How do you handle "extra" income?

[USGrant1962]

When I retired last year I had a withdrawal plan of $X/month that I would transfer from Vanguard to my bank for expenses. No problem so far. Now, I have some consulting income and instead of just blobbing it in with the rest of my portfolio, or transferring to my bank to offset my monthly draw, I have in mind to pay for various specific things with it. So my back-of-the-envelope plan is to fund, in this order:

1. $2K, small upgrade to my home office (Aeron chair, new laptop, some computer upgrades).

2. $XK, 1st quarter estimated taxes

3. $5K, we bought a new car and wrote the down payment out of my Vanguard MM, I'll "refund" that to my portfolio

4. $7,900, HSA contribution

5. $20K, annual iBond purchase

6. $XXK, renovations to the summer house

7. $6,500, Roth IRA

8. Q2, Q3, Q4 estimated taxes when due.

These were generally already in my FIRE budget (except additional IRA contributions) so this is all just mental accounting.

But, I find that thinking this way makes my paid consulting gig even more fun. Being a megacorp lifer and LBYM, I've never really had to worry earning X to pay for Y. I don't really now, but find it kind of rewarding to get a consulting check and say to myself "this pays for my laptop and Aeron chair".

For folks that are FIRE, what are your strategies for "extra" income? Do you chuck it in your portfolio, blow the dough, offset your planned spending, or something else?

 

[mystang52]

In general, we spend "found" money on fun or frivolous things. Heck, since we live with a budget and already have built-in cushions, I like to enjoy those once in a while "bonuses." Besides, if I let that money sit idle, no doubt very quickly something will break down in my house or cars. Gotta spend it quickly!

 

[OldShooter]

This is maybe a slightly extreme example of what Richard Thaler calls "mental accounting." (https://en.wikipedia.org/wiki/Mental_accounting) We all do it, but I think it's very useful to recognize it for what it is. There is no "extra" income. There is only income.

 

[Human]

I do the following with my part-time consulting income (in order, but dependent on earnings which vary greatly from year to year):

1. 100% to 401k contribution
2. Salary and bonus in an amount to maximize profit sharing
3. Use above salary to fund IRA and HSA
4. Feed my tech toy needs under the company
5. Any extra goes to general fun (usually travel)

 

[Meadbh]

I’m in the “money is fungible” camp. I would just add it to cash and allocate it as I usually do.

 

[brett]

Same here. Income is income. We respect it all.

Now, a big hit on the lottery may be a different kettle of fish!

 

[youbet]

Now, I have some consulting income and instead of just blobbing it in with the rest of my portfolio, or transferring to my bank to offset my monthly draw, I have in mind to pay for various specific things with it.

This is all just meaningless mental manipulations. Your income is your income. None of it is "extra."

Go to FireCalc and add the incremental income you expect for the next few years. See what difference it makes over the long run. Act accordingly. Labeling and re-labeling various spend buckets makes no difference, except in your mind. It's total income vs total spend that counts.

Just be sure to give some thought to what you're spending resources on to be sure your maximizing life's pleasures! That's what it's all about.

 

[USGrant1962]

This is maybe a slightly extreme example of what Richard Thaler calls "mental accounting."

I said that.

There is no "extra" income. There is only income.

In the context of FIRE extra income is that above what you planned or expected in whatever model you used to decide you were FI and could RE. In my case, I only have my portfolio and SS in FIRECalc and other retirement models (no Other Income/Spending). This even applies to excess portfolio returns and leads to all kinds of discussions on the retirement year paradox, resetting withdrawal rates, etc.

Are you suggesting that winning the lottery is meaningless as it is "only income"? Money is fungible, but income in excess of planned is extra in the context of FIRE. You can really only do two things with it, spend in excess of your spending plan, or keep it in which case it is a contribution to your portfolio.

As I said, in my case most of the items I listed were already in my spend plan so fungibility says it is going into my portfolio.

 

[youbet]

As I said, in my case most of the items I listed were already in my spend plan so fungibility says it is going into my portfolio.

I think you've answered your own question. Slice and dice your spending into whatever buckets you like and that make you feel comfortable. But, in the end, your spending is your spending and sub-categories identified with labels make no difference in the calculations.

Shouldn't your real concern be figuring out how to spend some of this incremental windfall so that it increases your enjoyment of each day of your life?

 

[Bamaman]

When I retired, I just went part time. My new part time job is doing something with the vast amount of paper that comes in the mail.

Go to the doctor, and it generates a thick envelope telling us how much Medicare co-pays the doctor is owed. Heaven help you if there is a hospital stay. Now we get brokerage statements monthly from many different places. Bank statements, utility, cable tv and internet statements on 2 houses. Those with a high FICO score get massive credit card offers. And when you hit 65, here comes bombardments for SS supplements. In September, it is healthcare offers.

I shred, shred, shred and still have a tall waste can weighing 20 pounds of solid paper to haul out monthly.

I just long for the good days when I seldom got mail and my days were not spent managing papers I have no desire to see. At least we have online bill paying and don't have to spend time reallocating our assets to creditors.

 

[RunningBum]

I'm generally in the "money is money" camp, but I think I get the idea here. If your plan is set, but you decide to do something (like the consulting gig) that brings in money, it's helpful to see what kind of extras it lets you have. That way you can decide whether it's worth it to keep the gig or not.

I didn't spell it out like this, but when I was in OMY mode because I thought in general terms how this would allow me more luxuries, like nicer trips, etc. Mostly it was peace of mind that I would have more buffer in case things went bad. I was working part-time, remotely, flex hours, and not too hard, so it wasn't something I felt I had to escape ASAP.

Now that I'm RE, I see virtually no chance of extra income coming in. The market can certainly do better some years, but I don't count that as extra because it may go away the next year.

As the OP points out in post #8, most of this is going into the portfolio or is expenses that would mostly happen anyway (HSA, Roth IRA, estimated taxes) so I'm not seeing a lot of extras here, though it does enable them later in life. If nothing else it provides a buffer.

 

[scrabbler1]

The only time I receive what I would describe as "extra" income is when I get cap gain distributions in my mutual funds. I never count on them from year to year, sometimes I get zero or a very low amount, other times I get a large amount.


Because of the erratic nature of these distributions (as opposed to the steadier and more reliable dividends), I always reinvest them. However, I still have to pay the income taxes on these distributions, and those taxes come out of my general budget, usually eating into the surplus or cushion I build into my budget. In this odd way, cap gain distributions actually "cost" me because of the tax effect on my budget. The huge cap gain distribution I got in late December last year I am still feeling the effects on my budget, with my April tax bill due in 2 weeks following the added estimated taxes I paid in late December and early January.

 

[SecondCor521]

I'm in the fungible camp and pretty much boil things down to expenses, stash size, and years left.

But regarding post #8, I have a similar situation. I RE'd assuming a SWR from my portfolio to be conservative. But then I realized I get income from places that are not my portfolio: cash gifts, credit card offers, tax refunds (I have a negative effective rate due to low AGI), etc. Individually they are small but they add up to about a 1.3% of my stash.

A while ago I realized I only had a few choices as to what to do with it: spend it on myself, give it away, or save it. So far mostly I've saved it, but that's just me. I'm trying to figure out how to spend more, but old habits (including worrying about running out of money) die hard.

 

[joeea]

When I retired last year...

But, I find that thinking this way makes my paid consulting gig even more fun.

So you are retired, but happy to be working.

For folks that are FIRE, what are your strategies for "extra" income? Do you chuck it in your portfolio, blow the dough, offset your planned spending, or something else?

If I felt like I needed extra income I wouldn't have retired.

 

[bingybear]

So you are retired, but happy to be working.



If I felt like I needed extra income I wouldn't have retired.

+1

Get rid of the budget, then their are no issues.

 

[W2R]

For folks that are FIRE, what are your strategies for "extra" income? Do you chuck it in your portfolio, blow the dough, offset your planned spending, or something else?

I don't know, and I will have to think this through. In June, I am getting a $500+ per month raise in SS because I will be age 70 and moving from divorced spousal SS to SS based on my own employment record. Since I never really counted on SS in the first place, to me it is "extra" income.

I plan to "blow the dough" as much as I can, without wasting it too much. Whatever is left over will go into my portfolio at the end of the year. That will probably be all of it because my retirement is a little over-funded already. But if the market crashes again like 2008-2009, I'll be less stressed than otherwise, I would imagine.

 

[Jerry1]

Generally I encourage people to send their extra income to Jerry1. PM me for my routing number.

 

[NW-Bound]

...
These were generally already in my FIRE budget (except additional IRA contributions) so this is all just mental accounting.

But, I find that thinking this way makes my paid consulting gig even more fun. Being a megacorp lifer and LBYM, I've never really had to worry earning X to pay for Y. I don't really now, but find it kind of rewarding to get a consulting check and say to myself "this pays for my laptop and Aeron chair".

For folks that are FIRE, what are your strategies for "extra" income? Do you chuck it in your portfolio, blow the dough, offset your planned spending, or something else?

I have been generating some significant cash by writing covered call options on the shares I already own. I call this "extra income", because that cash is something that I would not have if I did not do the options.

However, that is false, because while covered call options are safe, they have the risk of limiting my gains, and causing me to trail the market if and when things are more rosy than I expect. In the end, I just throw all that in my investment gain calculations. I did not blow it on anything.

In your case, I think it is really "extra income", because it does not entail any risk to your existing stash. If you did not count on this for your ER budgeting, then it is really extra. If you need it to survive, then it is not.

So, what's the difference? I think it means you can splurge, or "blow it" to borrow the terminology on this forum, and do not have to revise your financial plan to justify it.

 

[FireFool]

I've done my best to avoid earning extra income. When money > need than time > money. Enjoying life and not wasting time on w*rk.

 

[CRLLS]

unexpected or unplanned income is what I call it. I am n the "money is fungible" camp. On the other hand, everything is planned for and this is above and beyond that plan. I would probably do a blend. Splurge on something that was not planned for with some percent (50%?) of the money. Something that I might be casually interested in and would like to investigate further. Then I'd put the rest in with other investments.

 

[traineeinvestor]

My relatively trivial part-time consulting income is treated the same as any other income. The only difference is, when I budget, I assume that my consulting income for the year will be zero - which will be the right number when I no longer enjoy the consulting work.

 

[Sunset]

I do the following with my part-time consulting income (in order, but dependent on earnings which vary greatly from year to year):

1. 100% to 401k contribution
2. Salary and bonus in an amount to maximize profit sharing
3. Use above salary to fund IRA and HSA
4. Feed my tech toy needs under the company
5. Any extra goes to general fun (usually travel)

+++++++++++++++ EXACTLY,

Only specification I would make is: 100% to 401k contribution (both 401K Roth and 401K IRA).

Currently because I cut back a lot, I'm just funding the 401k Roth, and external Roth IRA

 

[RunningBum]

Back to post 1, a question about your order:

So my back-of-the-envelope plan is to fund, in this order:

1. $2K, small upgrade to my home office (Aeron chair, new laptop, some computer upgrades).

2. $XK, 1st quarter estimated taxes

3. $5K, we bought a new car and wrote the down payment out of my Vanguard MM, I'll "refund" that to my portfolio

4. $7,900, HSA contribution

5. $20K, annual iBond purchase

6. $XXK, renovations to the summer house

7. $6,500, Roth IRA

8. Q2, Q3, Q4 estimated taxes when due.

These were generally already in my FIRE budget (except additional IRA contributions) so this is all just mental accounting.

Is this an actual order, or a mental one? I would fund an HSA and Roth first and foremost. If you don't have enough left over for "fun" money you could take it out of other accounts. Take #3 and #4 for best example. It doesn't make sense to pay your portfolio $5K back and run out of money before you make your Roth contribution. Better to make your Roth contribution, and if you have to, skip paying your portfolio back for the car. This way you've got more money in the most tax advantaged account.

You're probably doing it all, but if I was working, the very first thing I'd do is max out a Roth IRA with the earnings, and make certain the HSA was funded too. If that wiped out the extra income, and I wanted to have some fun with the money, I'd definitely allow myself to take a similar amount of our one of my other accounts.

 

[USGrant1962]

Back to post 1, a question about your order:

Is this an actual order, or a mental one? I would fund an HSA and Roth first and foremost. If you don't have enough left over for "fun" money you could take it out of other accounts. Take #3 and #4 for best example. It doesn't make sense to pay your portfolio $5K back and run out of money before you make your Roth contribution. Better to make your Roth contribution, and if you have to, skip paying your portfolio back for the car. This way you've got more money in the most tax advantaged account.

You're probably doing it all, but if I was working, the very first thing I'd do is max out a Roth IRA with the earnings, and make certain the HSA was funded too. If that wiped out the extra income, and I wanted to have some fun with the money, I'd definitely allow myself to take a similar amount of our one of my other accounts.

It is approximately chronological in order, really just a checklist I jotted down on a post-it note. I'm waiting on the Roth to make sure that planned income plus consulting plus some cap gains I sold in January to fund much of this year's spend don't push me to phase-out territory (I know, first world problem). I also have more thinking to do on solo-401K and other self-employment perks, as I've said in other threads I'm over-deferred and would prefer to have more taxable funds for tax management strategies.

 

[sengsational]

This post won't answer "which of the 8" to fund, but that's not something I can contribute to very well.

For me, "extra income" would affect my cash flow calculation, but would not affect my actions (fungability and all of that).

Many of the things in the OP list would fall into the category of "outside the monthly burn rate" in my cash flow spreadsheet. Other things include once annual payments, like real estate taxes and auto and homeowners insurance. In other words, the "lumpy" stuff gets separate, tagged entries. The rest goes into the burn rate, which is uniformly subtracted every month.

The result is a decreasing available spending balance, which I restore in December. That restoration is designed to supply the lumpy and uniform expenses in the following year.