Realistic expenses over the long haul rant

[Balance]

Well, summer is over and I have enjoyed my time with the kids. I try and read a little each day on this forum and few others (MMM, etc) as I have learned a lot from my peers and gained perspective in my new normal. However, one thing that has me perplexed is reading about what others proclaim are their budgets and expenses, especially the ERE and MMM folks who proclaim to live on less than 40K per year. It is my opinion that a lot of these people do not factor in capital expenditures with their typical annual expenses. Let me give a simple example. A small family (3 kids or less) in America is going to have housing, transportation and maybe college expenses. As such, they need to have reserves for replacement for housing components, cars and some college costs. In my case, I have banked enough in college funds for my kids already, but I put about 5k a year in there for over 15 years. As to housing, I assume around 4K per year as a reserve which covers Roofing, Paint, HVAC, Water heater, Appliances and Maintenance equipment (lawn mower, etc) for a 20 yr cycle. Lastly, I buy a new car to me every 4 to 5 years (We drive our cars for 8 to 10 years). This means I need around 25K (today's dollars) each 5 years, so 5k per year.

Thus, if one is being realistic, this small family needs around 14k for cap ex or in my case at least 10K. My insurance costs are running around 24K and my housing costs (taxes, utilities, etc) less insurance and cap ex is running around 6K.

So, what I am saying is I find it hard to believe people are being realistic when they say they can live on less than 40k per year "all in" when I need at least 40K to cover insurance, housing and cap expenditures for large ticket items. My current budget is 70k net and it's tight. Remember, I have no mortgage, college funds banked and no other debt.

I feel compelled to drop in on the MMM and ERE crowd and point out that they may not be realistically factoring in all of life's costs. However, I brought this up here because most of you in the Early Retirement forum are the more experienced group and would like your thoughts and comments.

 

[Midpack]

So, what I am saying is I find it hard to believe people are being realistic when they say they can live on less than 40k per year "all in" when I need at least 40K to cover insurance, housing and cap expenditures for large ticket items. My current budget is 70k net and it's tight. Remember, I have no mortgage, college funds banked and no other debt.

Depends in large part on COL where one lives, but I can imagine living on $40K/yr, as we've lived well on a little over $50K/yr for the past 3 years including about $10K/yr in accrual expenses (your CapEx - cars, major home repairs/remodeling, furniture/appliance/electronic replacements, etc.). We track every penny, and we could easily cut back if needed.

I'll admit some of the couples who live on MUCH less than $40K/yr leave me scratching my head (momentarily) - BUT I don't worry at all if they're being "realistic" or not, why care? And those who spend more, fine and dandy, good for them.

 

[athena53]

I'll admit some of the couples who live on MUCH less than $40K/yr leave me scratching my head (momentarily) - BUT I don't worry at all if they're being "realistic" or not, why care?

Because they'll need Medicaid, subsidized senior housing, etc., when they run out of money and that costs all of us and our children? If you retire at 50 and run out of money at 75, going back to work is probably not an option.

Another expense in addition to the "capital expenditures" and insurance category is out-of-pocket medical/dental/vision/hearing. Many of us are in high-deductible medical plans (my deductible is $6K) which make sense if you're healthy overall, but can result in bad shocks when something does happen. Most dental plans max out after they pay $1,500/year, which means that any major work is mostly out of pocket. Hearing aids and vision are 100% out of pocket for most of us.

Finally, if you've got any kind of decent savings in after-tax accounts, you're probably still paying income taxes. I just retired in May so we'll still be in a pretty high tax bracket for 2014, but I'm looking forward to lower taxes in 2015 and subsequent. I doubt they'll be zero, though!

 

[plex]

It isn't difficult to find the articles where they list an excel sheet of everything they spend on, and usually it looks (mostly) reasonable.

For example, for some of the really frugal, if they have chosen to own a house at all instead of renting (which is generally an expensive lifestyle choice right there, not an investment), they will likely be able to do a vast majority of the repairs themselves, or at least are in a small house in a very low cost of living area and can do some repairs. They also may not have children.

Too many things to cover, but yes, obviously the long term expenses should be factored in. Normally taxes aren't labeled an expense, but they also certainly need to be accounted for in planning out the assets needed for the long term.

 

[Midpack]

Because they'll need Medicaid, subsidized senior housing, etc., when they run out of money and that costs all of us and our children? If you retire at 50 and run out of money at 75, going back to work is probably not an option.

I can appreciate and support that POV, and there are probably some who aren't being "realistic" - though probably under represented here compared to the population at large. This is an above average crowd in terms of financial literacy by and large. However, there are also some here who know better and in some form of competing choose to understate their spending (but would never admit it), AND others who really do spend a lot less than the OP. OTOH there are also some here who spend six figures annually.

I know the threshold of what a debt free couple or individual can realistically retire on is much less than $70K/yr...

 

[Fermion]

If your budget is $40k a year, ACA will not require you to pay anywhere near $24K for insurance. More like $4k.

Now your budget starts looking realistic.

Also someone could rent and not have unexpected capex in housing. My parents rent a very nice 2bd condo on a golf course for $600 or $700 a month (forget the exact figure but it is in that range). This is in low cost Georgia though.

$10K for housing, $4k for healthcare, leaves $26k for food, misc expenses, vacations.

 

[jjquantz]

Many of the more frugal ones will look at your auto replacement planning as extravagant. I don't consider myself particularly extreme in this sense, but my 2 cars were both bought new in 2002 and then in 2009. At the rate we are (not) putting miles on them I expect a workable life of 15+ years for each and I am aiming at 20. In addition, when the old one goes we won't be replacing it, we'll just go to one car. This puts my capitalization needs at more like $1000/year. I do most of my own auto work, so this expense is also minimized. I agree that it can't be ignored, but I can see how it fits into a $40K budget.

 

[jerome len]

Under no circumstances could I live on 40k a year and lead a frugal middle class lifestyle. This year my DW and I will spend over $1000, both at the Dentist and for new glasses. I'll have a small surgery....$250 deductible on that alone PLUS $7000 in health insurance.

I think the key is "middle class" lifestyle owning your own home. Truthfully, I might be able to live on 70k but that would be hard. For health reasons we spend a lot on food....and, fresh vegetables and fruit are are biggest expense....and, they are one of the key reasons we're healthy. Cars? we lease them.....one at $200 a month, the other less than $300 month....still 6 k a year. Why lease? we never have to buy new tires or spend more than an oil change since our cars are always like new. We have a friend that had an old car.....her repair costs were more than my DW lease payment so she leased a car as well. My 75 year old neighbor does the same. We live in a smaller condo, still have to pay $300 fees but dont have to shovel snow, put on new roof or cut grass. So, taxes, insurance and condo fees 6 k a month. We eat out once or twice a week....chinese or mexican restaurants.....still $200 month.....over 2k a year. Add it all up and it's far more than 40 to 60k a year and NOTHING we do is more than frugal middle class. The good news is we can afford it, we could afford more but we worry about extended care in truly old age....so we save and don't have to worry. Oh, kids and grandkids.....we don't spend a lot but we do buy grandkids birthday and Christmas presents....it's worth it seeing they eyes light up......that costs a little as well.

Maybe we could cut back some if we had too....but it no longer, in our opinion, would be a middle class life style. I know others think differently, that's OK and I don't mean to demean them or say they are wrong......40k just wouldn't work for us however.

 

[jerome len]

Sorry.....my condo fees in my earlier post should have read 6k a year instead of 6 k a month.....that will teach me to proof read better.

 

[Fermion]

Why do you need two cars when you are retired? Some get by with zero cars but one car should be enough if nobody has to commute.

I question if that would really be considered frugal middle class. Maybe frugal upper middle class...

 

[imoldernu]

My "long haul" experience is here. Note the word "frugal".
http://www.early-retirement.org/forums/f27/sharing-23-years-of-frugal-retirement-62251.html
We still have our two "other" homes, which represent our "excesses" and which we consider as "non performing assets". Without them, our expenses would be well under $40K.
We rarely think about or talk about money in our daily lives, and have hardly ever had any stress, except for the very early years when returning to the real world was still a possibility.

 

[pb4uski]

We would be at a bit over $40k if we cut out ALL the "fun" items in our budget (travel, golf, movies, dining out, etc), donations and didn't have any medical costs other than insurance so I can see that a couple that are homebodies or do a lot of things that cost little could get by on that amount. But in our case that would not include provisions for periodic car replacement or major repairs. I suspect we could if we had to, but luckily we don't.

 

[Fermion]

Here might be a budget for a retired married couple with a $40,000 a year income, age 45ish:

Taxes: $0 (LTCG $0, Dividend $0, standard deduction + personal exemptions covering interest income)

Rental: 2 Bd room condo or townhouse, $1000 a month

Utilities: $200 a month

One car lease: $300 a month

ACA premium: $276 per month

Food: $500 per month

Dining out: $200 per month

Gas/insurance for car: $200 per month

Clothing, gifts, misc: $300 per month

Total: $2976 per month

Monthly income: $3333 per month

Residual: $357 per month


It would be tight if you had significant out of pocket medical expenses every year, but then you may qualify for some cost sharing in addition to premium subsidy. If you cut out the car and used public transportation, the monthly residual would jump to $857 which means you could take a 2 week vacation about 3 or 4 times a year.

 

[ivinsfan]

Under no circumstances could I live on 40k a year and lead a frugal middle class lifestyle. This year my DW and I will spend over $1000, both at the Dentist and for new glasses. I'll have a small surgery....$250 deductible on that alone PLUS $7000 in health insurance.

I think the key is "middle class" lifestyle owning your own home. Truthfully, I might be able to live on 70k but that would be hard. For health reasons we spend a lot on food....and, fresh vegetables and fruit are are biggest expense....and, they are one of the key reasons we're healthy. Cars? we lease them.....one at $200 a month, the other less than $300 month....still 6 k a year. Why lease? we never have to buy new tires or spend more than an oil change since our cars are always like new. We have a friend that had an old car.....her repair costs were more than my DW lease payment so she leased a car as well. My 75 year old neighbor does the same. We live in a smaller condo, still have to pay $300 fees but dont have to shovel snow, put on new roof or cut grass. So, taxes, insurance and condo fees 6 k a month. We eat out once or twice a week....chinese or mexican restaurants.....still $200 month.....over 2k a year. Add it all up and it's far more than 40 to 60k a year and NOTHING we do is more than frugal middle class. The good news is we can afford it, we could afford more but we worry about extended care in truly old age....so we save and don't have to worry. Oh, kids and grandkids.....we don't spend a lot but we do buy grandkids birthday and Christmas presents....it's worth it seeing they eyes light up......that costs a little as well.

Maybe we could cut back some if we had too....but it no longer, in our opinion, would be a middle class life style. I know others think differently, that's OK and I don't mean to demean them or say they are wrong......40k just wouldn't work for us however.

Everyone makes their own choices and that's what makes the USA so great. However leasing 2 cars is not something I consider frugal middle class. I can't tell you how many times I've heard someone mentioning needing new tires or possible repairs as a reason to lease. You are willing to pay out 500 a month for the rest of your life, plus insurance, tax, and gas to drive 2 cars? 6000 dollars a years goes a long way with car replacement, repairs and yes tires.

We sold off a 10 year Ford sedan which we drove for 9 years, costs us new brakes, one other 900 dollar repair and 2 sets of tires. Someone paid us 2000 dollars for it. But I approve of people leasing as it increases the number of lightly used cars on the market.

 

[GTFan]

So, what I am saying is I find it hard to believe people are being realistic when they say they can live on less than 40k per year "all in" when I need at least 40K to cover insurance, housing and cap expenditures for large ticket items. My current budget is 70k net and it's tight. Remember, I have no mortgage, college funds banked and no other debt.

And you live where, exactly? This can make all the difference in the world.

Even with your capital expenses, we can EASILY live on $40k as a couple in the ATL with zero debt. Without significant belt-tightening.

As Fermion mentioned, the ACA changed everything (for me and for others).

 

[ArkTinkerer]

Given that the median household income is about $50K before taxes it is obvious that many families live on less and many manage to pay taxes and save for retirement as well. And while they probably don't include health care in that figure, if you remove taxes and replace it with healthcare its probably about a wash. Will this work on the coasts? Certainly costs more to live there. But in the heartland having $50K per year should be adequate for retirement. That is my estimated yearly expense for retirement and I actually expect to live quite well on less than that.

ArkTinkerer

 

[rodi]

Well, summer is over and I have enjoyed my time with the kids. I try and read a little each day on this forum and few others (MMM, etc) as I have learned a lot from my peers and gained perspective in my new normal. However, one thing that has me perplexed is reading about what others proclaim are their budgets and expenses, especially the ERE and MMM folks who proclaim to live on less than 40K per year. It is my opinion that a lot of these people do not factor in capital expenditures with their typical annual expenses. Let me give a simple example. A small family (3 kids or less) in America is going to have housing, transportation and maybe college expenses. As such, they need to have reserves for replacement for housing components, cars and some college costs. In my case, I have banked enough in college funds for my kids already, but I put about 5k a year in there for over 15 years. As to housing, I assume around 4K per year as a reserve which covers Roofing, Paint, HVAC, Water heater, Appliances and Maintenance equipment (lawn mower, etc) for a 20 yr cycle. Lastly, I buy a new car to me every 4 to 5 years (We drive our cars for 8 to 10 years). This means I need around 25K (today's dollars) each 5 years, so 5k per year.

Thus, if one is being realistic, this small family needs around 14k for cap ex or in my case at least 10K. My insurance costs are running around 24K and my housing costs (taxes, utilities, etc) less insurance and cap ex is running around 6K.

So, what I am saying is I find it hard to believe people are being realistic when they say they can live on less than 40k per year "all in" when I need at least 40K to cover insurance, housing and cap expenditures for large ticket items. My current budget is 70k net and it's tight. Remember, I have no mortgage, college funds banked and no other debt.

I feel compelled to drop in on the MMM and ERE crowd and point out that they may not be realistically factoring in all of life's costs. However, I brought this up here because most of you in the Early Retirement forum are the more experienced group and would like your thoughts and comments.

With your current budget of 70k net - you should qualify for ACA subsidies.

For a family of 4 (you have a family of 5 - so this number will be higher for you) subsidies kick in at 94200 gross MAGI. The 24k insurance is one of your biggest expenses - and it would drop.

I'm budgeting $84k/year gross, all in. I have a paid for house and property taxes are fixed because of California's prop 13. I retired this year - so my income was higher than the ACA limit - my current medical and dental insurance for a family of 4 is 15444... that will be dropping to around 10k under the ACA plans... less if I do a HSA plan - but I'll need to fund the HSA and account for out of pocket, deductibles, etc.

I know there are things in my budget I could cut right now. $5k/year for piano lessons for the boys. etc.

I lead a pretty cushy/comfy life and don't feel deprived. My budget was based on what we've actually spent for the past 6 years. Taking our gross income from all sources, subtracting out 401k and investment contributions. Subtracting out SS and medicare taxes. Adding in increased health care. We have a chunk of our nest egg set aside (not included in retirement calculations) for big ticket stuff. Anything less than the $84k will get pushed into this slush fund for cars, planned home improvements.

Our cars are older - (95 pickup & 2006 SUV) but we maintain them and there's no reason to think we can't drive them for many more years. An advantage to older cars is our registration and insurance is cheaper than if we had new cars.

 

[daylatedollarshort]

With a low taxable income health insurance premiums under ACA can be as low as $2 a month per person without even going on Medicaid, income taxes can be not only zero but a revenue source with tax credits, and college costs might be covered 100% by grants, part-time work and tax credits.

Reliable cars these days last 200K miles and need very little repair work. Retired households would not be putting any commute miles on the cars, so the cars are going to last a very long time. They might need only 1 car or live in a walkable area with good public transportation and just rent zip cars from time to time.

A newish, mortgage free condo in a resort area might have an HOA as low as $200 a month and utilities, including Internet, of only $100 a month or so. With a condo you'd only need to buy insurance for a ~1,000 square foot space of interior space.

Retirees / slackers not working for a living have time to go to estate sales and thrift shops in wealthy areas and buy original art work and furnishing for pennies on the dollar. Maybe they have time to do the frequent flyer hacks and get $5 - $10K of free travel a year. Appliances are bought off Craigslist. Books, music, play tickets, museum tickets are all free from the library. Food comes from loss leader sales, Costco, ethnic markets and farmer's markets for 1/2 the price of the retail grocery stores regular price. Bread is homemade for 25 cents a loaf using a $5 bread machine bought at a garage sale using bulk bags of ingredients from Costco. Social activities are happy hours and dinners with friends and free meetup groups for inexpensive activities like paddle boarding, board games, jewelry making and hiking.

Some of the ER forum bloggers and forum posters might not be factoring in all the expenses that they need but many really have just figured out how to live well without spending a lot of money. With renting an apartment or living in a small, newish condo, they just aren't going to have huge upkeep expenses.

I don't live completely like this now but these are the kind of tips I see from the frugal forums and I am working on some of these ideas. I took an informal survey on one of the frugal forums on who could live on the least amount of money for a pretty cool lifestyle and the people with mortgage free, lock and go condos in a beach or resort area with low HOA fees were the lifestyles that appealed to me.

 

[jerome len]

A question on expenses; Church and charitable contributions.

We donate $25 week or $100 month to our church and a little extra at Christmas. We also minimally support breast cancer, catholic charities and the Salvation Army a few times a year. I haven't seen any mention of this in anyone's financial budget......anybody want to comment on how this works into a frugal middle class budget?

 

[Midpack]

A question on expenses; Church and charitable contributions.

We donate $25 week or $100 month to our church and a little extra at Christmas. We also minimally support breast cancer, catholic charities and the Salvation Army a few times a year. I haven't seen any mention of this in anyone's financial budget......anybody want to comment on how this works into a frugal middle class budget?

There's no universal answer, but there are always averages...

 

[W2R]

Well, summer is over and I have enjoyed my time with the kids. I try and read a little each day on this forum and few others (MMM, etc) as I have learned a lot from my peers and gained perspective in my new normal. However, one thing that has me perplexed is reading about what others proclaim are their budgets and expenses, especially the ERE and MMM folks who proclaim to live on less than 40K per year. It is my opinion that a lot of these people do not factor in capital expenditures with their typical annual expenses. Let me give a simple example. A small family (3 kids or less) in America is going to have housing, transportation and maybe college expenses. As such, they need to have reserves for replacement for housing components, cars and some college costs. In my case, I have banked enough in college funds for my kids already, but I put about 5k a year in there for over 15 years. As to housing, I assume around 4K per year as a reserve which covers Roofing, Paint, HVAC, Water heater, Appliances and Maintenance equipment (lawn mower, etc) for a 20 yr cycle. Lastly, I buy a new car to me every 4 to 5 years (We drive our cars for 8 to 10 years). This means I need around 25K (today's dollars) each 5 years, so 5k per year.

Thus, if one is being realistic, this small family needs around 14k for cap ex or in my case at least 10K. My insurance costs are running around 24K and my housing costs (taxes, utilities, etc) less insurance and cap ex is running around 6K.

So, what I am saying is I find it hard to believe people are being realistic when they say they can live on less than 40k per year "all in" when I need at least 40K to cover insurance, housing and cap expenditures for large ticket items. My current budget is 70k net and it's tight. Remember, I have no mortgage, college funds banked and no other debt.

I feel compelled to drop in on the MMM and ERE crowd and point out that they may not be realistically factoring in all of life's costs. However, I brought this up here because most of you in the Early Retirement forum are the more experienced group and would like your thoughts and comments.

I can assure you that many of us are "realistically factoring in all of life's costs", and have a very good handle on realistic costs due to being retired for a number of years already. This isn't a theoretical exercise, to many of us.

Not all of us choose to support and maintain a "small family" with college aged kids, multiple cars, and so on. Many of us retire with no debt, in a modest paid off home in a low COL location in flyover country. Some of us do not even like to travel.

If you CHOOSE to spend more, that is your prerogative and I say, go for it! That said, your lifestyle choices are yours, not everyone's.

 

[athena53]

A question on expenses; Church and charitable contributions.

We donate $25 week or $100 month to our church and a little extra at Christmas. We also minimally support breast cancer, catholic charities and the Salvation Army a few times a year. I haven't seen any mention of this in anyone's financial budget......anybody want to comment on how this works into a frugal middle class budget?

Ours isn't frugal, but I'll post what we did last year, pre-retirement. Charitable donations were 11% of our AGI, with 7.5% going to our church, 2% to the local women's shelter and the rest to miscellaneous charities. Some of that remainder went to a donor-advised fund at Fidelity, meaning that I got the deduction last year but can have them send checks to charities at any time.

We made the decision to continue our 2014 church pledge even though I retired in May (3 years earlier than planned, so when we made the commitment last year we assumed I'd be working the whole year). Same with commitments to the women's shelter- we've got commitments of $3K to be paid over the next few years and we'll honor those.

Next year will be another ball game. DH thinks we ought to scale back our giving to the church in proportion to the drop in our income. Frankly, we could afford to keep it at current levels but I'm thinking of doing something in between. I spent a few years as the church Treasurer. I know where DH and I are in relation to the rest of the people in the pews and how many people have decreased pledges or stopped pledging at all while we increased ours every year. It may be time to cut back a little. OTOH, as long as we're taking extravagant vacations I'd feel wrong not giving away some of our blessings.

 

[Fermion]

Why would you not scale back church/charitable giving if your income decreases I would expect this just as I might expect you to increase giving as your income increases.

 

[robnplunder]

I can assure you that many of us are "realistically factoring in all of life's costs", and have a very good handle on realistic costs due to being retired for a number of years already. This isn't a theoretical exercise, to many of us.

Not all of us choose to support and maintain a "small family" with college aged kids, multiple cars, and so on. Many of us retire with no debt, in a modest paid off home in a low COL location in flyover country. Some of us do not even like to travel.

If you CHOOSE to spend more, that is your prerogative and I say, go for it! That said, your lifestyle choices are yours, not everyone's.

+1. I am not sure why the topic would cause the OP to "rant" on . It's not a bad topic to discuss but there are other things that deserve one's "rant" than this.

 

[daylatedollarshort]

If you look at the cost of attendance for a public colleges, especially in flyover country, and subtract out tuition, books and other school costs, even in California it doesn't cost that much to live like a college student. On some of the frugal forums the students decided to just keep the same lifestyle and use their post graduate incomes to buy years of ER instead of a big house with a mortgage out in the 'burbs with increased transportation costs to and from work. And many these days are choosing to stay child-free.

I do agree that some of the budgets I see with big houses and little kids are underestimating how much both cost over the long haul. And some of the bloggers budgets do seem to leave out a fair bit like dental expenses, gas for all the driving trips they take, or they attribute things like car expenses solely to their spouse and leave it our of their ER budget. But I guess if you don't have a spectacularly low and unrealistic budget it isn't newsworthy, and many online financial writers these days are more interested in catchy article headlines than asking too many questions that might kill the story so they'd have to go find something else to write about.

Some major news outlets had articles about a guy who kept his business expenses low because he had developed an AI application to do the work of 200 tech workers. On the forums people obviously pointed out that anyone who had such an application would in reality be make millions or billions from licensing fees to every major corporation in the world with an IT department, and not just keep costs low for a single mom and pop business, but I never read where one reporter even picked up on this.