Appendix: Expenses comprising each category.
In the table below, click on each link to see what the U.S. Consumer Expenditure Survey includes in each expense category.
Table A. Links for expenses comprising each category of the Consumer Expenditure Survey.
Source: Consumer Expenditure Survey Glossary which describes the expenses comprising each category.