Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Categories of withdrawal
Old 07-21-2013, 01:58 PM   #1
Thinks s/he gets paid by the post
David1961's Avatar
 
Join Date: Jul 2007
Posts: 1,074
Categories of withdrawal

As a fairly new retiree, I have a question, mostly for the folks who have been ER'd for years.
To me, there are two types of withdrawals - one is for the recurring expenses, like food, taxes, shelter, utilities, insurances, etc. I'd even put medical expenses there, even though they will fluctuate from year to year.
The second type of withdrawal is for special expenses that occur infrequently but are pretty big - maybe buying a new car with cash, putting a new roof on the house, replace air conditioning, major trips., major medical expenses, etc.
The total WR needs to account for both types of withdrawals. What I'm planning on is having a total WR of 3% and assuming 2% is from the first "recurring" category and another 1% from the second "infrequent" type. Fortunately, I have not had any major infrequent expenses yet. In thinking about this, I'm estimating that over time, the "infrequent" expenses will be about half of my recurring expenses. Not sure how accurate this is - ask me in 20 years and I'll have an idea. Do you folks break it down this way? How much do you plan for the recurring versus infrequent expenses?
__________________

__________________
David1961 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-21-2013, 02:12 PM   #2
Thinks s/he gets paid by the post
Gotadimple's Avatar
 
Join Date: Feb 2007
Posts: 1,761
You can classify it anyway you choose. Money is money.

I don't have a theory of per centage withdrawal - there is an amount I draw annually to cover expected expenses (basic and infrequent). There is also an emergency fund to cover 2 years of annual expenses to draw on for unexpected infrequent expenses, like a new furnace, or washing machine.

But I do consider travel as part of my 'basic,' and I budget a flat amount of money (without knowing where I am going) to cover my travel costs.

Rita
__________________

__________________
Only got A dimple, would have preferred 2!
Gotadimple is offline   Reply With Quote
Old 07-21-2013, 02:30 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,424
What I do is include car and boat "depreciation" in my expenses (the numerator) which provide for periodic replacements. Since we built our house new just prior to retiring I include maintenance but no replacements (such as roof, or whatever). Has worked good so far but its only been 18 months for me.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 07-21-2013, 03:07 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Location: Los Angeles area
Posts: 1,432
I also consider withdrawals to be of two types, but break them down as "basic" (medical, food, utilities, insurance, repairs, etc) and "luxury" (travel, new toys). "Luxury" is the flexible part, rising (most years) or falling (2009) based on my 72t distribution for the year, and if there are any big extra "basic" costs for the year (repairs, medical). My "basic" costs are about 60% of my distribution this year.
__________________
learn, work, save, invest, fire
CyclingInvestor is offline   Reply With Quote
Old 07-21-2013, 03:21 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by Gotadimple View Post
You can classify it anyway you choose. Money is money.
+1

Classify things as you wish as an aid to your understanding of where the money is going. But it makes absolutely no difference to your FIRE portfolio what you do with the money after you withdraw and spend it. The money has been converted to some experience or tangible item or, in basic terms, "spent."
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 07-21-2013, 03:45 PM   #6
Recycles dryer sheets
 
Join Date: Jul 2013
Posts: 108
Been pondering about the same topic. Sure, money is money, but annual expenses are a bit different from bigger stuff that needs some sort of spread over several years. And I know I've been accustomed to use regular wages for the former, and bonuses for the latter - I know, I'm lucky.

First way should be real amortization (i.e. if I spend $10k on a roof, well, I pay my bill, likely above and beyond my regular annual spend, but then I'd constrain my future 'wages' (i.e. the spend money I give to myself every month/year) to recover such a 'debt' by an amortization formula (i.e. 'reimburse' $1k a year for 10 years for said roof, and add a little % something to address inflation and so on). I would feel a little bit like an accountant (I am NOT!), but after all, those folks know what they're doing...

Otherwise, yes, create two categories (regular vs exceptional expenses) because when money is left at the end of the year in the regular pocket, I'd want to view it as part of my working capital again, while the exceptional bucket has to accumulate year after year, at least to a point. I am not sure to like this idea, because as you said, it's hard to calibrate and doesn't auto-adjust very well.

Disclaimer: I am NOT early-retired yet, so I am making that up, didn't go through any real-life experience like that...
__________________
siamond is offline   Reply With Quote
Old 07-21-2013, 03:52 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by siamond View Post

Otherwise, yes, create two categories (regular vs exceptional expenses) because when money is left at the end of the year in the regular pocket, I'd want to view it as part of my working capital again, while the exceptional bucket has to accumulate year after year, at least to a point.
It's absolutely true that you have to account in some way for bumps in your WR for major expenses. What aids you need for yourself to keep this straight depends on, well, you. If creating a "regular bucket" and a "exceptional bucket" does it for ya, go for it!
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 07-21-2013, 05:33 PM   #8
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,869
I do include these infrequent expenses as part of my spending, and so far my spending has always been below my planned withdrawal rate each year even so. When I have to pay for one of these expenses I tend to cut back in other areas for a few months, just as I did while working.

Your withdrawal rate in retirement is like your salary while working. You know you have to fit these expenses into your salary income somehow while working. Similarly, in retirement what you spend still has to fit into your income in the same ways.

The only difference (to me), is that in retirement I return the excess to my nestegg at the end of each year.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is online now   Reply With Quote
Old 07-21-2013, 07:41 PM   #9
Recycles dryer sheets
 
Join Date: Jul 2013
Posts: 108
I was thinking more about this topic while taking a walk... I think the key is to stay close to cash flows procedures we all used for many years before retirement...

Maybe an easy to proceed is to manage a 'Savings' account, and add a relatively small portion (0.5%?) of your annual withdrawal rate (WR) in there at the beginning of the year. If you have some lumpy/rare cash inflows (e.g. small lottery win!), put it in there too. Then draw on it when you have a lump payment to deal with that your regular checking cash flow can't manage.

This should take care of most situations (e.g. property taxes, etc). Now if you have something really big (e.g. new roof) to deal with, then take it out of your working capital (reverse balancing to sell high) and view it as a multi-year loan to yourself. The way to pay the loan will be to subtract your annualized loan 'payments' from your annual withdrawal in the following years, artificially lowering WR. With a bit of Excel tracking, this should be easy to manage.

Do not forget to negotiate hard with this loan shark you're dealing with (i.e. yourself!). Interest rates should not exceed the inflation... ;-)

PS. I just described a form of amortization, of course...
__________________
siamond is offline   Reply With Quote
Old 07-21-2013, 09:07 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
I've always budgeted for irregular expenses. The money just collects in the budget until it is finally needed. We spend as needed as long as it's within the budget, and withdraw from the portfolio as needed to support that spending, so budgeted but unspent money stays in the portfolio. Not exactly a constant withdrawal rate year by year. However, all planning (like FIRECalc runs) assumes withdrawals of the budgeted amount each year. The net effect should be a slightly larger portfolio than planned unless all the big irregular expenses hit at the same time.
__________________
Animorph is offline   Reply With Quote
Old 07-21-2013, 09:57 PM   #11
Full time employment: Posting here.
martyp's Avatar
 
Join Date: Sep 2010
Location: Bangkok
Posts: 963
My monthly budget includes recurring expenses and it also includes a "savings" category. The "savings" are regular deposits to an account that is used for the infrequent big expenses like buying a car or a major house repair or a new appliance. If I spend from my big expenses account then I intend to pay myself back over time.
__________________
Happy, Wild, and Free
martyp is offline   Reply With Quote
Old 07-22-2013, 10:13 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,973
I accounted for the unusual/infrequent expenses by reviewing what they have been in the past. I've bought cars, replaced applicances-major home systems/roofs/consumer electronics, and remodeled in the past. From there it's not hard to project cost and frequency for the future.

So my spending budget includes three broad categories, routine expenses (fixed, variable) and accrued expenses (the above, same as your "second type"). My budget works out to about $40K for fixed & variable and $9500/yr for accrued. I track variances for each expense and the three broad categories separately because while I expect to have little variance in fixed & variable routine expenses, I know accrued expenses will vary considerably from year to year - close to zero some years, or easily $20K some years. And I expect to review and adjust our plan every five years at a minimum.

There are many ways to address the big, infrequent expenses. What's most important is that we plan for them, and not act surprised when they hit...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is online now   Reply With Quote
Old 07-23-2013, 06:27 AM   #13
Thinks s/he gets paid by the post
Milton's Avatar
 
Join Date: Apr 2007
Posts: 2,076
Quote:
Originally Posted by youbet View Post
It's absolutely true that you have to account in some way for bumps in your WR for major expenses.
If you track your annual spending for a long enough period (say, ten years), the average amount will automatically include most - though admittedly not all - periodic expenses.

Just ensure that your passive income stream exceeds average yearly total expenses by some reasonable margin (say, 10%), and that should be generally sufficient to protect against truly unusual contingencies.
__________________
"To know what you prefer, instead of humbly saying Amen to what the world tells you you ought to prefer, is to have kept your soul alive". Robert Louis Stevenson, An Inland Voyage (1878)
Milton is online now   Reply With Quote
Old 07-23-2013, 07:51 AM   #14
Thinks s/he gets paid by the post
 
Join Date: Nov 2009
Posts: 3,865
My second-tier emergency fund is what I consider a "slush fund" I use for any large, unforeseen expenses I cannot pay from my local checking account which includes a buffer or cushion to cover smaller, unforeseen expenses. The investment income this slush fund generates (it is in an intermediate-term muni bond fund) is not required to cover my regular expenses so if it drops a little bit that is fine. The investment income also gradually replaces some or all of any infrequent withdrawals I make.

Living in a co-op apartment (as opposed to a house) means that large expenses bourne by the co-op will not only be spread out not only among the many shareholders (residents) but across many years due to its reserve fund.
__________________

__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 11:24 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.