Budgeting for major expenses in retirement

[Raymond01]

I have a retirement budget determined with X dollars every 7 years or so for a new car. My question is, how should I handle that money? Originally I was planning to withdraw monthly income from my investments, and stick it into a separate account for new cars. But that would be as much as 7 years of earning very little on that account. Should I instead leave that money invested, say in bonds, then just draw it out when needed? If so, I guess I am taking a small risk that the account will not have gone down too much due to interest rates etc. How do others handle budgeting/allocating for "longer term" major purchases?

 

[Live And Learn]

Excellent question. Right now I am thinking that I will hold 5 years of expenses in cash and / or short term bonds. Of that I am going to assume that 20k is going to be for "one time" expenses (new car, new roof, unforeseen medical event for either a human or a pet, etc). I don't want to have to create a balance sheet with multiple "accounts" to track all my accruals.

 

[Raymond01]

Your strategy is similar what I was thinking. I will use the bucket strategy. I don't mind keeping 5-10 years of annual expenses in cash/CD's/bonds, but for a major expense like a car or 2, that I don't think I will need for 7 years I just wasn't sure what to do with that money.

 

[daylatedollarshort]

I put an annual allowance for home repairs, medical and car replacements into the budget. Anything else would have to come out of savings.

We don't have separate accounts for any specific purpose. We keep some cash in checking accounts, I bonds, CDs, etc. I don't keep much money in personal, taxable accounts as it would count against us for financial aid for kids' college expenses.

It takes one phone call to liquidate part of the 401K portfolio for any major expenses that crop up.

 

[Hermit]

I'm not budgeting for a car. I bought a new vehicle as a retirement present to myself before I retired. First time I have gotten to drive a new vehicle since a 1973 Ford Van. (I always got the hand-me-downs from my wife.) It should last until I hit 70 in 6 years and then I will have SS and RMDs to cover replacements.

 

[scrabbler1]

I bought my current car in 2007, less than 2 years before I ERed in late 2008. It replaced my previous car which I owned for 15 years. I drive only about 3,000 miles per year, so I expect my current car to last just as long, which would be useful because if I can get it last until the first of my "reinforcements" arrives, unfettered access to my IRA, it would not put any big pressure on my taxable accounts. Even with my taxable accounts, I have what I call a "slush fund," one of my bond mutual funds whose money and interest income I do not need to cover my recurring expenses.

 

[Options]

I put an annual allowance for home repairs, medical and car replacements into the budget. Anything else would have to come out of savings.

We don't have separate accounts for any specific purpose.

...

It takes one phone call to liquidate part of the 401K portfolio for any major expenses that crop up.[/QUOTE]

+1
My strategy as well.

 

[rayvt]

It is virtually impossible to properly budget an allowance for a large expense that comes every 7 years. What can you do, transfer money from your portfolio to a savings account each month? In truth, you don't have "buckets" -- what you have is one pot of money, your total net worth. An attempt to assign different parts of it into different buckets is just a mirage.

So....decide on your asset allocation. When you withdraw money, maintain your desired AA -- no matter if you take it out monthly or at 7 year intervals. Just make sure your average draw fits into the 4% rule.

Or you can do what I did for a car. Finance it with a 1.99% loan from PenFed, making your "new car fund" be after you buy the car rather than before.

 

[Raymond01]

Thanks everyone for the input. For member daylatedollarshort, you put money for car replacement into your annual budget, but you don't have separate accounts. At the end of the year if you did not buy a new car, what do you do with that money?

 

[ChrisC]

It is virtually impossible to properly budget an allowance for a large expense that comes every 7 years. What can you do, transfer money from your portfolio to a savings account each month? In truth, you don't have "buckets" -- what you have is one pot of money, your total net worth. An attempt to assign different parts of it into different buckets is just a mirage.

So....decide on your asset allocation. When you withdraw money, maintain your desired AA -- no matter if you take it out monthly or at 7 year intervals. Just make sure your average draw fits into the 4% rule.

Or you can do what I did for a car. Finance it with a 1.99% loan from PenFed, making your "new car fund" be after you buy the car rather than before.

Budgets, separate accounts, asset allocations -- all seems confusing to me.

I made up a 2014 Budget in November 2013, as this is my first year in retirement. I'm not very good with spreadsheets or accounting ledgers or entries, but I do track spending and expenses at mint.com and from my credit card statements. My budget was just an estimate of expenses for the year. I don't have to worry about shortfalls or funding my budget because (1) I have enough pension income from a stable source to fund my projected 2014 Budget and years beyond, and (2) I have enough capital/net worth as well as liquid assets to meet any additional expenses even if my projected budget for 2014 and years beyond blew up. Indeed, my gut tells me if I were to discount to present value the entire pension income stream for 30 years, I'd still have surplus at current budget levels for future years. I don't currently fund any expenses from any dedicated accounts, except I began recently to start funding a specific medical expense from my HSA.

What I found in my 2014 Budget, in the first few weeks of this year, is that I probably significantly underestimated medical expenses for body repairs and maintenance. As we age, the body does break down and I'm finding my wife and I are beginning to decline and the body needs additional maintenance and repairs. I had reserved around $13K for medical expenditures (insurance premiums for health, dental and LTC, out-of-pocket expenditures for major surgery or dental care not fully covered by insurance, fitness apparel and memberships, prescription drugs, etc). I'm finding that parts of our bodies requiring dental implants, perhaps additional knee surgery, hearing aids, etc, spike up the expenses for this year. And who knows what needs repair in the future. BTW my insurance coverage is excellent, in my view. Also, the HDHP-HSA is working for me in an optimal fashion; and my dental insurance is excellent, including significant coverage for dental implants too.

I'm finding that going forward in the future, I might just as well reserve/specify $17K a year for all medical expenses; some years I'll be over that amount if major repairs occur; some years I'll be significantly under that amount if we're healthy and no surprises. I know this is an individual thing, but anyone here reserve for medical expenses and what annual levels have you specified? I'm not religious about budgets and retirement funding, though I think budgets in general are helpful planning tools.

 

[Live And Learn]

The reason you need to "reserve" for big ticket items is for good tax planning and ACA subsidy planning. If you have a new roof and a new car in one year and need to make extra withdrawals from a tax deferred account to pay for them that could conceivably push you into a higher tax bracket or send you over the 400% FPL limit for getting ACA subsidies. I have mitigated that risk by holding enough cash / short term bonds, which could turn my 5 year reserve into a (still very conservative) 4 year reserve. In a year like 2013 that cost me a lot in gains I can never realize, but the peace of mind was worth it. YMMV.

 

[Live And Learn]

I'm finding that going forward in the future, I might just as well reserve/specify $17K a year for all medical expenses; some years I'll be over that amount if major repairs occur; some years I'll be significantly under that amount if we're healthy and no surprises. I know this is an individual thing, but anyone here reserve for medical expenses and what annual levels have you specified? I'm not religious about budgets and retirement funding, though I think budgets in general are helpful planning tools.

I'm ultra conservative on this front and my annual expense "reserve" includes $30k for medical (premiums + out of pocket expenses). This number is based upon a Silver ACA plan and includes the full out of pocket max of 12.6k for two people.

 

[daylatedollarshort]

Thanks everyone for the input. For member daylatedollarshort, you put money for car replacement into your annual budget, but you don't have separate accounts. At the end of the year if you did not buy a new car, what do you do with that money?

It just stays in the portfolio. Usually we pay cash for cars, but this year we also just got approved for the Penfed 1.99% loan so instead of having reserves we will have car payments.

The budget logic is just to have a realistic, sustainable budget each year in our spreadsheets that accounts for all the major expenses. Some years we will actually spend more than others, but in years with light spending that money will be saved up for the inevitable large expense years. If our expenses are under budget this year, we won't be going woohoo, 10K extra leftover this year let's go to London and Paris on that money and then worry about replacing the roof the next year or running out of money when we are 90.

You don't have to do it with annual reserves, as long as you build those type of expenses into your retirement plan in some fashion.

 

[W2R]

I'm not budgeting for a car. I bought a new vehicle as a retirement present to myself before I retired. First time I have gotten to drive a new vehicle since a 1973 Ford Van. (I always got the hand-me-downs from my wife.) It should last until I hit 70 in 6 years and then I will have SS and RMDs to cover replacements.

+1

I bought a new Toyota Venza as a retirement present to myself too. I didn't want to park my new retirement car in the parking lot at work, where it might get bumps and dings, so I waited until just after I retired to make the purchase. But either way, I ended up with a brand new car coinciding with my retirement. This has been part of my retirement financial planning since nearly forever.

If the Venza lasts 10 years, I will be 71.5 years old by the time I might think about a new vehicle. By that time, I will be getting income from SS and RMD's.

Meanwhile, in my first four years of retirement I planned to spend 3.5%, but have been underspending. So, I am all set as far as new car money goes.

Unspent money goes back in my portfolio and is invested at my usual AA. I would only buy a car during a year when market performance has been decent, in order to avoid selling low.

 

[Midpack]

I have a retirement budget determined with X dollars every 7 years or so for a new car. My question is, how should I handle that money? Originally I was planning to withdraw monthly income from my investments, and stick it into a separate account for new cars. But that would be as much as 7 years of earning very little on that account. Should I instead leave that money invested, say in bonds, then just draw it out when needed? If so, I guess I am taking a small risk that the account will not have gone down too much due to interest rates etc. How do others handle budgeting/allocating for "longer term" major purchases?

In addition to our normal budget which includes all the typical stuff, we have an "accrual" expense category for major things. It includes not only new cars periodically, but major home repairs/renovation (the roof, HVAC, etc. have to be addressed some years), furniture/appliance/consumer electronics replacements, a big travel splurge every 3 years - all the bigger ticket items we might as well plan for but won't be annual (or even close in some cases). We've projected all these expenses out to age 95, and plan on the average each year.

We don't keep cash liquid for accruals, but we just show them as budget expenses when they occur (again, separate category so we don't confuse how we're doing on normal expenses) and withdraw money as needed from where it makes sense at the time (another way to rebalance for example). For us we expect accruals to average 20-30% of our budget, some years less and some years more - but all expected. You can handle these expenses any way you're comfortable, just as long as you plan for them somehow.

There's no reason it should be a surprise (not you, but occasionally we get a post here with someone who hadn't planned on replacing their 20 year old roof )! We all know these expenses will come up, and at roughly what frequency from past experience. Best of luck...

 

[Options]

It just stays in the portfolio. Usually we pay cash for cars, but this year we also just got approved for the Penfed 1.99% loan so instead of having reserves we will have car payments.

The budget logic is just to have a realistic, sustainable budget each year in our spreadsheets that accounts for all the major expenses. Some years we will actually spend more than others, but in years with light spending that money will be saved up for the inevitable large expense years. If our expenses are under budget this year, we won't be going woohoo, 10K extra leftover this year let's go to London and Paris on that money and then worry about replacing the roof the next year or running out of money when we are 90.

You don't have to do it with annual reserves, as long as you build those type of expenses into your retirement plan in some fashion.

Exactly what I do. Example: had budgeted for a new car this year, but will wait until next January after ER, because don't want to park new car outside (which I do now at work with current auto). Money just stays in the PF until then. Budgeting does not have to be complicated, IMO. I've always been really good with money, as in always being close to budget, so not really worried about bucket items per se.

 

[Birchwood]

I will retire this year at 64. My vehicles are 5 and 3 years old with few miles. I intend to drive the vehicles to at least 85,000 miles each. Since I drive only about 7,000 miles/ year, I may have to do a lot of road trips to reach the limit.
I have a large cash position that can cover many years living expenses.
If I need a new car, I will draw from my stocks, mutual funds, and bond funds, depend which is up. When that time comes, I'm old and don't care.
I'll pay cash. I will only trade every 8 to 10 years.

 

[joeprintz]

I budget each year for New Cars, uncovered Medical/Dental, Home Repairs and yes an amount for new electronics.. That money is saved in a brokerage account money market. I do keep a spread sheet for the fun of it and what is put in and taken out... This really works well for us. The when needed new computers, new cars, etc seem like they are "free"... Vacation budget is not done this way as we travel a lot and this is just another annual expense.

 

[youbet]

We don't have separate accounts for any specific purpose.

+1

 

[joeprintz]

We don't have separate accounts either.. But I know how much is put in each year for each item( not that it really matters) as long as it's available... It's kind of fun to be able to say- oh I can buy a new Mac, or a new car this year and there is still money for the other category.

 

[Major Tom]

Time for a confession - I have never created a spreadsheet, and don't know my way around Excel. How's that for an admission of guilt and incompetency in a group such as this? Just as, by the time I acquired my first cellphone, I felt as if I were the last person on the planet to get one, I now feel as if I am the only person left alive who doesn't know his way around spreadsheets. There is something about the rigidity of those cells that rubs me the wrong way. I know, I know, there is some strange type of stream-of-consciousness thinking going on in my head regarding spreadsheets but once I get it into my head that I don't like something, I'll do almost anything to avoid it.

I don't do any kind of formal planning for major expenses, other than to keep a cushion of a few thousand in my checking by saving from my monthly income (which consists of a monthly transfer of $1300 from savings to checking plus the odd bit of income from part-time work, which amounts to an extra $100-150). This small cushion serves for the minor major expenses such as vet bills, dental work, emergency trips back home to England etc. As a single renter with no kids who doesn't own a car, I have fewer major expenses than most ER's. The biggest upcoming major outgoing will be the purchase of a used Lazy Daze RV in a few years, if my plan to live in kitty heaven on 4 wheels with my cats comes to fruition. As this plan can be delayed or even abandoned at will, I am simply going to see how the market performs over the next few years and if things look doable, will take the money out of the portfolio. With a WR that is ~2.5% of the starting portfolio value and ~2.1% of the current portfolio value, I think I stand a good chance of being able to take a one-time 20K withdrawal without upsetting the apple cart too much. Or 25K. Or maybe I'll take 20K out and get a part-time job to make the other 5K.

All my withdrawals for at least the next 12 years will be entirely out of taxable accounts, and my income is sufficiently low that there is not as much need to carefully plan them so as to avoid pushing myself into a higher tax bracket. Little need for different "buckets". With the exception of a few thousand in checking, I just have one bucket - my portfolio.

 

[Live And Learn]

Out of my 98k budget I'd call 11k "accrual type" expenses. I can easily see going over that amount in any particular year but my 4 -5 years of cash/short term bonds gives me 44 - 55k and I'm more than comfortable with that. In fact, I'm thinking that's too much and maybe I should keep only 4 - 5 years of non-discretionary expenses plus 25k for accrual type things. After all, in a down market I would probably tighten my belt despite all the calculators in the world telling me I don't have to.

 

[rayvt]

+2

When I retired I had considered setting up seperate accounts, but while figuring out the mechanics it became obvious that it was a silly thing to do. Like what do you do if you need a new car 3 years into the 7 year period, or a new roof 15 years into the 20 year period? You don't have enough, so you've got to "borrow" the shortfall. From yourself.

Say you "borrow" a $10K shortfall from your investment portfolio to pay for the rest of the car. Now the car account has to "repay" the loan back to the portfolio. But that's where all the money comes from in the first place, so you're just shuffling money from the portfolio to the car fund and then back to the portfolio.
Or maybe the car account borrows from the roof account. Now every month the car account gets its allocation but has to pay some of it to the roof account. Now what happens when a new roof is needed and the roof fund would be fully loaded except for the money it loaned to the car fund? Does it issue a demand notice to the car fund? Or does it borrow the shortfall from somewhere else? Where? the New Furnace Fund?

Working thru all the permutations convinced me that the idea of having seperate accounts was just a very complicated way of fooling myself for the sake of an illusion. In fact there is just one pot of money (your total net worth), and mentally subdividing it into seperate chunks is just a mirage.

 

[Live And Learn]

All my withdrawals for at least the next 12 years will be entirely out of taxable accounts, and my income is sufficiently low that there is not as much need to carefully plan them so as to avoid pushing myself into a higher tax bracket. Little need for different "buckets". With the exception of a few thousand in checking, I just have one bucket - my portfolio.

Don't feel bad about not using spreadsheets. I need them for work so they are totally ingrained into my life and it was easy enough to use those skills for my personal stuff also.

I agree that you don't need to fret over this stuff as much as others. My annual budget is 98k (because it includes 30k of healthcare expenses) and if I could keep it below 64k then I could get ACA subsidies, which would reduce that 30k by a boatload. Withdrawal strategies are becoming more of a focus for me now that my "time is drawing near".

I love the simplicity of your life that gives you so much freedom from financial worries. Kitty heaven on wheels sounds idyllic.

 

[REWahoo]

... having seperate accounts was just a very complicated way of fooling myself for the sake of an illusion. In fact there is just one pot of money (your total net worth), and mentally subdividing it into seperate chunks is just a mirage.

+1

Like you, I toyed with the idea and discarded it as busywork.