Capital expenditures vs. safe WR

[GravitySucks]

Home improvements so far have been low enough that it's met less than a years budgeted expense every year. Next year is a new roof though. If it causes a bump to the taxes I may see what loan rate I can get. If it's a low enough I'll pay it off over 3 to 5 years. That's if the tax hit would be more than the interest hit.
I did get a car loan last time. If a loan rate is less than expected inflation it's pretty much a winner in my book. That rate and keeping me at the 15% tax bracket that year made the loan a great way to go and it matched the budgeting, but I wouldn't do it just for the budget matching. If money gets expensive again I'll pay the taxman instead.
I expect some years will be over budget, like next, and some will be under budget, like this year.

 

[youbet]

All net costs related to buying and moving into my Dream Home added up to $92,603........... What I did was treat this as a permanent reduction in my portfolio nest egg.

I'd be very comfortable with that method too W2R.

Your net worth hasn't really decreased. Your FIRE portfolio decreased by $93k and your real estate assets increased by $93k. So, that's a wash.

But, the survivability of your FIRE portfolio (investable assets net of your primary home) at your planned WR is now reduced and you've used the lower FIRE portfolio value to test that (with success). That is, you restated your circumstances, retested via FireCalc historical data, noted that based on historical data you're still very safe....... and on you go enjoying life!

To me, both the action and the method of accounting for it make complete sense. I love the fact that you seem to be getting more utility (in the economic sense) from the $93k invested in your Dream Home than you were getting from those same dollars residing in your FIRE portfolio. And that's what it's all about, isn't it? Maximizing utility (enjoying life) while maintaining a prudent statistical outlook regarding portfolio survivability.

 

[scrabbler1]

I write down my 4% budget amount on Jan.1 st .Any money left from last years budget goes into a slush fund for big purchases .

While I don't fund it the exactly same way you do (but similarly), I have a slush fund I use for big, non-recurring expenditures I can't use my day-to-day, month-to-month budget to handle. I have sometimes described it as my second-tier emergency fund. This slush fund is actually in two parts. One is a fund which has checkwriting privileges which I tend to use only if I need its money more urgently, through a check. The other is a fund which lacks checkwrting, so the route to tap into it takes an extra few days to move the money around to my local bank's checking account.

When I have surpluses from my general budget, I use them to replenish the slush funds. Reinvesting each fund's monthly dividends is a slow way to replenish them, too.

 

[W2R]

I'd be very comfortable with that method too W2R.

Your net worth hasn't really decreased. Your FIRE portfolio decreased by $93k and your real estate assets increased by $93k. So, that's a wash.

But, the survivability of your FIRE portfolio (investable assets net of your primary home) at your planned WR is now reduced and you've used the lower FIRE portfolio value to test that (with success). That is, you restated your circumstances, retested via FireCalc historical data, noted that based on historical data you're still very safe....... and on you go enjoying life!

To me, both the action and the method of accounting for it make complete sense. I love the fact that you seem to be getting more utility (in the economic sense) from the $93k invested in your Dream Home than you were getting from those same dollars residing in your FIRE portfolio. And that's what it's all about, isn't it? Maximizing utility (enjoying life) while maintaining a prudent statistical outlook regarding portfolio survivability.

You bet, youbet! (Yes, I have been waiting for years for a chance to say that, ha ha!)

Living in this house has really upgraded my quality of life. I get such a kick out of living in the kind of house I always longed for, when I was younger. In many ways my Dream Home helps to make up for growing old (which I think is the pits, but I am 70 so it's starting to become more apparent).

I still have lots of wiggle room in my spending so I don't feel constrained by the lower portfolio amount. You're right... I retested everything half to death with FIRECalc and every other method I could think of, so I'm sure this expenditure and re-evaluation of my portfolio is going to be OK for me.

 

[HFWR]

I have a small Roth, and a slightly larger taxable, the former designated as the “new air conditioner fund”, and the latter the “next car fund”, set up this way to mitigate large, taxable withdrawals from the IRA that holds most of my stash. There’s also a line item (around 2% of home value) in each yearly withdrawal for more minor but ongoing maintenance.

 

[RetireAge50]

If I want to buy a car or something the money just comes from the portfolio. This obviously reduces future withdrawals going forward. Not a problem as our normal withdrawals are about 50% discretionary (so can take a little whack).

Also hoping the market will be better than the worst of all time helping to offset such reductions.

 

[clifp]

How do folks track one-time withdrawals to support capital expenses like a major home remodeling project vs. their planned safe withdrawal rates?
I’ve been retired for 3.5 years and our WR seemed high at 8-9% until I backed out large chunks for a home remodel one year and a new car this year. Want to see how others account for the lump sum expenses that occasionally come up.

Well, you can always cheat and just rerun your calculations with your new net worth. (This is similar to the advice from W2R).

But I think the root of your question, is how do I really know if my spending level is ok (especially relatively early in a retirement).

I was somewhat terrified of making major purchases, so I waited until I been retired for 12 years (2011) before doing a kitchen remodel, expensive metal roof, a solar system, and cheap Tesla S all in the span of less than 3 years. To be honest, I just handwaved it away as my bonus from being fully invested during a good bull market.

I think a more useful is to depreciate the capital expense. In the case of car it is relatively easy, you'll need/want to replace the car in 7-12 years So divide the price by how many years you expect to keep the car - resale value when you buy a new one, that yearly car expense should be part of your WR.

In the case of home stuff, I'm not good at home maintenance stuff, I procrastinate doing it and lots of stuff I don't even notice. But if you can identify the major things you have to replace (furnaces, appliances, roofs) over the next decade and add to it the stuff you really want to do add a new dock, bathroom remodel. Make a guess at the cost and divide by 10 and add that your projected budget.

 

[DEC-1982]

It's just a change in net worth. I don't use withdrawal rates.

 

[lem1955]

Avg VPW

I've been retired since Dec 2015. In 2016 I withdrew 3.8% of my portfolio. In 2017 we had to make major repairs to our house - stripped off the old siding and put up Hardie Board siding and renovated our 30 year old kitchen - some new appliances, not all. That necessitated a 7.7% withdrawal. I didn't stress over it because I was confident I could return to a less than 4% withdrawal rate in the next year. However, I had read about Variable Percentage Withdrawal rate and knew that I was likely to inherit at least a few hundred thousand dollars in the future. Plus my spouse is 9.5 yrs my senior. And I have very little cash in non-taxed advantaged accounts, so I decided to use the VPW schedule in 2018 and save whatever I didn't use in a taxable account. The withdrawal (according to the schedule) was 5.2% but I contributed the max to my ROTH IRA from new earned money and put an additional $7400 into a taxable money market account. My average withdrawal over the three years is still higher than it would be if I had used the VPW schedule from the start and not made the renovations. But I'm feeling fine. The renovations have improved our quality of life, and I am increasingly confident that we can live below our means despite the state of the stock market.

 

[Independent]

I've been planning for this since 2010 and have run many models, spreadsheets and Firecalc simulations (like another poster mentioned you can model lump-sum withdraws). Every scenario has 100% confidence up to age 95 so am not concerned about outliving our money. Was just asking how others treat the lump sums out of curiosity.

We track actual expenses, so they are both in the actual expense spreadsheet. In the detail, I'll have a unique line item for each of them - "Car replacement", "New house".

In the future, if I'm trying to use my actual expenses to follow past trends or plan future spending, they will be easy to isolate.

When I revise my "How are we set up for future spending?" model at the end of the year, I will have fewer dollars in financial assets. It will give me a lower SWR.

When I'm subjectively thinking about how comfortable I feel about my total financial position, I'll know that I won't need to replace the car very soon, and I've got more equity in the house if I eventually need it for LTC expenses.

 

[Sojourner]

How do folks track one-time withdrawals to support capital expenses like a major home remodeling project vs. their planned safe withdrawal rates?

For lumpy expenses, like home remodeling or car purchases or replacing major appliances, I have a separate sheet in my FIRE budget spreadsheet that calculates the average 10-year costs of these items and factors those costs into my "annual spend" number. This works really well for occasional, large, irregularly-recurring expenses, but I guess if a big expense were truly "one time only", then simply reducing the size of your total investable NW by that amount would be the easiest and best approach.

 

[Dd852]

For tracking purposes I always look at both the current 12-month rolling expenses vs. liquid assets and the 60-month rolling expenses annualized vs liquid assets — I’ve done that both while working and during FIRE and found that the five year window smooths out our lumpy expenses: renewing computers, repainting house, funny medical blips. The strong market and relatively low spending means I’ve never really been put to the test, but I have told myself that the important number to keep in check is the 60-month one.

 

[SecondCor521]

Slightly different take that I don't recall seeing posted yet:

Whatever your method or approach, I think it's important to be brutally honest with yourself about whether something is truly "one-time" or if it's merely infrequent.

I remember discovering this when I first started trying to budget when I was about 24 years old. There were the regular monthly bills, of course. But then in December there was the "one-off" of Christmas. In January the "one-off" might have been a small car repair. In February it was the dentist. I eventually realized that while it wasn't the same thing every month, I had to figure on 25%-33% more than the metronomic monthlies to even get a basic handle on a realistic cash spend monthly figure.

The same thing can happen on a longer time scale. I might be able to hold my budget breath for six months and spend $X per month, but eventually the roof and the car and the washer/dryer will need replacing.

If it is truly one-time (the bucket-list trip to Antarctica maybe), then counting it as a permanent reduction in the portfolio works. If it's ongoing and there is an Antarctica trip this year and a Galapagos trip next year and diving to the Titanic in 2020, perhaps you might be fooling yourself.

 

[Dtail]

^^^
For us, we fund monthly a lumpy type of account for these types of smaller non regular expenses, separate from the major "new roof" type of expenses.

 

[ncbill]

I try to avoid lumpy expenses after watching mom burn through all her cash trying to keep up a large, older (1920s) home after her divorce.

So I've never owned a traditional home, a monthly fee pays for outside maintenance (including the roof) for my townhouse.

 

[BeachOrCity]

As a newer ER person I can tell you how I planned for lumpy expenses. My budget is based on actual spend where certain numbers are zero’ed out and replaced with a different number that includes a lump allowance

Healthcare is changed to a flat 20k a year for 2
Auto is changed to a flat 11k year to include depreciation or new car replacement money
Home maintenance is changed to flat 5k year

My plan is to track actual spending and then adjust by these flat numbers and change the flat numbers as needed if I am averaging more or less.

 

[ER Eddie]

Thanks for asking the question, OP. I was curious about this myself. I'll probably move after retirement, which will entail a big, one-time expense.

 

[Dtail]

Thanks for asking the question, OP. I was curious about this myself. I'll probably move after retirement, which will entail a big, one-time expense.

Yeah 15k to move 1300 miles down south.

 

[jkern]

I've tracked irregular type spending (remodeling, new appliances, new furniture, roof, car replacement, kids college, kids wedding, etc.....) for the last 30 years. For me, it has averaged about $13K to $14k per year. When projecting SWR I just add this amount to my know yearly cost of living. If the the WR is within my desired range, all is well.

I treat a big year as simply reducing the Portfolio by the amount spent and calculate next years WR using the average. BTW, this year I spent about $65k of this stuff.

 

[esterhazy]

Slightly different take that I don't recall seeing posted yet:

Whatever your method or approach, I think it's important to be brutally honest with yourself about whether something is truly "one-time" or if it's merely infrequent.

I think this is especially true for early retirees. For someone who is retiring at age 67 it is quite plausible that they may never buy another car in their life; they may not have any major house repairs; they are unlikely to move to a new house; etc. After all, they have (on average) only 10-15 years left.

But if you retire in when you are 42 that changes substantially. A roof lasts 20 years? You're looking at at least two roof replacements while you are retired. Maybe 3. Same for a furnace or a water heater. Even something like hardwood floors often only last 25 years. So you need may need to budget replacing all the floors in your house at least one time.

And so on....

 

[DrRoy]

When I RE'd I had some funds in a separate account "off the books" for one big project. We are remodeling the family room now and it is going there. We expect to go over the amount by about $10K and that will count as spending. I also charge an allowance each year toward a new car to spread out that expense.

 

[Retired Expat]

I am not of the belief that any funds withdrawn are gone as some have said. If we are talking capital expenditures they have value that remains or slowly depreciates. Well, hopefully if they are intelligent capital investments... If I put $50k into an addition to my house is that gone or will I recoup it upon sale? The car you buy has a residual value o you need to account for that somewhere.

I account for these things as future “earnings” from the one time sale in the future. Kind of like investing in Real estate... the money may not really be gone...

 

[audreyh1]

I am not of the belief that any funds withdrawn are gone as some have said. If we are talking capital expenditures they have value that remains or slowly depreciates. Well, hopefully if they are intelligent capital investments... If I put $50k into an addition to my house is that gone or will I recoup it upon sale? The car you buy has a residual value o you need to account for that somewhere.

I account for these things as future “earnings” from the one time sale in the future. Kind of like investing in Real estate... the money may not really be gone...

House remodels are often not completely recouped in house sales. Vehicles are depreciating assets. You cannot sell slivers of either annually to withdraw retirement income. For this reason most folks count only their liquid assets to determine withdrawal amounts/rates and not their entire net worth.

 

[donheff]

I am not of the belief that any funds withdrawn are gone as some have said. If we are talking capital expenditures they have value that remains or slowly depreciates. Well, hopefully if they are intelligent capital investments... If I put $50k into an addition to my house is that gone or will I recoup it upon sale? The car you buy has a residual value o you need to account for that somewhere.

I account for these things as future “earnings” from the one time sale in the future. Kind of like investing in Real estate... the money may not really be gone...

I think W2R and Youbet covered this well above. The addition is a wash or even an potential increase to your net worth. But from an SWR perspective it is a hit to your portfolio. How you "account" for it depends on what you are accounting for, If you are trying to keep track of how much you can spend, absent a home equity loan or home sale, it is a hit.

 

[Fishingmn]

I do a calculation of useful life and cost for each major expense (cars, appliances, hvac, roof, paint, flooring) which calculates a number we include in our expected annual expenses. Right now that's $9,300/year.


Obviously, some years will be higher than others (like this year when we bought replacement car) but at least we are budgeting for these.