Capital expenditures vs. safe WR

[arch57]

How do folks track one-time withdrawals to support capital expenses like a major home remodeling project vs. their planned safe withdrawal rates?
I’ve been retired for 3.5 years and our WR seemed high at 8-9% until I backed out large chunks for a home remodel one year and a new car this year. Want to see how others account for the lump sum expenses that occasionally come up.

 

[pb4uski]

Withdrawals are withdrawals... whether spent on a new car or on hookers it doesn't really matter... it is money from the portfolio that is gone.

 

[Bamaman]

I would borrow money before getting too much into my planned withdrawal rates. No one knows how long they have on this earth, but being conservative is better than coming up short when someone has another 10 years to live.

I could make it until 75 years old before any IRA money is needed. But those RMD's hit at age 70 1/2, and I will be reinvesting the money since we don't plan on spending more than we currently are (spending.)

 

[razztazz]

I kept a spare bag of money "off the books" because I knew these I'd have to call an audible someday and I didn't want the expense to upset my retirement math. Over the years I would direct excess funds to top off that account after a big pay-out.

IOW: My retirement funding was based on: No matter how much money you need, you'll need more.

 

[Katsmeow]

When DH retired and I semi-retired 8 years ago I knew that we were going to have some big withdrawals (above 4%) for several years. Some were because we had kids in college and others were house related. I ran Firecalc using manual spending (this required being a supporter) so was able to project spending by year. Without that, it can be modeled in Firecalc as one time expenditures or by reserving some money and not including in the portfolio or as spending.

 

[USGrant1962]

I have two approaches. My basic budget include allowance for "car depreciation" which allows for a replacement every X years, and for major home repairs. So for regular living expenses I am actually withdrawing less than my total "budget."

For planned expenses I used FIRECalc's "Portfolio Changes" tab to cover the final couple of years of tuition, two new cars (one of which is a new used car), and renovation of the summer place we bought from the in-laws before I retired.

 

[W2R]

How do folks track one-time withdrawals to support capital expenses like a major home remodeling project vs. their planned safe withdrawal rates?
I’ve been retired for 3.5 years and our WR seemed high at 8-9% until I backed out large chunks for a home remodel one year and a new car this year. Want to see how others account for the lump sum expenses that occasionally come up.

In 2015 I bought my Dream Home in cash. My old house was paid off so that helped, but still my Dream Home was more expensive than my old house. Also there were other costs involved. For example, there were costs for moving, closing, and a major re-landscaping project for the yard of my Dream Home. All net costs related to buying and moving into my Dream Home added up to $92,603. There is no way I could get this just from petty cash lying around! I am not that kind of high roller...

What I did was treat this as a permanent reduction in my portfolio nest egg.

From 2010-2015 I had spent an average of 2.1%. This is how I knew I wasn't fooling myself, and that I could really afford to forever reduce the amount on which my WR was computed.

Also in 2013 I got divorced spousal SS which meant I was spending less investment money than I had been previously, more like 1.7%. Anyway it all worked out.

Another way to think of this is to imagine that I withdrew 3.5% every year and just didn't spend all of it, and put it in savings. Then I would have had more than enough in savings to pay for it. Deciding whether to think of it this way, or as a permanent portfolio reduction, is just mental gymnastics IMO. I prefer the latter because I actually put the excess back into investments instead of into savings.

 

[Dtail]

I kept a spare bag of money "off the books" because I knew these I'd have to call an audible someday and I didn't want the expense to upset my retirement math. Over the years I would direct excess funds to top off that account after a big pay-out.

IOW: My retirement funding was based on: No matter how much money you need, you'll need more.

+1
Even though money is fungible, I am currently building up a reserve account off the books and when I will need it for a car for example, I will not technically include it in my WR% for that year. The monies which are funding the emergency/large expenditure account IS included in my WR% of those years. I know, I know......

 

[footenote]

Withdrawals are withdrawals... whether spent on a new car or on hookers it doesn't really matter... it is money from the portfolio that is gone.

+1

Another way of asking the OP question is:

"Do I count my house equity / vehicle equity in my retirement calculator 'Portfolio' total?"

Answer you generally get is "No."

(I still remember how upset I was in my thirties to realize that a home is a wasting asset. )

 

[Another Reader]

How do folks track one-time withdrawals to support capital expenses like a major home remodeling project vs. their planned safe withdrawal rates?
I’ve been retired for 3.5 years and our WR seemed high at 8-9% until I backed out large chunks for a home remodel one year and a new car this year. Want to see how others account for the lump sum expenses that occasionally come up.

That extra 4 or 5 percent is not insignificant. I think you front loaded your expenses without any planning and you have permanently reduced your portfolio and your income as a result. The fact you are discovering this retrospectively is concerning. Most people plan for these expenses and set aside funds outside their assets used for retirement income projection or borrow the money and include the payments in their WR.

If you don't include the "lump sum expenses that occasionally come up" in your planning, you are not accurately projecting your WR. You also can't expect long term success if you consume too much of your retirement assets early in retirement, especially now with a SORR event possibly looming.

 

[FIREd]

I “save” part of my withdrawals to pay for large capital expenditures like home maintenance and car replacement. In reality, what I “save” simply stays in my portfolio and continues to compound.

I consider “home remodeling” purely a want and I would not withdraw extra money from my portfolio to fund such a project (I usually pay-as-I-go for it using the discretionary funds in my monthly budget).

 

[arch57]

That extra 4 or 5 percent is not insignificant. I think you front loaded your expenses without any planning and you have permanently reduced your portfolio and your income as a result. The fact you are discovering this retrospectively is concerning.

I've been planning for this since 2010 and have run many models, spreadsheets and Firecalc simulations (like another poster mentioned you can model lump-sum withdraws). Every scenario has 100% confidence up to age 95 so am not concerned about outliving our money. Was just asking how others treat the lump sums out of curiosity.

 

[Another Reader]

I've been planning for this since 2010 and have run many models, spreadsheets and Firecalc simulations (like another poster mentioned you can model lump-sum withdraws). Every scenario has 100% confidence up to age 95 so am not concerned about outliving our money. Was just asking how others treat the lump sums out of curiosity.

Sorry, that's not how it came across. Sounds like you have a solid plan, but still more aggressive in the early years than I would do. This is a conservative crowd here, and I'm on the more conservative edge.

Can't help with the lump sum question, as my only withdrawals are RMDs from an inherited IRA. No choice there.

 

[donheff]

My SWR is higher than my typical expenses. The excess is tracked in a psuedo-account and is available for any large purchases that would exceed my SWR in any given year. My actual expenses are low enough that I have not tapped this "mad money" fund.

 

[RunningBum]

In the budget I created pre-retirement, I have an annual expense bucket for car replacement.

In retirement, I don't track spending categories, but just track cash flow each month. This means I have a huge expense in the month I have bought a car, and I note what it is in the spreadsheet. I use VPW as a model but if I go somewhat over in a year I have such an expense I don't worry, as long as I'm under in other years.

If I were more worried about it I might create a side fund for such purposes that I pay into and track that fund rather than the actual purchase, but I just haven't bothered doing it. I could also lease the car or make payments so I'd have level payments, but I don't want to make such decisions based on easier personal accounting.

 

[audreyh1]

I have plenty extra accumulated outside of the portfolio I withdraw from annually, and use that for the occasional large lump sum purchases. If I ever spent that all down, I would not increase my withdrawal rate, but would rather “save up” from my annual income to cover large lump sums.

 

[Golden sunsets]

I think the question is, how often going forward will there be "lumpy expenditures", that push your SWR to the 8 or 9%, that you have experienced twice out of the 3.5 years that you have been retired? If those "lumpy" years will not occur again, or only occur rarely throughout your retirement, then you're good. If they occur with more frequency, then it would appear that your modeling was off.


Sent from my iPad using Early Retirement Forum

 

[Aerides]

How do folks track one-time withdrawals to support capital expenses like a major home remodeling project vs. their planned safe withdrawal rates?
I’ve been retired for 3.5 years and our WR seemed high at 8-9% until I backed out large chunks for a home remodel one year and a new car this year. Want to see how others account for the lump sum expenses that occasionally come up.

We don't really track the big expense other than go "oh yup bought the car". As long as the rest is within the expected range, and you're not really having these every year from now on.

(Of course, there are always unexpected things, so if next year you need a new roof, or the year after that you pay for a kid's wedding, then that's not an exception, it's your new WD, and to a certain extent, most of us have a buffer included in our budget to handle what's typical for us...)

Assuming these are really just back to back one-times, there's probably no issue, unless these two high years skimmed enough off the nut that you can't continue with your remaining balance and your typical SWD, which does not sound like the case for the OP.

 

[tb001]

In this case I would, like others have said, treat it as a hit to the portfolio. We’ve done this in our model with a few big expenses we know are going to be coming.

Not yet retired, but we’re accruing for these expenses annually. We will likely leave the $ invested. I feel like this is a bit of extra conservatism/buffer as most of these are discretionary. With the exception of a new hvac or something like that, we’re not going to be spending on this sort of stuff, especially in the early years, if the market is down significantly. About 1/6th of our budget is set aside for this type of expense, so minimizing this spend, especially in the early years, can move the needle.

 

[REWahoo]

Withdrawals are withdrawals... whether spent on a new car or on hookers it doesn't really matter... it is money from the portfolio that is gone.

Exactly.

Any funds withdrawn - and spent - are reductions to the portfolio. Over the past couple of years RMDs have required us to withdraw slightly more funds from the portfolio than we've spent, and those unspent (except for taxes) funds are still in our portfolio, albeit now in a taxable account.

 

[Moemg]

I write down my 4% budget amount on Jan.1 st .Any money left from last years budget goes into a slush fund for big purchases .

 

[Floridatennisplayer]

Same here. It’s all just money. It’s just a withdrawal. Tracking? I never got that. If I need something I just buy it. What difference does it make?

 

[jollystomper]

When I built our retirement budget I tried to factor those things in. I looked at our expenditures over the last 15 years, which included some major home expenses (basement remodel, new roof, new driveway, cars, etc.), as the basis for our expenses forecast. Of course I can't fully predict the future, but it helps gives us some guidance as we spend in retirement.

In addition, I received some unexpected money after retirement that we decided not to invest for now, but to set aside for major expenses we choose.

So far (though it has only been six months) our SWR is only a quarter of what we forecast, even with some generous expenditures. Our hope is that, with some years spending less, and in those years of expenditures spending more, it will even out in the long run (however "long" ends up being at our age ).

 

[audreyh1]

I write down my 4% budget amount on Jan.1 st .Any money left from last years budget goes into a slush fund for big purchases .

Same here - any withdrawn funds unspent by the end of the year go to the slush fund which is available for large one time purchases or extra spending as desired

 

[karen1972]

Given you have already taken out the lump sum, then I personally would just re-run all my calculations based on the permanent lowering of your nest egg.
The bigger home may be a one-time event, but the car typically is a recurring expense.

For me, Capital is treated like a reserve budget and it rolls over year to year so you will have ups/downs, but if you plan it out it should smooth it out and when you see it all on paper its easier to plan for. I have done HOA reserve budgets before and it works the same way. Example: 2 cars staggered every 5 years to replace. Let's say you figure $10k+trade-in, so that would be $2k/yr needed for car replacement.

The two budgets together had to be less than my WR. If my capital budget ends up short then we "add" reserves over the next couple of years and then go to our other budget and start trimming (vacations/eating out, etc) to get us back in alignment. Since I was 43 when I retired, this to me was critical because nothing lasts long anymore, you use to get a water heater that lasts 20-25 years, now they tell you 10, maybe 15, so thats likely 3 water heaters in my lifetime, 2 hvacs, 2 A/Cs, 3 refrigerators, maybe 4 washer/dryers, at least 8 more cars,etc.