If You Earn $200,000 a Year in Your 50s, Follow These Budgeting Tips
High-income earners in their 50s are probably keeping one eye fixed on their retirement goal, even if they plan to work into their 60s or 70s. And, likely, they’ll still need a budget.
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If that sounds like you, consider the following budgeting ideas from financial experts.
Budget Template
Every budget looks different depending on factors including geography, health issues, debts and more. For example, someone living in Manhattan might spend 45% of their income on rent and only 2% on transportation costs such as subway passes and taxis or rideshares.
Even so, the average 50-something American earning $200,000 (or more) per year can break down their budgets using this method.
See Also: Retirement Savings: 4 Expenses Retirees Regret Keeping in Their Budgets, According to Experts
Savings Rate
Good budgets start with the target savings rate first, not last.
“Savings and investments become even more critical as the day for retirement nears,” noted Erika Kullberg, financial attorney and founder of Erika.com. “Most individuals should ‘tax’ themselves for saving between 20-30 percent of each paycheck as they build their retirement nest egg to take advantage of compounding growth. This will reduce the reliance on Social Security and employer pensions.”
Consider splitting your direct deposit so part of each paycheck goes into a savings account. If your employer can’t do that, try creating automated transfers after each payday so your money leaves your checking account before you can spend it.
Taxes
Certified Financial Planner Justin Haywood, founder of Haywood Wealth Management, notes that taxes get steeper here. “A significant portion of the budget goes to taxes, for someone earning $200,000 a year. At this income level, they are likely in a higher tax bracket, and should use careful tax planning to minimize their IRS bill.”
That’s where a high savings rate helps. The more you contribute to your IRA or workplace retirement account such as a 401(k), the less you’ll pay in taxes. You can also take advantage of tax-efficient investments such as real estate syndications or investment properties to reduce your tax bill.
Although single tax filers pay in the 32% tax bracket for their highest dollars, careful planning can drop their top tax bracket to 24% and their total tax rate to 10-20% of their income.
Housing
Kullberg sees many of her 50-something clients earning around $200,000 per year put approximately 30% of their income toward housing costs. This includes not just rent or mortgage payment, but also property taxes, homeowners or renters insurance, repair and maintenance costs and utilities.
“Although housing is a major part of the budget, many of my clients in their 50s aim to pay off any outstanding mortgage. In their later years, they don’t have any long-term obligations,” she said.
Transportation
Most of Kullberg’s clients at this age and income bracket spend up to 15% of their income on transportation costs.
Haywood explained that those costs include more than just car payments, however. “Car payments, insurance, maintenance and fuel costs all add up. Some high earners have more expensive vehicles or multiple cars, but that comes at the cost of their savings rate or their lifestyle spending.”
If you spend more than that 15% on something like a luxury car, remember that you might have less to spend elsewhere, like on traveling or meals out.
Healthcare
Most Americans in their 50s retain good health and modest annual medical bills. But that won’t last forever, and Kullberg recommended planning for future costs now. “With age, healthcare costs rise substantially and it’s important to budget for higher medical expenses and insurance premiums.”
That means saving and investing for higher healthcare costs in retirement. Consider pairing a high-deductible health plan with an HSA. Health savings accounts come with the best tax benefits of any tax-advantaged account: contributions are deductible, the money compounds tax-free, and withdrawals are tax-free if used for health-related expenses.
Consider treating HSAs as a secondary retirement account — with even better tax advantages.
Discretionary
Some people object that groceries are necessary, not discretionary. That’s true technically, but it doesn’t explain how college students can live on a $100 grocery budget each month while others spend upwards of $1,100.
Kullberg recommended spending 25% on lifestyle expenses such as groceries, meals out and other discretionary expenses. Travel, clothes, accessories, entertainment, spa treatments and shopping all fall under this category as well.
Haywood added another discretionary expense that many older budgeters forget: helping their adult children. “If you have grown children, discretionary expenses could include helping them with college tuition, extracurricular activities, added costs of them living at home, and general support.
“Even if your children have left the nest, some parents still assist with major life events like weddings or down payments on homes,” he explained.
Don’t let these expenses sneak up on you. If you plan to help your grown children in any way, budget for it by saving and investing earlier.
Final Thoughts
Joe DiSanto, financial consultant and founder of PlayLouder.com, suggested keeping your focus on the fundamentals no matter how much you earn. “I don’t fundamentally approach budgeting any differently based on income. You look at your income minus your target savings rate, and the leftover amount is what you are working with to spend.
He added, “If have enough to spend liberally then great. If not, I always encourage folks to tighten the belt on discretionary and take another look at structural expenses like housing and transportation costs. “Of course, planning to tighten the belt and actually doing it are two different things.”
Budgeting is simple on paper. But staying disciplined to avoid overspending is what generally separates people who retire with plenty of savings from those headed toward a lean retirement.
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