Budgeting for major expenditures in retirement

[23window]

I haven't retired yet but I'm only a few short years away. I'm getting a good handle on my spending and have almost 20 years of data in Quicken. For those of you in retirment, how do you plan for major expenditures? I would be replacing a car every 8 - 10 years, spending $10,000+ on a new roof every 20 years, $12,000 on new HVAC system every 10 - 12 years, etc. I suppose I could amortize these expenses and have a major expenditure budget item. I wonder if there is a better or more practical way of doing it?

 

[Bamaman]

Just setup one or two savings accounts intended for accrual of such items, and make monthly deposits into them.

 

[marko]

We have an all inclusive core annual set of expenditures along with a heavy slush fund to deal with moderate unexpecteds. This is slightly below our SWR so we're 'banking' a bit each year.

Larger things you cannot plan on over $15K or so: roof, major house reno and such, we just dip into the portfolio and deal with it.

We take the KISS approach

 

[bizlady]

We have an emergency fund which is enough to pay for a nice new vehicle' knowing that will get placed someday. We add a yearly amount to cover other repairs

 

[Ronstar]

I created a capital category in my cash supply. So far I've made capital improvements (a few at $4-6k), but haven't dipped into the capital account yet. I categorized those as misc as an incentive to keep spending down. Since I made the improvements separately in three consecutive years and at a relatively small amount, they don't adversely affect my comparative accounting.

I'll need a new roof in a few years and I'll use the capital account then. I'm making car payments now as a vehicle expense and may continue car pmts as expenses rather than capital account in order to keep things the same.

 

[Senator]

Although I am not retired (yet), it is a similar question on a rental property.

I allocate 10% of my rents for maintenance and capital improvements. On any given year, that is a pretty close number to actual.

For a home, I would suggest to see what it would possibly rent for. Then, take 10% of that number. I would think a number like $200 a month for household maintenance would be a good number for a long time frame. A more expensive home would need more.

Of course, you should have a pretty solid number to draw from, as maintenance items come in a lump sum, not a monthly budget number.

I also am making sure I have enough for a car payment. If I pay off the loan, that's extra for me.

Having an allocation budget makes the most sense.

 

[Tadpole]

I do it the way Bamaman suggested. This is for spikes of $50K or less. For larger or unexpected expenses I will need to dip into emergency funds.

 

[UtahSkier]

I am also a long time Quicken user with lots of data to use for budgeting. I use the lifetime planner to forecast what my future expenses can be for the current portfolio.

I just retired and now have the time to explore the budgeting tool. Using my past spending data, I can see large expenses that happen every 7 to 10 years. I create categories for these expenses that apply to my annual expenses.

As an example, DW and I maintain a household of 2 dogs. They have an average annual expense for food, health, toys and grooming. Probably averages around $125 per month. But, they live around 10 years and getting a new dog costs about $2200 in the year we get it. So, I have a "New Dog" budget of $4400 every 10 years which is an monthly expense of $37.

I do the same with other regular expenses (new ski equipment every 7 years, etc).

However, unpredictable major expenses like new AC or new roof will simply come from the portfolio as needed and the financial model will be adjusted accordingly. Using the quicken lifetime planner, I make sure I have a healthy balance on the end date (90 years old).

 

[arky]

I keep an "emergency" fund of ~20K in a savings account (earning virtually nothing) to handle any out of the ordinary expenses (roof, big appliances,etc). I don't include this fund in my liquid net worth. The plan for any true big emergency is to cash in some amount of assets.

 

[Fedup]

I have my after tax savings for things that are not planned. I also have a large home equity for emergency. That's said I never counted everything when I run firecalc. I hold back a little bit. For example, I never counted the money in exoteric IRA account. That's my money to spend, if I don't spend it then it goes into savings. Once I start tapping into my husband's 401k, any extra will go into savings. I'm not very good into exact ratio so I give it a bit of head room. That's said we bought brand new car, brand new house, and my husband is a handy man, he does a lot of fixing. It saves me a lot of money.


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[W2R]

I haven't retired yet but I'm only a few short years away. I'm getting a good handle on my spending and have almost 20 years of data in Quicken. For those of you in retirment, how do you plan for major expenditures? I would be replacing a car every 8 - 10 years, spending $10,000+ on a new roof every 20 years, $12,000 on new HVAC system every 10 - 12 years, etc. I suppose I could amortize these expenses and have a major expenditure budget item. I wonder if there is a better or more practical way of doing it?

Every year in early January I withdraw my spending money for the year and move it from Vanguard to my local bank account. This is key to how I handle these expenses. I don't have a budget per se, so my withdrawal has to cover all of my expenses including unexpected major expenses.

When a major unexpected expenditure comes along such as car, roof, HVAC, or dental implant, I just take it from that year's money which is already in my local bank, and tighten the belt accordingly in the following months of the year. So much for any big discretionary expenses! They can wait until a year when no major unexpected expense has come along.

But what if the big unexpected expenditure comes along late in the year, say in December? If there isn't enough discretionary money left in that year's spending money, then I'd withdraw the money from my nestegg as a loan (from me to me). Then in early January when withdrawing for the next year, I'd pay myself back by withdrawing less money for the year. That hasn't happened yet but it nearly has.

 

[old woman]

I have money in a ROTH IRA I can use for major items like a roof. I am older so I have fewer future major cost, I will deal with them when I see them. I got a new roof about 3 months ago. I will get a new house in a couple of years but my 2007 has 50,300 miles on it and should last 10 more years or longer since I am 67 now I will only need one more car ever of even one since I drive about 250 miles a month now. I got a furnace had hot water tank the last year or two and new appliances about 4 years ago so not many major things coming I can see.

 

[donheff]

I budgeted more than actual expected expenses and maintain a pseudo account of the unspent pseudo withdrawals. In other words I don't take the full amount out and I track the remainder. I label that a mad money/big expenditure fund. I am considering tapping it for a basement remodel now. I intended it to be available to fall back on if the market goes way south but I expect that in the event I will just hunker down and leave it be.

 

[ElizabethT]

We have a line item in our budget that equates to about 12% of our annual run rate, then let it accrue from year to year. The intentional usage of this line item is for vehicle and RV replacement, or any home repair or upgrade of $5,000 or greater.

Less-than-$5,000 items/repairs are covered via more modest Home and Auto Repair line items, which combined represent about 5% of our annual run rate.

 

[brett]

We don't budget for those items. We just take the money out of our savings/investment pot as we need it. We know the potential of a large expenditure is there and take this into account in determining the cash flow and asset base that we need for our retirement.

Besides, we gave up worrying about what will happen in 20 years. We could get hit by a bus tomorrow. When we retired we did not know that we would be selling our home within a year, travelling, and then renting. Did not have to upgrade the windows, replace our large cedar shake roof, renovate the kitchen and bathrooms etc.

 

[W2R]

I will get a new house in a couple of years

Thanks, that reminds me! I forgot to mention how I handled my *really* big major expense - - buying my dream house in cash last summer.

There are two ways to view how I did this:

(1) I did not fund the price of the house from my usual withdrawal at my chosen WR. I wanted this expense to simply lower the fundamental value of my nestegg. The latter was larger than I need to support my desired lifestyle so this was OK with me.

(2) My financial plan would have allowed a 3.5% WR, but my actual WR during my six year retirement so far was quite a bit lower. The difference, when added up over six years, is more enough to cover the house. So, another way of looking at this would be that I saved up for the house over a period of 6 years.

I will continue to withdraw less than 3.5% of my December 31st portfolio value each January. This will work out in my case, and I do not plan to ever buy another house.

 

[braumeister]

We never seem to spend as much as our WR would allow, so the surplus just gets added to the slush fund, accounted for separately (in another column of the spreadsheet). A new roof was paid for from this fund last year, and some extra travel will probably come out of it this year.

 

[rodi]

I have a slush fund for big ticket stuff, and I have a HELOC for the belts/suspender appoach. The slush fund will cover more than a new car AND a new roof... My plan is to refill the fund from excess cash flow if I drain it.

I have zero plans to tap the HELOC - but having it gives me confidence that I'd be able to maintain my tax brackets, ACA income cliffs, etc... and spread the spending over more than one tax year.

In reality - my slush fund should be more than enough to cover the big ticket expenses that might occur in an unplanned way.

For home improvements - I budget a decent chunk each year for this. We haven't exceeded it despite being in process of a big remodel and plans for more. DH provides the labor (with my help on the easier stuff like painting). Even in years we replaced windows and remodeled kitchens.

 

[Fedup]

I leave my Roth IRA for last to tap. But before we( H&I) retired, we had major dental work done that cost up to $5k on top of a generous dental plan. This year we have a low benefit plan now. But we are lucky, we don't have to worry about ACA.


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[audreyh1]

We never seem to spend as much as our WR would allow, so the surplus just gets added to the slush fund, accounted for separately (in another column of the spreadsheet). A new roof was paid for from this fund last year, and some extra travel will probably come out of it this year.

Another slush fund here. We've let it keep building as our withdrawal is quite a bit larger than our spending. Now that the slush fund has grown quite a bit we'll probably spend some on a new vehicle as well as increase the travel a bit. We'll still have plenty remaining for emergencies/unexpected expenses.

 

[old woman]

I leave my Roth IRA for last to tap. But before we( H&I) retired, we had major dental work done that cost up to $5k on top of a generous dental plan. This year we have a low benefit plan now. But we are lucky, we don't have to worry about ACA.


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I considered that but taxable and IRA cost tax money when you spend it. Taxable is passed to heirs tax free just like it was a ROTH so why not me save tax money. IRA is being spent to maximize my income for life so taking out about 10K a year so far with that and SS and dividends I am attempting to even out lifetime taxes maybe try not to get SS taxed or not deciding yet. Two more years until RMD and I want them pretty much my choice so don't want IRA to grow out of control so spending some of it.

 

[Teacher Terry]

WE have an emergency fund and could tap equity in our paid for home if we wanted too. Before we retired we did all the expensive things to the house. Our old cars were costing to much in repairs so we bought 2 slightly used cars. When they die we will be in our 70's by then and we will probably share a car. We don't drive a ton now. It is certainly less then when we were working f.t.

 

[Live And Learn]

When I did my initial retirement budget I used an accrual approach to calculate my initial withdrawal rate. I understand that some years my WR will be more and some less. I split the accruals into two pots for record keeping; less discretionary (roof, appliances) and more discretionary (replacement vehicle, furniture upgrades). As long as my multiyear average is at the initial withdrawal rate (adjusted for inflation) I consider myself on budget.

Each year the total amount actually spent is included in my withdrawal rate calculation which means some years I will be over or under my total budget which is fine as long as the variance is explained by the big ticket items a d the multiyear average of the big ticket items total is also on/under budget.

Actual funding simply comes out of my 4 year cash & short term savings (which also serves as my buffer against a down market).

 

[Teacher Terry]

The studies show that most people spend less $ as they age. By the time people are in their 70's most no longer want to travel much, etc. This is why in our early 60's now we are ramping up the travel.

 

[Hermit]

The budget effort is very different for a lot of people on this board. Some hit the numbers they planned before retirement almost exactly. For me, I was way off on everything. Like you, I had 20 years of Quicken data to go on. What I did not have were costs associated with a new location half way across the country at about $5k/yr and cost overruns for kid's college and building a house. I think I will be between $100k and $150k over planned spending (I don't really keep a budget) for the first 5 years. I am withdrawing an additional $24k per year for the first 6 years to try to even things out. I'm still under 3% WR so in my case it is not a major financial burden, just spending more than I planned and withdrawing more than planned to cover it.