Dear Liz: What is the formula now for expenses? When growing up, we were told that one-third of net income should go to rent, but recently, I read that 50% is the standard with the remaining 50% divided between wants and savings.
Answer: You may be referring to the 50/30/20 budget, which suggests limiting “must haves” to 50% of after-tax income, leaving 30% for wants and 20% for savings and extra debt payments. (After-tax income is your gross income minus taxes and is often a different figure from your net income. Your net paycheck may include deductions for insurance premiums, retirement contributions and other expenses.)
The 50/30/20 budget was popularized by Sen. Elizabeth Warren (D.-Mass.) and her daughter, Amelia Warren Tyagi, in their book, “All Your Worth: The Ultimate Lifetime Money Plan.” Warren once headed Harvard University’s Consumer Bankruptcy Project and promoted the budget as a way to help people reduce their chances of going broke.
The “must haves” category includes more than housing payments. It also includes other costs that would be difficult, expensive or dangerous to forgo temporarily, such as food, utilities, transportation, minimum loan payments and insurance.
The budgeting rule you grew up with, just like the 50/30/20 budget, was meant to help people live balanced financial lives. Limiting spending on big expenses, such as rent or mortgage payments, helps ensure there’s enough left over to save for the future, pay off the past and enjoy the present.
Of course, many people find it difficult to limit their must-have expenses to recommended levels, especially in high-cost areas. Housing costs alone can eat up half their incomes, or even more. To avoid going into debt, they may need to reduce other spending or saving or find ways to increase their income.
You mentioned in a column about distributions from a 401k and IRA and the effect that those have on taxes of one’s social security benefits. Your example was if one made over $44,000 in combined earnings then their SS benefits would be taxed at 85%. Does this apply if one waits until full retirement age to start drawing their social security? My husband also will be required to start receiving MRD in 2023. Are those distributions taxed differently than the rest of our income, since we are both still working? Or does it matter whether we are working or not?
You can read more about how Social Security benefits are taxed on the SSA site: https://www.ssa.gov/benefits/retirement/planner/taxes.html
Your benefits can be taxable regardless of when you start — what matters is how much other income you have. However, researchers have found that many middle-income people pay less taxes overall if they delay Social Security and tap their retirement funds instead. You can read more here: https://www.financialplanningassociation.org/article/journal/JUL18-understanding-tax-torpedo-and-its-implications-various-retirees