Spending in early retirement

[dory36]

FWIW: Taking a quick look at where the money went in the first year of retirement, I get something like $10,000 for the recurring spending I had to incur (mostly groceries, health insurance, and indoor living).

There was another $2000 or so in required boat maintenance costs; this could have been kept to about 1/3 of that had we chosen to do more ourselves rather than hire as much of the work out.

We spent a good 50-60% of our 1st year's spending on discretionary expenses (those I could choose not to incur, with no significant adverse effects), such as restaurants (our weakness) and upgrades to our living space.

All in all, pretty much as expected. Whew!

How does this compare with others?

Dory36

 

[RedOscar]

I have just finished my second year of retirement. We are a family of 4 with two in college (one a senior, one a freshmen) The following represents how our household has cut the pie over the past 12 months.

Housing 9% $4000
Food 11% $5000
Transportation 6% $3000
Medical 13% $6000
Other stuff 15% $7000
Taxes 46% $21000

As you can see, taxes have eaten me alive. This was due to a large capital gain when my former company sold out in an all cash deal, forcing me to sell years of accumulation.

However, things will get better. Future taxes will be much lower. Day to day expenses should also come down as the kids leave the nest.

This should give me and the Mrs. more time and money for the fun things in life! I'm looking forward to it.

Red

p.s. Wish I knew how to to use the table formatting to better present the above, but you get the idea.

 

[Cody-Girl]

I average for EVERYTHING for the past 3 years is about $750 - $1000/month. Some months are less, some more. When I didn't travel and had a paid for home my expenses were closer to $500/month - all of my hobbies are free and my personal expenses for food, clothes, utilities, health care, etc, are super low cost. Since all my investments are tax deferred except some emergency funds in CDs, I can keep my taxes in the 10% or even 0% tax bracket. Payed a total of $500 in state & fed taxes last year! Will be less this year.

 

[Ed_B]

This is a critical area when planning for ER. As a wanna-be ER type, I am watching this closely. My wife and I hit on what has turned out to be a great idea. Instead of trying to do anything with a budget (not a good process for people who spend very carefully anyway) we decided that we would fund a joint checking account for "the house", essentially all of our living expenses. We though that if we both put in $1500/month we would be fine. As it turned out, the account started growing immediately, so we backed off to $1400/month each and then to our current $1300/month. The account is still growing but at a slow rate and we want it to do that so we can pay for the unexpected expenses (house/car repairs etc.). We are living comfortably on this amount and it is extremely gratifying because this is much less than we earn. My wife retired two years ago at the age of 51 and receives a pension that is larger than our current living expenses.

We have mid/upper 6 figure retirement plans + savings + taxable investments. We're still paying on our mortage but have just concluded a re-fi that will convert our current mortgage from 30 to 15 years. The loan rate of 4.635% was just too good to pass up. This does not save us much per month but reduces the time that we will be making house payments from 21 to 15 years. The 6 year reduction should amount to a considerable saving over the life of the loan.

Am planning to ER in 15 months when I reach age 55. By then, we should have things pretty well lined out financially. Oh, yes... health insurance is a big problem for many but we have a handle on that as well. We can get a Kaiser HMO plan, just like we have had for the past 30 years and find reasonably good, for the two of us for $450/month and the company where I've worked for the last 29 years will pick up half of that. Assuming no major unforeseen probs between now and then, our plan looks to be on schedule.

 

[dory36]

Instead of trying to do anything with a budget (not a good process for people who spend very carefully anyway) we decided that we would fund a joint checking account for "the house", essentially all of our living expenses.  We though that if we both put in $1500/month we would be fine.  As it turned out, the account started growing immediately, so we backed off to $1400/month each and then to our current $1300/month.  

What a great idea! It sure beats meticulous record-keeping for those of us who don't do well at that!

Dory36

 

[RedOscar]

I agree that Ed_B makes a very practical approach to managing ones checking account for normal everyday expenses. It should work well if monthly expenses are reasonably level throughout the year. Unfortunately, it seems my expenses vary quite drastically during the year.

Personally, I've never been entirely comfortable with living from paycheck to paycheck each month, allowing balances to dip into the below $1000 level. Consequently, I usually have a fair amount of ready cash available in interest checking and money market accounts. No doubt I've left money on the table due to reduced rates of return for those funds, but I sure sleep better at night knowing I can cover most contingencies that might arise.

In the end, one needs to manage money using whatever method works best for them.

Red

 

[Ed_B]

Hey, Red. Yes, our living expenses are pretty level throughout the year so this works well for us. I'm not counting the $20k emergency fund that we have as that is "savings" while the routine spending is handled by the "house account".

I have to laugh at the so-called Pundits who make the blanket claim that everyone needs 70-80% of their pre-retirement income to maintain their lifestyle in retirement. I suppose that this kind of reasoning makes sense to people who spend everything they make. We don't. We live well but frugally. Our spending each month amounts to about 40% of our current after-tax income. The rest is saved or invested. Once in a while we splurge on something nice, such as the home theatre system we bought last December. This was not an impulse purchase. We had been looking at them for the past two years but did not like the high prices and limited features. Finally, Circuit City came through with a deal that was irresistible. We saved over $500 on the system and got just the components we wanted. It's great and we are really enjoying it. The wait has made the enjoyment all the sweeter.

 

[Ed_B]

Hi, Dory36. It's not much of a system for the folks who enjoy crunching everything with a spreadsheet but it works well for us. As a professional scientist, I know how to crunch numbers every which way but loose but pefer to spend my time on more enjoyable and/or productive pursuits. I'm a strong believer in the KISS principle for most things, especially when it is backed by hard data that says it is working. Another favorite of mine is "If it ain't broke, don't fix it!".

PS - this is a GREAT web site and I am very pleased to be here!

 

[RedOscar]

PS - this is a GREAT web site and I am very pleased to be here!

Hi Ed_B,

I agree that Dory36 has provided a wonderful service to those in and near ER with this web forum (I still remember when they were called bulletin boards [BBS} before the internet really took hold).

It has proven a little difficult during my first three years of early retirement to get a handle on an expected annual budget. The first three years were fraught with high taxes and rapid increases of health insurance. But I believe we are starting to get into a groove as we begin our fourth year. Income taxes have definitely been wrestled under control. As the kids leave the nest, I hope to get a better deal on health insurance premiums (those family plans are killers).

Anyway, annual expenses should settle in at around 35-40% of pre-retirement income. I don't have a crystal ball so I have no way of accurately predicting the future. Nonetheless, things are looking pretty good from my perspective.

One important aspect of tracking expenses that I have found over the years, is an awareness of how the money is spent. It has allowed me to identify areas where things were out of whack and to make adjustments, as well as assist me in planning for the future. I feel much better knowing how I got to where I am today, and how I might get down the path that leads to tomorrow.

Good luck with your ER plans. It sounds as if you are on a good course.

Red

 

[RedOscar]

What a great idea! It sure beats meticulous record-keeping for those of us who don't do well at that!

My wife and I have a little inside joke on this. I tell her she can buy anything she wants as long as she gives me a receipt. She is a very frugal person, so I know not much is going to be spent. At the same time, I can track where the money goes and for what. It gives us a good chuckle every once in a while when she asks if she can buy something.

My brother says I am anal-retentive. I still don't know what that means, but it doesn't sound complementary! :-/

Red

 

[Ed_B]

Hello, Red. Glad to hear that you're getting into the ER groove. I like hearing comments like that as they are most encouraging.

Our youngest is 28 and graduating from Portland State University in 10 days. He studied architecture, which is a 5 year program. He also spent 4 years with Uncle Sam's Misbehaving Children, so got off to a later start than most. That was OK, though, as he was "squared away" when he started college, rather than being an unfocused 18 year old air-head. In any case, we are going to be empty nesters (DINKs) very shortly now. And both he and we are READY!

I know what you mean about taxes. Thank heavens for the 401k, 403b, and IRAs. Without them we would have been roasted alive financially. It's been bad enough even so that I made a bumper sticker that reads "I drive a 9 year old Ford so I can afford to buy Uncle Sam a new Caddy... every year!". Am looking forward to ER as much for the reduction in tax bite as anything else. Almost makes me wanna send the IRS a sympathy card when they won't be getting so much free money from me anymore... Nah, just kidding!

A crystal ball would come in real handy at times. I've done quite a lot of personal financial planning so far and have more to do yet. Not saying I am really good at it yet, just that it is necessary and I am willing to give it a shot. My problem with all this planning, though, is that I end up using so many assumptions that I have serious reservations about whether the final result is valid. There seems to be too much room for errors to creep in as the passage of time shows the assumptions used to be more or less accurate. Still, about all we can do is give it our best shot and hope that we are more often closer to right than not. As someone once said "He who fails to plan, plans to fail". I don't know the source for that quote but it seems like a good one to me.

I understand how tracking expenses can be quite valuable for most folks. My wife and I have never done that as we are very careful spenders who rarely spend on anything that isn't necessary. Yes, we buy a goodie now and then but it is a rare event in our lives. We started our married life by agreeing not to spend more than $100 on anything unless the other of us agreed that it was a good idea. This forced us both to make our case for things that we wanted to buy. We figured that if we couldn't make a good case for buying, we probably shouldn't. That worked real well for several years, especially when we were young and didn't have a lot of spending money. We don't do it so much anymore, but years of careful spending have become such a habit that it is no longer needed. I'm so tight with a buck that my wife actually cheers when I spend a few dollars on clothes or tools.

Thanks for the "good luck" wishes. The way life goes, a fellow can use all of that he can find.

Ed_B

 

[moguls]

I'm planning to retire within the next year. In preparation we've been tracking our spending for the past 2 years.

I'll chime in and provide an overview of the process my DW and I use to track our expenses.

First we make most of our purchases using a credit card. Since we pay it off every month there is no interest, but it provides us with an excellent record of our expenses. Of course paying off the card monthly is key, but anyone who is a dedicated LBYM type would not have problems handling that.

Every 60 - 90 days we review the credit card bill and enter the expenses into categories we set up in a spreadsheet. This process usually take less than 30 minutes. At that time we also review our checking account and record any expenditures in the spreadsheet. Ususally not many, so this takes less than 15 minutes.

The spreadsheet is set up to calculate my monthly and estimated annual expenditures.

I then have adjustments for my expected modifications to expenses after retirement (i.e. medical ins, lower work related expenses, increases for travel, etc.)

Again, not sure this would work for everyone, but it sure proved to be a relatively painless way for DW and I to get an overview of where our money is going and what our expenses might really be in ER.

Moguls
(331 days and counting)

 

[RedOscar]

I'll chime in and provide an overview of the process my DW and I use to track our expenses.

I've been using the computer for nearly 20 years now to record income/expenses. In the mid-80's, I used a program called Pha$ar on the Atari ST. Around 1996 I switched to Quicken when I moved to the PC. I pretty much record ALL transactions.

Over the years, we have found an interesting side benefit to this recordkeeping. The information almost becomes like a diary. I can perform searches and generate reports that help us revisit the details of many of our life activities. While the information does not always contain desired information (names/phone numbers/etc.), it nicely tracks the when, where and how much for much of what we do.

Initially it took a bit of discipline to keep the "cash" account accurate, but now it almost seems like second nature. I have always felt that it was a worthwhile habit to get into.

Red

 

[Ed_B]

Sounds like a plan, Red / Moguls. The bottom line in all of this seems to be to do whatever works for you and do it consistently. We use the monthly checking account statements that we get from our credit union to watch what happened, when, and how much. Not that we do it with a SS or Quicken but it is useful to review this info from time to time.
It's especially helpful that we get "e-statements" online rather than on paper. This makes reviewing, searching, and cataloging them very easy. We do the same with our brokerage account statements which are also online.

While we both have credit cards and a "house account" credit card, we don't abuse credit and with only 2-3 exceptions that I can recall over the past 34 years, pay the bills off every month. Another quote that I have found very useful is "We can't borrow a better standard of living". How true, how true. When we borrow, our banker acquires a better standard of living while we acquire a bunch of debt. :-/

A lot of this is a throw-back to my raising. My Mom is a real sweetheart who grew up during the 1930s when times were really tough. Her family lost pretty much everything and had to live hand to mouth for a number of years. This awful experience caused her to become the person that she is... extremely frugal, hard working, and absolutely terrified of poverty. She taught me a great deal about earning and managing money. Unlike my older Sis and younger Bro, I LISTENED to what she had to say because I knew that she had "been there and done that" in terms of financial and personal survival. Because of this, I always worked, always saved, and always had money in my pocket. I even started my own bank and loaned money out to other kids and charged them interest. Lawn mowing, a paper route, and various odd jobs added to the pot. Unlike Mom, I never lived through terrible economic times but I have taken her hard learned lessons to heart. This caused me to create my Three Rules for Financial Success: 1) work hard... all bosses appreciate this in an employee and when times get tough (and they will), they know who will get the job done and retain those employes; 2) save religiously... no matter how little it is, ALWAYS save something towards improving your future; and 3) invest wisely... diversify your holdings and invest mostly in things that accumulate value over time rather than in things that depreciate. I'd much rather buy GM stock, for example, than a new GM car. Yes, I need to buy a car from time to time but rarely ever keep one for less than 10 years. This allows me to amortize the cost of the car over a longer period of time and I take very good care of my cars so that they last a while.

I'm sure that the folks in this group can add lots of good ideas to this short list. Please do, as we can all learn and improve our money management skills when we listen to the experiences of others.

Ed_B

 

[dory36]

Before I retired, I had my paycheck sent to my brokerage account (without checkwriting feature), and had established an automatic payment to my checking account of our budgeted living amount.

The minor hassle involved in moving funds beyond the budgeted automatic amount was sufficient to delay "impulse" spending long enough for logic to intrude.

Dory36

 

[Ed_B]

An excellent idea, Dory36. We did something similar to that when we quit using the local bank, which had several local and very convenient branches, and started using one of the local credit unions. They only had 2 branches, so visiting them was not convenient. Money deposited there tended to stay there and not get taken out and spent. It wasn't until then that we actually started to slowly but surely accumulate wealth. Another great feature of the CU is that their service prices are MUCH lower than the bank and they have a number of free services that are also beneficial to their members.

It's really funny when I think back on it. It seemed to take forever to amass our 1st $10,000... literally years. These days, $10k doesn't have the buying power that it once did but it's much quicker and easier to get! We invested that in a US Treasury Bill that was paying 9.6% interest at the time. That was a solid investment with virtually no risk and a reasonable pay-off. It really did the trick in terms of starting us on the road to our investing / money management future.

Another thing that helped was perhaps a bit silly but... I had started reading a few financial magazines, such as Money and Kiplingers. I enjoyed the information there and tried to find ways to apply it to our situation. Among the things that caught my eye were the ads that Vanguard had. I really liked their sailing ship logo and their "stay the course" approach to investing. As I learned more about investing, I began to appreciate their "no-load" and low expense approach to personal finance. I could see how paying a load up front, simply to invest, would result in less money invested and thereby less return realized. Investing in stock index funds also had appeal, as that allowed for excellent diversification and was also tax wise. As soon as we could save up the money, $1000 per fund back then, we started investing in two of their funds, 500 Index and Healthcare. Over the next few years, we contributed $15k to each of these funds. Even though the market has pulled back over the past 3 years, our investments in these two funds have still doubled (500 Index) and tripled (Healthcare). These are core positions for our taxable investment account and we will probably hold them for some time. We might use them to pay off our mortgage when I retire or we might hang on to them and make systematic withdrawals to cover our living expenses... haven't decided yet. Any words of wisdom from anyone on the issue of paying off a mortgage (recently refinanced to 15 years @ 4.6%) vs. holding onto two pretty good mutual funds for the long haul? All advice appreciated.


Ed_B

 

[Mr._johngalt]

Hi Dory. An excellent idea indeed. Removing the cash
from quick use on "impulse spending" is a device I have used off and on for years. Alas, I was not as focused as I should have been and am now paying the price. Even today
it would benefit me to "lock up" more cash so as to
remove temptation. Paul Terhorst is my ER guru, but
I am quite sure he would be appalled with the number
of toys and stuff we continue to hang onto.

 

[Ed_B]

The Terhorsts are definitely fascinating people and I enjoy reading about them a lot. That said, I could not live their vagabond lifestyle, no matter how interesting it is. I suppose that this is a throwback to my childhood days when Dad was a soldier and we moved every 3 years, whether we wanted to or not.

Like others who participate in these message boards, I NEED a home base and the close connection with friends and family.

Still, it is fun to read about their exploits and experience them in a vicarious sense. They have a web site at:

http://www.geocities.com/TheTropics/Shores/5315/

for anyone who wants to drop in and read about their exploits.


Ed_B

 

[Mr._johngalt]

I follow the Terhorsts closely and exchange e-mails
from time to time. However, I could never adjust to their lifestyle either, under any circumstances.

 

[Ed_B]

Perhaps the Terhorst's are yet another example of doing that which works for you. This seems to be one of the real keys to happiness and life in general.

For myself, ER means having the freedom to do whatever I want, whenever I want. Yes, there will always be imitations on ones' activities, but at least one of them will not be working a routine schedule for someone elses convenience. I'm really looking forward to having a free-wheeling schedule and deciding what activity sounds good on any given day.

 

[Mr._johngalt]

For those of you who may have wondered "How does he do that?"; here are some current real life
examples. I am sitting here dressed in clothing
which was either scrounged from a "free table" at my
wife's employer, or picked up at garage sales. We are
having our bathroom remodeled. The contractor needed
2 X 4s. I didn't buy them. My neighbor was cleaning
out her shed and offered any lumber if I would haul
it away. I also got a rototiller, an extension ladder,
and a whole pile of other stuff, all free. Other neighbors replaced their appliances and set out the
clothes dryer and fridge for anyone to haul off. I sold
those for $150.00. I just had my
truck into the body shop for some work. I scoured the
salvage yards for parts and paid about 25% of
new prices. Then I got 5 estimates including 2 from
the same shop with locations in 2 cities. One shop was
$60 lower but couldn't start until August 5. I talked them into giving me the lower price but doing it 2 weeks
earlier in the other shop. Anything which is sitting
around unused is converted to cash as quickly as possible. This may sound like work but it's so
ingrained now I hardly notice I am doing it. The rules:
No. 1 No lazy money. If it's not used, convert it to cash. No. 2 Negotiate everything. You'll be amazed
what people will agree to. No. 3 No impulse buying.
Think about every purchase beyond a cup of coffee or
an ice cream cone. No. 4 When you do buy something,
shop, shop, shop. I hate to shop but there is big money
to be saved.

 

[Ed_B]

The rules:
No. 1 No lazy money. If it's not used, convert it to cash.
No. 2 Negotiate everything. You'll be amazed what people will agree to.
No. 3 No impulse buying. Think about every purchase beyond a cup of coffee or an ice cream cone.
No. 4 When you do buy something, shop, shop, shop.


Excellent advice, John. I know people who are into similar activities and the thrill of chasing down a real bargain only serves to spur them on to greater things. I tend to do the same thing only perhaps not to the same extent. Example: I wanted a big-screen TV. I shopped for a year and a half to find one that was "just right". Ended up with a great system and even saved $500 while I was at it. This is the first BIG item I've purchased since I bought a new Ford Ranger pickup in 1994. It's got 98,000 miles on it now and is still going strong. It too was a bargain thanks to Ford wanting to sell more 4-cyl. cars to make up their CAFE numbers for all the gas-guzzling V8s in their SUVs. Whatever... it worked out for me.

 

[puma]

<<<<<<<Am planning to ER in 15 months when I reach age 55. By then, we should have things pretty well lined out financially. Oh, yes... health insurance is a big problem for many but we have a handle on that as well. We can get a Kaiser HMO plan, just like we have had for the past 30 years and find reasonably good, for the two of us for $450/month and the company where I've worked for the last 29 years will pick up half of that. Assuming no major unforeseen probs between now and then, our plan looks to be on schedule. >>>>>>

ER will come in another year, and we will need that health insurance until SS can cover us. Where can I get good information on plans that would cover "snowbirds?
Is there a place that makes comparison shopping easier?

 

[oldcrowcall]

Man, if I had to live like some of posters on this board I'd rather work till I drop. I enjoy life. Good wine, boating, fine cooking. My parents were very frugal all their lives, but not because they wanted to I don't think- they didn't have the bucks. I retired at 63 with a million in retirement funds. Not really a lot these days. I should be more careful with my spending, but I what the heck, for the next 15 years is prime time.

 

[cute fuzzy bunny]

I havent noticed anyone living a lousy life here.

About the only three things I dont do or do differently from my six and seven figure income days:

- I dont eat lunch out every day and dinner out most of the time. I cook better meals at home that cost a fraction as much, I have time to shop and cook, and I enjoy the heck out of it.

- I dont drink $25-40 dollar bottles of wine anymore. I found quality bottles under ten bucks and recently have found five dollar bottles that are almost as good. I can tell the difference and appreciate a more expensive bottle of wine, but I'd rather drink a ten dollar bottle and sleep until 10:30 every morning than work my butt off to gain a small edge in depth and concentration of some old grape juice. But man, I really did think I was SOMETHIN' whenever I pried open an expensive bottle

- I dont go on multiweek vacations to foreign lands. Been there, done that, and without the job I dont have the stress that calls for it. But I've been on one and two day driving trips to napa valley, muir woods, lake tahoe, alcatraz, marin headlands, point reyes, hearst castle, etc. Fun. Almost free.

In the meanwhile I live in a nearly new very nice home in a slightly upper middle class neighborhood, drive a nearly new very nice car, and get 10 hours of good sleep a day like clockwork. Oh yeah, all my neigbors own boats of varying type and size, so thats pretty much covered...the best kind of boat after all is someone elses...