making a budget for retirement

[medved]

I never before tracked our expenses. We just spent what we wanted/needed, and saved/invested the rest. To be honest, I never had any idea what we spent. I suppose that is a real luxury. Or maybe we are just careless. I did know that we lived well below our means, but never got much more granular than that.

Some people on this board suggested that, before one can think seriously about ER, need to know what your annual burn is. That made sense, so I had a look at what we spent in 2015. And at the end of this year, I will do the same for 2016.

What I am struggling with is how to use this information. What I mean by that is our expenses these days (last year, the prior year, this year) will be very different than our expenses in retirement. There are some significant expenses we have now that we will no longer have, but then other expenses we will have more of (e.g., travel). I tend to think the expenses in retirement will be so different from our expenses these days that what we spend these days is not all that relevant.

Part of me says given that we will retire with something like $13 million in invested assets, and a house that is fully paid for, and no debt, I should just not worry about it, and retire when I want to retire. But I am risk averse, so am trying to be thoughtful about this.

Are there others here who felt like your pre-retirement expenses were very different than what your expenses would be in retirement? If so, how did you deal with that? Did you try to get granular about what you would spend in retirement? Like mortgage every month, food, car and house expenses, travel, etc? Or just get a very rough idea? Thanks.

 

[mpeirce]

Our main expenses didn't really change much. We spent a bit more after retiring, not on daily life (that stayed pretty much the same), but on additional travel since we had the time and desire to do more traveling.

> I tend to think the expenses in retirement will be so different from our expenses these days

You didn't say why you think this. Are you planning to move or to hit the road or something else?

 

[Gotadimple]

Yes, my expenses were different, and yes, for my peace of mind, I got granular.

First of all, income is different, and so is the tax burden on that income.
Second, depending on your age, health expenses my be significantly higher, and then drop once you are eligible for Medicare.
Finally, as you noted, you need to pull out certain expenses because you won't have them anymore, and increase others because you will be spending more. And don't forget the costs of maintaining your home (upgrades, replacements, repairs, etc.)

Assuming the world doesn't change, your $13M in investable assets won't change. But that's life in a vacuum, and there is a risk to your $13M.

So the purpose to doing the granular budget is not can I afford it? But, what will I need to spend on each year, and am I invested properly now that there is no income. You don't say what you did for a living, but the absence of a regular paycheck does make a difference psychologically - and that's the reason to pencil out a budget.

Rita

 

[COcheesehead]

Try the RPM tool, retirement preparedness measure on Fidelity. They'll make you register, but you don't need an account. It will help you break down your expenses into great detail, some are things most of us forget, like medicare supplemental insurance, deductables, dental, etc. If you don't know the numbers, they will guide you with an estimate. It really helps nail down your expenses. It also accommodates one off costs and non reoccurring costs. Great tool.

 

[medved]

You didn't say why you think this. Are you planning to move or to hit the road or something else?

A good amount of the money we currently spend is on the kids, and by the time I retire the kids will be in college (which is already saved for). And while we may stay in our current home for a couple of years after retirement, soon enough we will move to a different place -- to a smaller house with a lower cost of living. Then state taxes will be different, health insurance will be different, utilities will be different. And whatever work related expenses I have now will no longer exist. And there is some insurance I pay now (such as disability insurance) that I will drop. But then there will be higher expenses for travel and recreation. Maybe it will all equal out in the end, but I feel like I am just guessing about that.

 

[jim584672]

With 13 million I think you will be ok with or without a budget.

 

[medved]

Assuming the world doesn't change, your $13M in investable assets won't change. But that's life in a vacuum, and there is a risk to your $13M.

Yes, I am keenly aware of that. I am in the process of trying to reduce my exposure to equities, gliding toward a 50/50 or perhaps 40/60 AA at retirement, to somewhat reduce that risk. But I know the risk exists.

So the purpose to doing the granular budget is not can I afford it? But, what will I need to spend on each year, and am I invested properly now that there is no income. You don't say what you did for a living, but the absence of a regular paycheck does make a difference psychologically - and that's the reason to pencil out a budget.
Rita

The psychological issue you allude to could be a big deal for me. It could lead me to be much more conservative with money than I may need to be. I could see myself thinking "I might live another 40 years, medical expenses may skyrocket, so I better not spend too much."

 

[pb4uski]

A good amount of the money we currently spend is on the kids, and by the time I retire the kids will be in college (which is already saved for). And while we may stay in our current home for a couple of years after retirement, soon enough we will move to a different place -- to a smaller house with a lower cost of living. Then state taxes will be different, health insurance will be different, utilities will be different. And whatever work related expenses I have now will no longer exist. And there is some insurance I pay now (such as disability insurance) that I will drop. But then there will be higher expenses for travel and recreation. Maybe it will all equal out in the end, but I feel like I am just guessing about that.

You could take your current expenses and then adjust it to what you expect when you are retired. For taxes, you can do a calculation as if you were retired using TurboTax or the tax calculator at tax-rates.org.

 

[socca]

I use an Excel spreadsheet for budgeting. The various income and expense items are based upon granular personal finance tracking I do using QuickBooks. However, my budget includes important items that aren't found directly in QuickBooks, such as 'Reserves'. I also use worst-case values in my budget rather than typical or average values. So, for example, I might budget $500/mo for food when QuickBooks says I only average around $400/mo.

The point of this exercise is to figure out what portion of my income can safely be labelled 'discretionary'. If calculated correctly, the discretionary portion of my income can be safely blown on all manner of silliness without damaging my financial health.

 

[RunningBum]

The biggest danger I see in using historical spending data is irregular expenses. If you didn't happen to have any home maintenance expenses, for example, you can't assume a future budget of $0. Eventually the roof will need to be replace, windows replaced, furnace fixed or replaced, etc. Likewise if you didn't buy a car, you still have to figure that eventually you will buy one eventually.

 

[RobbieB]

I have never tracked my expenses, never made a budget, never balanced a checkbook and don't know how to use a spreadsheet.

I do my net worth once a year with a paper and a pencil when I do the taxes with turbotax.

So far, so good -

 

[ownyourfuture]

With 13 million I think you will be ok with or without a budget.

What he said

 

[ABQ2015]

In retirement I want to travel more, spend more on entertainment, and relocate to a higher cost of living area where I will rent at least the first year. To ensure I can afford this, I have estimated expenses in some detail.

Federal taxes will go down but not by that much as all of my retirement income will be taxable. State taxes in the high cost of living state will not increase because I am eligible for a number of middle class tax breaks that are not available in my current state. Both of these were a surprise.

I read through past ER threads on how much do you spend on travel and used an estimate that met my expectations (e.g., a single person who makes about 4 trips a year including 2 international trips). I used a travel site to double check the cost of a European vacation. I also reviewed ER threads as to how much to budget for home repairs, replacement cars, and unexpected expenses.

I occasionally check Craigslist to see what rental houses cost in my relocation area. Also real estate sites for home costs and property taxes if I buy a home.

I currently track my expenses in about ten categories. I increased these amounts by about 10% to account for higher cost of living in retirement. And more in some categories as I will need warmer clothing and more household goods if I buy a home (e.g., window treatments). Tracking my current expenses also allows me to easily determine where I can cut expenses if needed and how much it will save.

But I agree with others that you are probably okay at $13M.

 

[MichaelB]

Part of me says given that we will retire with something like $13 million in invested assets, and a house that is fully paid for, and no debt, I should just not worry about it, and retire when I want to retire. But I am risk averse, so am trying to be thoughtful about this.

Are there others here who felt like your pre-retirement expenses were very different than what your expenses would be in retirement? If so, how did you deal with that? Did you try to get granular about what you would spend in retirement? Like mortgage every month, food, car and house expenses, travel, etc? Or just get a very rough idea? Thanks.

Having enough to retire is part how much you have and part how much you need. You really do need to have a good sense of each if you want to reduce financial uncertainty surrounding ER.

Figuring out how much you've spent over the past year is not hard, but it does take time. It gives you a valuable baseline and can be an important component of a framework you build to help look forward. Some people get into the nitty gritty and track every expense. More important for you is to ask yourself if you plan on changing your current standard of living. That's really the biggest 'driver" of your budget and the most important variable for projecting future expenses.

 

[jkern]

If you are interested in tracking expenses, just create a spreadsheet. Add or subtract line items as needed. Adjust the line item numbers each year. Allocate a certain amount for irregular spending. Done.

Of course, with $13M you'll probably be just fine no matter what.

 

[Gumby]

I've tracked pretty much every dollar we've spent over the past ten years. My spreadsheet has 57 rows for different types of expenses. When you get that granular, it is much easier to see what will likely change and what will stay the same.

 

[Meadbh]

Congratulations on having $13 million. I don't think the amount matters unless your projected expenses are minuscule (<2%) in comparison. It's still helpful to know where your money is going now, and to estimate where it will go in the future. If you do have more than you need, it can be a very reassuring exercise. It can motivate you to consider taking up new activities that you hadn't considered, or embarking on a philanthropic mission.

I reviewed my expenses for two years prior to ER. I developed a retirement budget, starting with an Excel template that I found online, and I have customized it for my needs. I have done monthly analysis for the past three years (though I am a bit behind at present) and I find it very helpful.

 

[donheff]

DW and I were a lot like you pre-ER. We spent what we wanted, lived below our means, and saved a lot. But not $13M Since we were in a more "normal" financial situation I worried that we wouldn't be able to match 80% of our pre-retirement income (the goofy common wisdom I accepted before studying the matter). So I logged every dollar we had spent for two years back using check books, detailed breakouts from credit cards (which we used for most payments), evaluation of cash withdrawals and spends. I then broke it down by categories and analyzed what we could expect after retirement. That immediately tossed 80% out the window. With a good perspective on what we would likely need to spend I was able to construct a budget that incorporated all that, added a significant increase in travel, and a significant fudge factor for things I might not have factored in. That made clear that we would be well under 4% (the then rule of thumb) so I felt we were go to go.

Since ER we have drifted back into spending what we want with almost no attention to details as you propose. I track and analyze the withdrawal ratios to be sure we are staying well under 4% but figure I won't need a detailed budget unless circumstances change. With $13M at 3% WR you could spend almost $400K a year. If that fits within your real spending pattern you are good to go. If not, sell one of the mansions and dump the Tesla.

 

[HadEnuff]

Congratulations on having $13 million. I don't think the amount matters unless your projected expenses are minuscule (<2%) in comparison. It's still helpful to know where your money is going now, and to estimate where it will go in the future. If you do have more than you need, it can be a very reassuring exercise. It can motivate you to consider taking up new activities that you hadn't considered, or embarking on a philanthropic mission.

I reviewed my expenses for two years prior to ER. I developed a retirement budget, starting with an Excel template that I found online, and I have customized it for my needs. I have done monthly analysis for the past three years (though I am a bit behind at present) and I find it very helpful.

This.

I would want to know. I have nowhere near 13M, but I also have no idea of what your spending habits are. It still comes down to a % of your investible assets, per year, and can your "nut" support that.

 

[jabbahop]

We were similar in that we didn't have a budget that we followed. Before retirement we did what you have done and went back and tracked the past two years.

I then built a spreadsheet that had the big items of spending and those items that were likely to change in the future. Things like mortgage/property taxes (as we will be selling and downsizing), private HS for one kid, taxes, medical when kids leave, travel, etc.

Obviously it is an estimate but it showed that overall we will be paying less (even with increased travel) than we currently do. I then factored in when we take SS, Medicare, etc. to figure out the data I needed to enter into Firecalc and other calculators.


Sent from my iPad using Tapatalk

 

[Aerides]

We have been tracking actuals the past 3-4 years as RE got closer. We don't break that down by category, but we wanted to just spend what we spend, figure an estimate for insurance/taxes that will change, etc.

We lbym, but we also don't scrimp to do that. Certain expenses will change now, maybe a bit more travel, but we accounted that in. "ok we're spending X, lets add Y as a a reasonable buffer and we're still 100% on firecalc? Go"

We'll continue to adjust and track as we go. Now that we are RE, for the first year I'll be tracking monthly to see if we are on target vs. yearly, but assuming we're not way off I figure that will be a short term thing.

 

[wmc1000]

I started my budgeting/tracking spreadsheets 4 years prior to retiring. As I went along I adjusted my future retirement budget based on actual info and projected new and periodic costs broken down into monthly amounts, (this escrows dollars for future needs). Then I added in changes in our retired years to account for Healthcare pre-medicare and post-medicare.

Of course I ran all the retirement calculators, Firecalc, I-orp, Fidelity RIP, etc to see when we would reach FIRE with a good size cushion!

 

[Dan32]

As someone said to me recently "You can't change who you are". No doubt you amassed $13M by working hard and living below your means. So I would create a budget that doesn't include travel, vacation rentals, etc. Then calculate a SWR (3 or 4%) of your investments and try to somewhat change who you are by spending at close to your means. Do this soon, because your health will deteriorate as you age. Congratulations!!

 

[JustCurious]

Part of me says given that we will retire with something like $13 million in invested assets, and a house that is fully paid for, and no debt, I should just not worry about it, and retire when I want to retire.

Um, is this a serious question? If you put all of your money in cash or money market funds and got zero return for the rest of your life, you could spend more than $400,000 per year for 30 years before you run out of money. Making a more reasonable and conservative estimate, you could expect to get a 3-4 percent return with a conservatively diversified and allocated portfolio, and you could safely withdraw more than half a million dollars each and every year, for the rest of your life, and not run out of money. Ever.

The average American household spends about $52,000 per year. You have the resources to spend 10 times that amount, every year, for the rest of your life and not worry about money. If those numbers cause you to worry, you do not have a money problem, you have an problem with your perspective on life. Seriously. Do you realize that you have more than 99.9% of the U.S. population, and more than 99.999% of the world's population? Adjust your perspective on life and money and come to terms with this and your "worry" about retirement will go away.

 

[Danmar]

It doesn't matter how much you have, it is always possible to overspend. Underspend too (depending on your spending philosophy). Also, comparing yourself to "the average" when you are in the top 1% or .1% is of little use. In fact, I could make the case that the more you have the more useful expense tracking and budgeting is.

I have tracked spending in detail for decades, have a rolling 3 year budget all while having a net worth well in excess of the OP. I would be lost without my financial "tools" I feel these are necessary to get the biggest "bang" for my "bucks". This is true at any spend level in my opinion. I found this particularly useful in the years just before and after retirement. I had so many decisions to make, ie when to retire, where to live, how much to spend,etc. It would have been more difficult to make these decisions without adequate data. (Currently 66 retired 10 years)