Analysis

Key factors in your budget that will affect your retirement

John L. Smallwood
Special to the Outlook

COVID-19 prompted many people to restructure their monthly budget just to make ends meet. And for some who are planning for retirement in the next 10, 20, or 30 years, the pandemic was a wakeup call to review how their spending, expenses, and savings could impact their lifestyle when they’re no longer working.

Taking such a long view is important, but unfortunately many don’t, and that lack of analysis and planning can cost them lots of money that they could use in retirement, said John Smallwood (www.johnlsmallwood.com), president of Smallwood Wealth Management and author of It’s Your Wealth – Keep It: The Definitive Guide to Growing, Protecting, Enjoying, and Passing On Your Wealth.

“When it comes to wealth and retirement planning, everybody’s got an opinion,” Smallwood says. “Accountants say one thing, mutual fund advisors say another, stockbrokers and life insurance agents say something else.

“But most people don’t think big-picture. Wealth planning requires having a sound strategy, and a budget is integral to it. Without a budget and an overall plan, you’re flying blind toward retirement.”

Smallwood explains some key dynamics of wealth and retirement planning to take into account when budgeting:

Lifestyle 

“Income minus savings minus debt equals lifestyle, or how much you have left to enjoy a certain lifestyle,” Smallwood said. “But if part of that debt is a credit card, then you’re probably spending more than you’re earning. You have to get your lifestyle aligned with long-term financial realities and goals. The mindset that we need less income in retirement than during our working years is wrong, and it creates an excuse for people. It keeps people from thinking about saving enough money.”

Savings rate

 Smallwood said it’s wise to think of yourself as a business, with savings being a way to invest in yourself. The more saved, the more wealth grows over time,” he says. “If you’re not putting away a certain amount of money every single year as a percentage of your salary, then financial pressures are actually going to push you backward before and during retirement.” He recommends that those making under $100,000 annually should save at least 10 percent.

Wasteful expenses

 Expenses you can modify or eliminate today can make for a better retirement tomorrow. Smallwood recommends looking at margin of utility – a method to determine how much enjoyment one is getting from the things on which they spend money. “What expenses do you have that are not adding value?” he said. “I’ve seen clients’ budgets with hundreds of dollars a month in items that they had no idea they were spending money on, such as subscription-based services or products that are automatically charged to the credit card.”

Financial leaks

“People often don’t realize how much leakage they have on an annual basis and how it adds up,” Smallwood said. “Convenience fees on insurance for your car, house, or life; fees to banking institutions; late fees on credit cards. Let’s say you have $1,800 in excess charges in a year. Investing that in a way that it earns 5 percent interest over 25 years could return $85,000.”

“Building a long-term strategy takes time,” Smallwood said. “The only way to make improvements is to understand where you are to start with and then create good habits, as in a budget, that you can stick to for long-term success.”

 John L. Smallwood is a senior wealth advisor (www.johnlsmallwood.com) and president of Smallwood Wealth Management and affiliated companies, providing investment consulting and financial plan design for corporate executives, entrepreneurs, and professionals. He is the author of It’s Your Wealth – Keep It: The Definitive Guide To Growing, Protecting, Enjoying, And Passing On Your Wealth.