Budgeting for Big, Non-Annual Expenses

[Midpack]

Everyone here knows projecting spending is essential to retirement planning - you can't plan without spending, nest egg and years at a minimum. And it's easy to project the routine daily-weekly-monthly-annual spending expenses we all have.

But over the course of a 30 year retirement, there will also be significant non-annual big ticket expenses as well, that need to be planned for somehow. Expenses like buying cars periodically, major home renovations, major home repairs (new roof, new siding, HVAC replacement, storm-water-insect damage, etc.), replacing furniture-appliances-electronics for example. Others may have travel, boats, planes, antique cars, family expenses or others. Those expenses don't come up as often in planning threads here. Occasionally there comes a post with someone who didn't plan on replacing their roof wondering how to account for it, after the fact.

Some folks just keep the non-annual big tickets expenses apart from spending tracking, some just take them on the chin as they hit (with/out a budget?), and some may build them into budget spending in some manner - like I do. I am not saying there's a right way - only that it's worthwhile to somehow plan for those expenses as well - unless you plan to use leases and loans for everything.

Before I retired, I looked back at what we'd actually spent and at what frequency in the past - and extrapolated what I thought we'd spend over the next 30 years. I came up with average annual expenses of $15,000 per year. Turns out I wasn't too far off, at least so far we've averaged just over $18,000 from 2011 thru 2018. I am excluding 2019 from my average because we moved, bought/sold/renovated homes, and chose to replace almost all our furniture - expenses we don't expect to incur often if ever again. I knew the expenses would vary considerably from year to year, some we can plan for (and defer/accelerate), some we can't.

All I am saying is we all have these expenses, and when planning for retirement spending, it's important to account for not only the routine daily-weekly-monthly-annual spending --- but those infrequent big ticket items too.

Maybe others here have even better ways to build these non-annual big ticket expenses into the spending plan?

FWIW

I track all our spending, though I separate normal expenses from medical expenses, taxes and (somewhat misnamed) "accruals" or non-annual expenses like those shown here. My month to month focus is on all the normal expenses, but I don't want to lose sight of the other expenses.

 

[ExFlyBoy5]

We also have had quite a few large expenses that while not all surprising, they have been significant enough to take a close look at how (over time) this would effect passive income levels. Since 2019 was such a positive year in investment returns, the overall cost of these "extras" were easier to swallow. Had this occurred in 2008-2011, it may not have been so palatable.

Nonetheless, I think your chart illustrates pretty well how expensive these extras can be and to plan accordingly.

 

[RobbieB]

Yeah, it's been a great year to blow dough!

My method of dealing is call the broker and say I need X grand from the taxable and Y from the IRA.

 

[COcheesehead]

I use a planning tool, RetirePlan, that allows you to input all kinds of non annual expenses like car replacement, house maintenance, etc. I may not have these occurring in the right years, but I at least have a slot for them in the budget.

 

[RunningBum]

Totally agree. When people base their budget and WR on what they spent the last couple of years, I wonder if they are including such big ticket repair/replacement items. If they haven't had any and don't include a fund for those, it's not a good plan.

In my budget at ER time, I included $500/yr for car repairs, $1000/yr home maintenance, and $10K/yr capital fund for cars, major home repairs, etc. Vacations were another $5K.

I haven't gone back to check to see how my spending has been for those items, but I'm doing well overall even with new cars for my son and I, house painting, tree removal, etc. I switched to a VPW based WR in 2015, and I've been under every year. I don't celebrate too much since I haven't bought a car in that time, but have had those home projects. I figure VPW handles things pretty well. If my expenses are low for a year, and the market does well, I have more I could spend the next year. I don't use it as a license to splurge too much since I may have a big expense coming. If I have a huge expense that puts me over budget for a year, VPW gives me a little less to spend the next year, but the overage is spread out over my remaining years rather than making me spend the whole amount less the next year.

I can also see it work for people who withdrawal the whole amount they are allotted for the year with their WR, and banking any excess. That can be a side fund that you use for the large unusual expenses. If the side fund is empty, you either have to "borrow" from your nest egg, or hold off if it is an deferable expense. You can't defer fixing a leaky roof, but you can probably defer a new car if you existing one is just a little older than you like, but is still reliable.

 

[dadu007]

Yep, I've thought about this a decent amount...
When I set up YNAB, I set up a category for "One-time Big Expenses". I've been using YNAB since 2013, and when I look at the average for that category, it's ~ $15,000/year, so that's what I use in my retirement plan. Funny how I arrived at the same figure!

 

[Dtail]

We add in the lumpy yearly expenses as a separate budget item funded monthly.
As for big ticket non recurring expenses, we have a separate account funded from one time unexpected income items/ unused budget expenses and this balance is not included in our investment assets.
Just my way of doing it.

 

[Lewis Clark]

I try to ammortize the lumpy expenses, based on my past history with them. For example, if I plan to spend $30,000 on a new car in 10 years, I will treat that as a $3,000 expense every year.

I also add some cushion by planning the expenses a bit higher than I really expect to spend. In this example, I might estimate spending $32,000 on that new car in eight years, so my number for planning might be $4,000 per year for car replacement, even though I expect to spend the $3,000 per year on average.

I do this for each of the major lumpy expenses.

My planning also includes a fudge factor as a contingency. This is a few percent of the total spending.

So, on average, when I actually spend should always be lower on average than what I plan for.

 

[kgtest]

New Cars
College Costs
Remodels
Weddings

Those are probably most common...once you get through all those it's just water heaters, dryers and roofs...

I look around and short of an uninsured flood, the largest expense I might have is maybe an a/c unit in the house, or a couple new appliances in a year. Not everything will break all in one year, even though sometimes it feels that way.

2019 seemed like one of those years...new bed, new tires for both vehicles, new car battery, new washer and dryer after my temporary repairs gave out, new furnace inducer motor and flame detector. I suppose if I bought top of the line, and paid someone to deliver and install all of this it might cost me a lot of money...

Turns out it was only about maybe 2500 or 2600 to take care of it all. But alas, 2020 is now here and the Microwave is not playing nice and that retaining wall isn't going to build itself.

 

[pb4uski]

I depreciate our cars, boat and jet-ski in Quickenand that depreciation is included in our Quicken expenses that were used as a base for our retirement planning... so that is effectively how I included lumpy car and boat purchases. I didn't really include the occasional roof or boiler other than through the fact that our theoretical safe withdrawal spending is significantly higher than our actual spending.

 

[mountainsoft]

I try to ammortize the lumpy expenses, based on my past history with them.

I do something similar, though nothing in specific detail. I just look at our overall spending from the last six years (what I have records for). During that time we've had to buy new furniture, a new washer/dryer, a new car for my wife, a new mattress, some major car repairs (new windshield, catalytic converter, tires), unplanned expenses after my mom had a stroke, a health scare for my wife, etc. I would expect these types of issues to continue in the future.

There's really no way to predict which big ticket item we'll need to pay for next, so I just average these costs out as part of our normal spending. This year we needed a new mattress, next year we might need a new car. Of course, some years two or more major items will hit at once, but it still tends to average out over time.

Also, if we have a car accident or health problem, we probably won't be spending as much on travel or eating out, so that should balance things somewhat also. We can always skip a vacation or two if money gets tight.

 

[CardsFan]

We don't budget for the non-annual big expenses (and actually, we don't budget at all), but our WR is low enough (about 1/2 of the Firecalc result) that we can handle them, when they happen, without real concern.

FWIW, we have a new roof, new AC, remodeled the kitchen, and live in a condo/townhome. Aside from new cars (current ones are 2012, so due to be replaced in the next few years), and of course a medical emergency, I don't see any big ticket items hitting us in the next 10 years. But, if they do, we have the reserves to handle them.

 

[badatmath]

This may not be logical, but I do not count all my assets in firecalc when figuring out what I will have to live on. And I plan to replace HVAC & roof right before I retire (out of current funds).

Therefore, the assets I do not count there are my oh crap fund - that pays for larger expenses or anything else I screwed up on.

 

[RetireAge50]

Spending is not an input in my planning model. My portfolio balance determines how much I can spend.

 

[gerntz]

2020

gd #1 wedding: $20K
gd #2 car: $20K

 

[levindb]

We calculate how much we can withdraw/year to spend ALL of our nest egg by age 105. Our actual spending needs are well below that...that gives us some cushion. We withdraw monthly.

With that flexibility, we also look for ways to spread big expenses over many months or years. When we purchased a car, we put as much as we could on 0% credit card offers. Paid the remainder with 6 months same as cash offered by the dealer.

If we ever have to withdraw a great deal for any reason, we try to schedule that toward the end of year and do some in December and some in January to spread the load over 2 years. Stuff happens...while you cannot plan when everything will happen, you can plan how you will deal with these situations.

LBYM is most important.

 

[Katsmeow]

When DH retired in 2010 and I semi-retired I knew that we would come out several years later with a smaller net worth. We knew this was going to happen because we had some big ticket items.

KGtest says the big 4 are:

New Cars
College
Remodels
Weddings.

I agree on 3 of the 4. Paying for big weddings is not something that I will ever do. I got married in Las Vegas. I think expensive weddings are a waste of money will never incur cost for one (my kids know how I feel about this).

I would add one other big items which is moving.

The big one we had starting when DH retired was that we had 3 kids who were at or near college. That ended up being a large expense over the next several years.

A big expense even without remodel is often moving particularly if you are moving to a different area. WE had two major moves in the last 9 years. The last one just resulted in a 6 figure remodel (that didn't come from our portfolio -- this is what I mostly did with my inheritance from my mom).


Anyway -- 9 1/2 years later our portfolio is much smaller than it was when we started. A lot of that was predicted, some of it wasn't. Looking back at the average isn't really helpful looking to the future. I mean, I'm not going to send anyone else to college. We have bought and remodeled our current house and don't plan to move. We bought a new car a little over a year ago. We drove our other car under 600 miles last year. Yes, there probably is a car in the future and I should reserve for that.

As far as house related, I see that there are expenses you know you will likely have but don't know when v. expenses you may never have. The roof is only a few years old but will probably eventually need to be replaced. We replaced our electrical panel, HVAC, hot water heater and completely gutted the master bath. We did some work on the pool (it is about 20 years old) but it will need another 10k or so eventually.

I know that something totally unexpected could break and need a major repair. On the other hand, some things are unlikely to (we just replaced the retaining wall on the property and it should be good for the next 30 years).

Basically if I averaged out past one time spending it would be way higher than what I anticipate going forward. I think it is better to try to consider more what kinds of things we might experience in the future and estimate those.

 

[Jerry1]

I’m dealing with this right now. After looking at my 2019 budget and actuals there is nothing in the budget for large, one time purchases. Not concerned because as several have said, my budget is a lot less that my maximum withdrawal rate. My question is, what does anyone do with the budget money? For example, my 2019 budget was $80K and I think I should allocate $1000/month for a new car in the future. What do you do with the $12K? Do you actually withdraw it or move it into a separate account? Or, do you just add it to your total to evaluate how you’re doing compared to your maximum success withdrawal rate?

 

[Bir48die]

I have an account that was supposed to be for capital expenses for these big projects. I'd put money in every month and so it was there when needed. That lasted a year. Now as some have said I really just have a little extra in the "big" account and use that as needed. I generally have an idea on what's coming up for the year early on. So this year it's a new mattress and a couple home projects. Could be a travel trailer later this Fall.

The advantage of planning well early is that we have funds if we need to just pull the trigger and not fret over budgeting. However that does not mean we don't save on what we buy and delay some of the projects to spread out the costs.

 

[socca]

I came up with average annual expenses of $15,000 per year.

I treat allocation to reserves as just another annual expense in my budget. This allows me to arrive at a reasonable number for discretionary income. In contrast to many folks who visit this website, I ignore the current market value of my assets (and thus don't calculate a withdrawal rate to help manage spending). Instead, discretionary income is my favorite measure of wealth. I've been using this approach for the last 13 years with no regrets.

I don't overthink my allocation to reserves expense. Coincidentally, my $13k number isn't far from your $15k number.

 

[jollystomper]

When planning my retirement I looked at Quicken data over 5, 10, and 15 year averages to get a sense of the impact of large non-annual items. In the 10 years before I retired we did a lot of large, non-annual spending which included auto purchases, new roof, new bathrooms, appliances, HVAC system, etc. I also looked at the replacement costs for the major appliances in our home, so those are factored in as well. Our planned yearly spending takes that into account, so we know we may have years where we are well under the outgoing cash flow plan (like last year, even with the purchase of an additional car and replacing a well pump), and years we will go over. Then there are also things like future costs we want to potentially help out children with, costs associated with moving to a lower cost/tax area, etc. that are factored in.

We do not have a separate "reserve" area, but we have enough cash to cover potential major expenses before we choose to take SS. In fact, that is a "debate" I am mentally having now. Our mortgage balance is down to about $52K. However, the rate is very low and the monthly cost is easily managed from pension and investment income. Paying it off all at once now would save interest, but reduce our cash in case a major expense did occur. We will probably find some middle ground method to handle it.

 

[Lewis Clark]

My question is, what does anyone do with the budget money? For example, my 2019 budget was $80K and I think I should allocate $1000/month for a new car in the future. What do you do with the $12K? Do you actually withdraw it or move it into a separate account? Or, do you just add it to your total to evaluate how you’re doing compared to your maximum success withdrawal rate?

I keep it invested as normal, then withdraw it when I need it.

 

[athena53]

It's easier done in the rear-view mirror, but I retired 5.5 years ago and have kept the average withdrawal rate below 3.5%. 2016 was a very expensive year because we downsized and there were a lot of expenses associated with that, but if I look at what I could have withdrawn over that period at 3.5% and what I actually withdrew there's a surplus of about $15,000.

My car is a 2012 and running well (knock wood), my roof has 40 years left on the warranty and I'm not planning any major renovations. Hopefully that surplus will continue to build before anything major happens.

 

[PatrickA5]

I don't budget, but I do keep track of expenses in Quicken. Other than savings, every outflow of money is an expense. So, if I buy a $40K car one year - I show it as an expense.

At the end of the year, I have a spreadsheet that "backs out" large, irregular, expenses (such as college) to get an idea of where I would likely be most years in retirement (in the future) - knowing full well there will probably be other items to replace them.

Back in our "leaner" years, we used to have multiple savings accounts with monthly additions for various large items. It worked well. Don't need to do that anymore.

 

[brett]

Seems to me that there is little difference once retired for those who have been successfully managing their personal finances for years. Matching expenses in retirement is no different that in our working lives. It is of no surprise to us that we will need to replace roofs, appliances, etc. in retirement just as we did in prior year.

There have always been surprises...medical and capital included. There always will be. Plus the planned events such as vehicle replacement, renovations, etc.

We certainly do not keep sub ledgers and/or segregated funds to cover these items. We decide on affordability and then draw down from our investment accounts as required.

It sounds like a lot of busy work to me to keep quicken and record everything down to the last dime, keep ledgers and sub ledgers, and YoY comparatives.