My former Jeep needed an engine repair that cost more than $6,000 to fix! It was a budget buster and a shock to my financial system. Thankfully, my emergency fund kept me from selling assets or using my credit card. Have you experienced an unexpected financial shock like a medical expense, a new roof, or appliance repair? It's gut-wrenching.
Most budgets are very detailed and do not allow for any margin of error. They account for expenses down to the penny, so if an unexpected expense occurs, it destroys the budget. It causes financial harm and stress, especially if no emergency fund exists. If you're working, you may absorb the expense over time through your salary or income, but what if you're retired? What if you're living on a strict retirement budget or fixed income? Let's explore a few budget-busting items.
- Medical expenses can derail any budget, but as retirees age, the chance of an unexpected medical expense rises substantially. According to Fidelity, a retired couple may spend more than $315,000 to cover health care expenses.
- Long-term care assistance. Spending more than $1 million for long-term care coverage or assisted living is possible. According to Genworth, a private room at a nursing home facility currently costs more than $9,000 per month and could jump above $21,000 in 30 years.
- Home repairs are another budget buster. Maintaining or repairing your home could cost between 1% to 5% of the home's value. If you live in a million-dollar home, expect to spend $10,000 to $50,000 annually for the upkeep.
- Taxes will put a dent in your budget. The $10,000 limit on state and local taxes hit individuals hard, especially those in California or New York. Texas residents have high property taxes, and incurring a $10,000 bill is common. Changes to tax policy are a risk for retirees.
- Increased rent is a concern for retirees. According to Redfin, rent for Austin residents soared by 46% from 2021 to 2022, and the average asking rent price is $2,531. If your rent increases, you may be forced to move to a smaller apartment or different part of town.
- Inflation is a tax for retirees living on a fixed income. Inflation recently touched 9.1%, and prices at grocery stores and gas stations continue to rise. Butter soared 26%, cereal increased 13.8%, and ice cream rose 12.5% over the past year.
- Owning a pet is expensive. In addition to feeding your dog or cat daily, there are healthcare expenses, boarding fees, and insurance costs.
Combating unexpected expenses is a full-time job requiring discipline and diligence. Regular maintenance, care, budgeting, etc., helps keep your budget in check. Here are a few suggestions to help you prepare for budget busters.
- Build an emergency fund to cover three to six months of expenses. If your expenses are $10,000 per month, allocate $30,000 to $60,000 to the fund.
- If you're nearing retirement, consider an emergency fund to cover three years of living expenses. The extra savings can protect you against unexpected costs while maintaining your lifestyle if you retire when the market is down, like this year.
- Protect yourself, your home, your cars, and your pets through insurance planning. The proper coverage can offset large or sudden expenses.
- Consider long-term care insurance or annuities to avoid longevity risk.
- To battle inflation, own stocks. Since 1990, the S&P 500 has trounced inflation by 2,000%.
- Work with your financial planner or CPA to develop a tax-efficient strategy for your retirement income distributions.
- Include a line item in your budget to cover unexpected expenses. A suggested amount is 5% of your total budget. If your annual budget is $100,000, then the amount is $5,000.
Preparation and planning are paramount in limiting the shock and surprise of unexpected expenses. The best time to prepare for a flood is when the sun shines. Don't wait for disaster to hit before you take action to fortify your financial foundation.
Beware of little expenses. A small leak will sink a great ship. ~ Benjamin Franklin
July 19, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located 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 you 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. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.
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. I sold my Jeep and bought a new Toyota 4Runner.
 https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs Fidelity Viewpoints, 5/25/2022
 https://www.redfin.com/news/redfin-rental-report-april-2022/, Tim Ellis, May 18, 2022
 YCHARTS – 1/1/1990 to July 18, 2022