Who is Spending Less This Year?

[retire@40]

There are signs of intelligent life on Earth. When money is a little tight, we probably won't keep taking the same withdrawal percentage. There is always something in the budget that can be adjusted downward.

AICPA Tracks Spending Patterns
New York ( April 22, 2008 )
By WebCPA staff

People are cutting back on their spending to save money as the U.S. economy slows, according to a survey by Harris Interactive for the American Institute of CPAs.
The AICPA found that 25 percent of the 1,026 adults it polled said that they were either spending wisely or not spending as much as a way to save money. That’s a sharp increase from the 2 percent who said last year that they were spending wisely or cutting back on spending in order to save more.
Spending wisely or not spending as much ranks second as a savings strategy in the current survey. Interest-bearing savings accounts take the top spot, with 40 percent of respondents. Other strategies cited were company-sponsored retirement plans (13 percent); stocks, bonds and mutual funds (11 percent); individual retirement accounts (7 percent); certificates of deposit (5 percent); and conserving energy (3 percent).
“We’d like to see more people taking advantage of company retirement plans like 401(k)s,” said Carl George, chair of the AICPA’s National CPA Financial Literacy Commission, in a statement. “Many employers match a percentage of a worker’s contributions. A matching contribution is basically free money.”

 

[rs0460a]

When money is a little tight, we probably won't keep taking the same withdrawal percentage.

Don't assume that this is the case in all instances.

For instance, in retirement (been a year) my forecast is to increase withdrawls from my/DW's portfolio for the next 10 years.

Why? Due to ER, our retirement income does not come "on-line" all at one time. For instance, between us, we will have six separate sources of income (beyond our retirement portfolio). I'm already drawing two of the six, but the last (and the largest) will not come for another 9.5 years (my SS), which also happens to be the largest income source.

Forecast is that my withdrawls (at a rate to support 100% of final net income) go from 6.5% this year till 10.5% at age 70.

At age 70, withdrawls drop to 3.x% and don't exceed the "magic 4%" till age 82+.

As in all plans, "it all depends"...

- Ron

 

[Leonidas]

We're spending more this year, but we withdrew the money last year when investments were ripe for taking some profit. (House needs some expensive repairs that I can't do myself, and I promised the Princess a couple of upgrades.) Even though I'm spending it this year, I think of it as last year's money.

 

[Notmuchlonger]

1/1/2008 to 3/31 2008

Is less than what we spent during the same time period in 2007.

Im going to guess we will spend slightly more this year due to food costs increasing. That and we had to put 5000 into our house.

 

[Bestwifeever]

See, this drives me crazy re retirement calculators. No one would say, hey the economy is booming, so go ahead and increase your withdrawal rate to 6, 8, or 10 percent this year. I thought the whole point of FireCalc and other modelers was to take this kind of withdrawal swings out of the game.

If you believe the calculators, then changing your withdrawal rate based on a poor economy seems to be a form of inconsistent market-timing. If you don't believe the calculators and think you'll have to go down to a smaller withdrawal rate at times, why don't we just use those smaller rates for our calculations in the first place?

So interesting that in the two or three years I've been reading this boards how the sentiment has swung with the economy in that time.

(And I must admit I'll be the first to decrease our withdrawal in the downtimes, too!)

 

[Walt34]

We're more aware of spending, mostly on gasoline, and make an effort to drive the pickup as little as possible, and put more effort into planning driving to keep it to a minimum. At least I do, DW is not quite so good at that. Eating out is way down, mostly a result of higher fuel prices.

Food budget is the same but we keep a closer eye on sale items that we will use.

Optimism is high though, as I'm working part time occasionally, full time is still pending, however the job is dependent on government contracts and therefore not to be taken for granted. The bulk of that (two thirds) will go to savings/short-term investments, the rest will be "play money". DW will finish her BA in about a year, after that she will look for a part time or light duty full time job.

 

[W2R]

I'm not retired yet, but I tentatively plan to withdraw a variable amount between 2.4% and 3.9%, depending on the market and other factors (such as social security payments or failure, and so on).

If necessary I could manage on as little as 0.3%, but I doubt I will need to do that.

As a non-retired person whose net worth recently increased substantially, I would estimate that I am probably spending around 33% more than last year. I would also guess that this increase in spending will not last, once it is no longer a novelty. Hard to know. I bought curtains for my previously curtainless spare bedroom the weekend before last, for example. Now I have them, so no need to buy them next month, KWIM?

 

[fmhealth]

I'm spending MUCH MORE! Just retired in Jan of this year. My children recently moved from Cleveland to Scottsdale. Instead of costing us about $100.00 to drive & stay with them every two months. We now fly & rent a condo. Total cost around $2,500 for an incremental increase of $2,400/trip or about $10,000/year.

Money well spent but unplanned for. Things happen. Lifestyle change from Cleveland to Scottsdale. PRICELESS!!!

 

[FIREd]

We are still working and our income has actually increased about 20% from last year but YTD we have spent 12% less than last year despite the fact we had to unexpectedly replace our A/C last week. We expect that trend to continue until the end of the year, our goal being to spend about 10% less this year than last year. But it's quite easy this year to save money because of the current economy. Less pressure to consume... It's a voluntary cutback which allows us to put more new money to work in a down market. It also is a bit of a "retirement training", learning to cut back when the market is down.

 

[piano88]

spending less

We're spending less this year--maybe down 5-10%. I've cut back to working 60%, and consulting and volunteering the rest of the time.

 

[ERD50]

If you believe the calculators, then changing your withdrawal rate based on a poor economy seems to be a form of inconsistent market-timing. If you don't believe the calculators and think you'll have to go down to a smaller withdrawal rate at times, why don't we just use those smaller rates for our calculations in the first place?

I don't think it is an issue of believing or not believing the calculators. The calculators can only go so far.

In the case of FIRECALC, it tells you would have happened in the past. The future may be worse than the past, your personal inflation rate may be greater than CPI, you may live longer than you are thinking, and.... if you set it for 95% success, that means that you would have failed 5% of the time.

And there is a lot of variability in those results. Most of the time, you wouldn't need to make any cut backs at all, and you would still die 'rich'. FIRECALC can't tell you which of those outcomes will happen, only what has happened in the past. It's just hedging a bit, for those who care to do so.

Personally, if I felt I needed to start tightening the belt because of this recent little market dip, it would tell me that I should have kept working (or should go back to work). Other people may be in other stages and feel differently, or not have that option.

So interesting that in the two or three years I've been reading this boards how the sentiment has swung with the economy in that time.

I think it's to be expected. A while back, when we had a foot of snow, I didn't hear too many of my neighbors discussing sharpening the blades on the mower.

-ERD50

 

[Bestwifeever]

A while back, when we had a foot of snow, I didn't hear too many of my neighbors discussing sharpening the blades on the mower.

But when it's summer we still know winter will be coming and most of the posters on this board are not grasshoppers--don't our plans and FireCalc account for the winters we know will be coming (i.e., the economic climate we are in right now)? Yet we trust our calculations and planning only in the summer (i.e., two or three years ago), not in the winter.

I just think it's interesting what a downturn does to our confidence, that's all.

 

[youbet]

don't our plans and FireCalc account for the winters we know will be coming (i.e., the economic climate we are in right now)? Yet we trust our calculations and planning only in the summer (i.e., two or three years ago), not in the winter.

Indeed, FireCalc does back-test scenarios vs historical data and if we assume the future to be no worse than the past, it's a good test. Like you, I'm somewhat surprised at how conservative RE decisions and discussions about WR have turned on this forum. A year or two ago it was the opposite with much chatter about the sins of dieing and leaving stacks of money behind.

I just think it's interesting what a downturn does to our confidence, that's all.

It's like the ball changed hands due to a fumble and we've pulled the offense off the field and now the defense is out there!

ERD50 had a really good thread back a few months. The discussion concerned portfolio volatility and our ability to be comfortable with large swings, especially downward swings, in value. In FireCalc, success = not running out of money. But if you RE at 50 and half your money is gone at 60, can you remain comfortable even knowing that in the past, as tested by FireCalc, there would be some recovery and you'd be OK? Kinda tough, huh? Keep on spending despite the fact that at the current rate of decline you'll run out of dough by 70 unless things improve significantly?

This has led to discussions about enhancing portfolio stability. Delay SS until 70, put some money into a SPIA, save a bunch of extra money (work longer) and have side stashes of cash to use in down markets or maybe just worker longer, save more and have a lower WR.

Maybe ERD50 will chime in and point us back to that most interesting discussion.

 

[ERD50]

I just think it's interesting what a downturn does to our confidence, that's all.

I hear what you are saying, but I don't think it's a matter of confidence in the model. For me, it is a realization of what the model can tell me.

Look at the output of FIRCALC with the defaults. Roughly 80% of the time, you end up with more money than you started with. Roughly 5% of the time, you run out, and roughly 15% of the time, you are on thin ice.

Even if we assume the future will be similar to the past, we don't know ahead of time which of those paths we might be on. So, there are two options that people can look at:

1) Keep a very conservative SWR for many years to help assure success. Only increase the SWR later in life, if the model indicates we can with a shorter time frame and our portfolio at that time.

2) Use a less conservative SWR up front, but plan to cut back if one the 20% scenarios plays out.

The advantage to #2 is, you get to spend more $ when you are younger (and very likely the entire time!), and probably can enjoy it more. You have less chance of ending with a big pile of money on your deathbed, wishing you had spent more of it when you were younger. But, you also have to be prepared to cut back and have some lean years. It's a tradeoff.

It's all a matter of risk profile and personal preference. But I don't see either as not trusting the calculator, just a matter of utilizing the calculator to guide you down two possibly different paths.

-ERD50

 

[ERD50]

Maybe ERD50 will chime in and point us back to that most interesting discussion.

Ask and....

http://www.early-retirement.org/forums/f28/firecalc-dips-net-worth-anyone-scared-32866.html

It helps to have an 'odd' word in the title. 'Dips' is not as common as 'annuity' or mortgage when you do a search.

My inadvertent best for that was mistyping 'seal level' for 'sea level'. Pretty easy to find that infamous thread!

-ERD50

 

[youbet]

Well.... right on time. Thank you Mr ERD50!

As stated, it's that 15% (or so) of "thin ice" experiences that grab folks attention. This despite the fact they think they understand that FireCalc defines success simply as not running out of money. That is, a really scary close call is perfectly OK.

I think most folks fall into the trap of assuming they'll do "average." In actuality, following the 4% + inflation rule will typically leave some of us out of money and sleeping in the gutter, and significant group having scary close calls and......on the other extreme.......a lucky few basking in wealth untold 40 years post retirement.

Look at the FireCalc intro page. There is a great explanation regarding the danger of using averages and a graph based on actual historical data to back it up. Good stuff!

So, how 'bout it bestwifeever, can you handle a roller coaster ride that dips your portfolio drastically early on and continue believing that the future will be no worse than the past and a recovery will save you. And, even if a recovery does save you, will you have spent time developing ulcers from stress instead of enjoying your well deserved RE time?

At about this stage, we usually cue the folks who have no worries to chime in. You know, the ones with huge cola'd pensions, enough "extra cash on the side" to fund the national debt or simply enough money so they can live nicely on a 2% WR.

 

[Bestwifeever]

So, how 'bout it bestwifeever, can you handle a roller coaster ride that dips your portfolio drastically early on and continue believing that the future will be no worse than the past and a recovery will save you. And, even if a recovery does save you, will you have spent time developing ulcers from stress instead of enjoying your well deserved RE time?

Hey, I said this right up front in my first post on this thread :

"(And I must admit I'll be the first to decrease our withdrawal in the downtimes, too!)"

I am a world class worrier about mundane things, let along something as huge as retirement. We ran FireCalc every which way to heaven until we had a 100% success rate to determine our target date--and still I know I'll never be quite sure!

 

[SecondCor521]

Quicken tells me I am spending about 4.4% less YTD 2008 vs. 2007.

2Cor521

 

[rs0460a]

enough "extra cash on the side" to fund the national debt.

Yep ...

 

[youbet]

I am a world class worrier about mundane things, let along something as huge as retirement. We ran FireCalc every which way to heaven until we had a 100% success rate to determine our target date--and still I know I'll never be quite sure!

And I've been known to do a little fretting myself......

We used the same method you did to get some extra padding...... used 100% survival rate instead of 95%. So far, two years into retirement, no plans to cut back on spending. Didn't get to RE until 58, and at 60 I really don't want to start drawing lines through activities like vacations, fishing trips and those kind of descretionary things because of the risk of being too old to enjoy them as much if/when things improve later.

For the younger crowd, I think it makes sense to postpone vacations, etc., if you're really worried. Once you hit the big six - oh, however, it becomes a little worrisome to put off activities which require some physical abilities. So, I'm not. If I'm wrong, I'll wave at everyone from the bread line in ten or twenty years.

 

[Milton]

A prescient article from two years ago: U.S. Personal Savings Rate.

I'm spending MUCH MORE! Just retired in Jan of this year. My children recently moved from Cleveland to Scottsdale. Instead of costing us about $100.00 to drive & stay with them every two months. We now fly & rent a condo. Total cost around $2,500 for an incremental increase of $2,400/trip or about $10,000/year.

Perhaps you should consider moving to Scottsdale on a permanent basis.

 

[megacorp-firee]

We're spending more ... but it was part of 'THE PLAN'.

Travel and indulging in my vices (aka Las Vegas, ... my excuse is that this is how I keep my raging hormones in check ... that's my story and I'm stick'n to it! ).

The important part is that it is part of the plan. Unless something real bad happens (yeah ... it's not bad enough yet ), I will continue with my plan. After 57 years, it's too late to second guess myself. So far it's (planning your w*rk, w*rking you plan) gotten me here...

Leave with the girl you brought to the dance, I say.

 

[beowulf]

You actually know how much you spend I try to do this a different way - since we are both still working, I care more about how much we are saving. While I track major expenses, I'm not yet into the track everything on a spreadsheet mode. What I do know is that we are increasing savings every year at a rate exceeding our salary increases. I suppose that tracking expenditures is the only way to do it once you are not accumulating - maybe next year. It's going to be a real shock to our psyches not putting anything away and just pulling out. Have to resist the urge to buy the 100 lb bag of Alpo ).

 

[megacorp-firee]

You actually know how much you spend I try to do this a different way - since we are both still working, I care more about how much we are saving. While I track major expenses, I'm not yet into the track everything on a spreadsheet mode. What I do know is that we are increasing savings every year at a rate exceeding our salary increases. I suppose that tracking expenditures is the only way to do it once you are not accumulating - maybe next year. It's going to be a real shock to our psyches not putting anything away and just pulling out. Have to resist the urge to buy the 100 lb bag of Alpo ).

We're in distribution mode (i.e. retired) and it's the 1st year, so being a compulsive planner, I am tracking what we spend to see if it matches my plan (which it is, ... so far).
When working we tracked our savings also. ... and the shock (pulling out) is not as great as you would think... as long as you have anticipated them.

 

[REWahoo]

You actually know how much you spend I try to do this a different way - since we are both still working, I care more about how much we are saving. While I track major expenses, I'm not yet into the track everything on a spreadsheet mode. What I do know is that we are increasing savings every year at a rate exceeding our salary increases. I suppose that tracking expenditures is the only way to do it once you are not accumulating - maybe next year. It's going to be a real shock to our psyches not putting anything away and just pulling out. Have to resist the urge to buy the 100 lb bag of Alpo ).

Yikes. I'd strongly urge you to track your total spending, at least in some reasonable layer of granularity, prior to reaching the "not accumulating" phase. Once you're no longer working and living off your nest egg is no time to discover your expenses exceed a reasonable withdrawal rate.