Managing Sinking Funds

[FLSUnFIRE]

As I approach my FIRE date (still deciding which ramp to take and hoping for PT at my current job and I may go OM1/2Y quitting at the end of the year instead of summer to bolster my cash position), I find myself paying a lot of attention to my budget and getting very disciplined in my spending.


For the first time I made a budget this year (as opposed to tracking expenses as I have since 1998), and have put in a SF line for auto and home maintenance (HSA covers medical). I'm trying to figure out how I'd like to manage it from a cash flow perspective (where to put the real money). Basically, I want to give myself my allowance and part of the months expenses is paying into the sinking fund. That could either be leaving the cash in place (MMF) and not distributing it to my checking account or paying it into another account specifically set up as a sinking fund.


For those that use sinking funds, how do you manage/track it? Do you prefer a separate account (perhaps a HY Savings account somewhere) or just track a portion of the balance within your cash account?


FLsunFIRE

 

[Dtail]

I keep a separate sinking fund in an online HY account.
I then track it and break it down into 2 categories in an excel sheet.
One for short term lumpy expenses like car maintenance, accruals for property taxes, HOA dues, etc.
The other for more of emergency type expenses like a potential car. This is funded monthly from unused withdrawal funds and sometimes from unexpected sources (small inheritance).
Ongoing budgeting and comparing to actual spending is a big part of our continued retirement analysis.

 

[FLSUnFIRE]

I keep a separate sinking fund in an online HY account.
I then track it and break it down into 2 categories in an excel sheet.
One for short term lumpy expenses like car maintenance, accruals for property taxes, HOA dues, etc.
The other for more of emergency type expenses like a potential car. This is funded monthly from unused withdrawal funds and sometimes from unexpected sources (small inheritance).
Ongoing budgeting and comparing to actual spending is a big part of our continued retirement analysis.

Do you withdraw each time or re-balance periodically/as needed? Given my natural tendencies, I think I will pay most of my lower cost lumpy stuff (<$250) from my "allowance" and end up with a huge SF as I'd want to keep my cash in the highest yielding account ! I currently pay all my medical "out of pocket" and let my HSA ride unless it's something really significant.


I'm debating if I even need a SF for my car... it's new and under warranty and arguably a luxury as I can walk to almost everything other than w*rk (and I won't be doing that much longer)! I'll likely just decide to get a new vehicle if and when I want to and the portfolio will support the one time reduction.

 

[Dtail]

For the lower cost lumpy stuff, I fund it from my monthly SWR and thus effectively smooth out the "lumps". I withdraw from the account when the actual lumpy expense occurs.
Medical expense for example I don't consider lumpy, so if there is a larger one time expense in this category, then my monthly budget takes a hit, but only really analyze the budget vs. actual on a YTD basis.

 

[SumDay]

I make two withdrawals a year for our "annual spend" and deposit it each time in our Ally account. I have an automatic withdrawal set up to move our "monthly paycheck" from Ally to our local bank checking account.

I got my inspiration for this from this folks on this ER board, but also from a blog I follow:
How to Build a Retirement Paycheck

How to Manage the Bucket Strategy

I haven't had to pull from our cash bucket at Vanguard (yet) but may have to for the withdrawal I plan to make at the end of this year. Time will tell. Hope this helps.

 

[atmsmshr]

Just retired last summer. I plan on always keeping 3-9 months of cash expenses on hand, split between the credit union and Fidelity accounts.

Stocks were up a few weeks ago, so I funded the cash projects to December from LTCG sales.

Who knows where stocks will be in 6 months? Then I may have to sell some bonds to fill the cash bucket instead of stocks.

Although cash is a portfolio drag, I have not worried about the recent market volatility.

Semper Gumby

 

[rk911]

As I approach my FIRE date (still deciding which ramp to take and hoping for PT at my current job and I may go OM1/2Y quitting at the end of the year instead of summer to bolster my cash position), I find myself paying a lot of attention to my budget and getting very disciplined in my spending.


For the first time I made a budget this year (as opposed to tracking expenses as I have since 1998), and have put in a SF line for auto and home maintenance (HSA covers medical). I'm trying to figure out how I'd like to manage it from a cash flow perspective (where to put the real money). Basically, I want to give myself my allowance and part of the months expenses is paying into the sinking fund. That could either be leaving the cash in place (MMF) and not distributing it to my checking account or paying it into another account specifically set up as a sinking fund.


For those that use sinking funds, how do you manage/track it? Do you prefer a separate account (perhaps a HY Savings account somewhere) or just track a portion of the balance within your cash account?


FLsunFIRE

we have about a dozen sinking funds for all sorts of things from out-of-pocket medical expenses, household maintenance, property tax, new car purchase to entertainment and pet expenses. i use Quicken to track everything. all of the long-term money sits in a high-yield on-line bank savings account and occasionally laddered CDs. the rest...the short-term money is in a traditional bank's MM account.

 

[Finance Dave]

I won't go into our strategy for pulling money out...it's a bit messy for the next few years. But, we basically use a 5 year CD ladder within our TIRA for much of it...so there is $80k or so coming due every 6 months. We don't spend all of that, so we keep in "cash" what we will need and transfer that to our checking account as a TIRA withdrawal, and the rest goes back to buy more CDs.

Fortunately bought the last "round" of CDs before COVID hit...rates are around 2.75%.

 

[FLSUnFIRE]

Thanks for the responses. For now I'm tracking the budget lines (but not moving cash) so I can decide where to put the cash for my reserves and how to account for them. I'm still thinking about how I want to track these. When I was working (ok, "while I am," but mentally I'm gone and have been living off my allowance with all pay deposited into my investment account) my savings rate was high enough that any big expenses could be covered by reducing my investments and paying out of current income.



I may just earmark some of my MMF for a while and when the balance gets high enough, find a high yield account I can deposit into on a monthly basis.


FLsunFIRE

 

[lem1955]

I began retired years by moving one year's expenses from Vanguard Funds to Ally and taking monthly withdrawals from there. But a few years in, I've decided to sell Vanguard securities and keep one year's expenses in Vanguard Prime MM inside my tIRA and take the monthly withdrawals from there. Then I can decide at year end if there are funds left over to reinvest, convert to ROTH, or blow that dough. The first option doesn't have tax consequences since I haven't moved it out of tIRA. Plus, it's simpler than having another bank account in the mix. I no longer have Ally accounts.

 

[Rianne]

We're hunkering down and waiting it out. Re investing dividends and capital gains, both in taxed and pretax accounts, using cash, ready to cash out I bonds and EE bonds. This will hold us until pension kicks in (hopefully, pension kicks in :-/). Watching our expenses week by week but a few medical issues have come up lately. I think we're ok due to sufficient HSA savings.

Everyone's in the same boat, predictions are out the window. I don't listen to a single prediction.

 

[audreyh1]

As I approach my FIRE date (still deciding which ramp to take and hoping for PT at my current job and I may go OM1/2Y quitting at the end of the year instead of summer to bolster my cash position), I find myself paying a lot of attention to my budget and getting very disciplined in my spending.


For the first time I made a budget this year (as opposed to tracking expenses as I have since 1998), and have put in a SF line for auto and home maintenance (HSA covers medical). I'm trying to figure out how I'd like to manage it from a cash flow perspective (where to put the real money). Basically, I want to give myself my allowance and part of the months expenses is paying into the sinking fund. That could either be leaving the cash in place (MMF) and not distributing it to my checking account or paying it into another account specifically set up as a sinking fund.


For those that use sinking funds, how do you manage/track it? Do you prefer a separate account (perhaps a HY Savings account somewhere) or just track a portion of the balance within your cash account?


FLsunFIRE

I have funds set aside for one year’s expenses including taxes to be paid during the year. This mostly in high yield savings with monthly transfers to checking to cover bills.

Beyond that I tend to have cash accumulate as we usually underspend our annual withdrawal. This we can tap into for anything at any time including vehicle purchases. Depending on how much, it may be stashed in several vehicles. I often make use of short-term no penalty CDs as those are very liquid. I also often buy CDs 12 to 18 months when offered as specials. Some excess is usually in a high yield savings account.

So I just track what is earmarked for normal spending budget and expected taxes, and the rest of the short-term funds is fair game for large purchases or gifts.

 

[FLSUnFIRE]

For the time being, I have started tracking a household and auto sinking fund on my balance sheet as a portion of my MMF. I am not setting up a separate account (I may at some point in the future to seek slightly higher returns in a high yield savings account or CDs with staggered maturities as the balance becomes more significant).


I've been spoiled by LBMM for so long that I almost always was able to fund unexpected/infrequent expenses out of my regular cashflow or short term cash balances that hadn't been swept into investments so "saving" for these expenses is not ingrained in my habits yet.

 

[socca]

I am not setting up a separate account...

My budget contains an expense item for "allocation to reserves" but I don't actually have a separate pot of money labelled "reserves". There is no need for this since by definition reserve money is used only for non-periodic expenses, and it's not a big deal for me to raise cash from investments when necessary. I've actually never had to raise cash by liquidating an investment, but there's a first time for everything.

 

[pb4uski]

I don't do no stinkin' sinking funds.

Seriously, never made sense to me... sort of like playing with your zipper.

I have a monthly "paycheck" that is an automated withdrawal from one of our retirement investment accounts to the checking account that we use to pay our bills. That paycheck along with my small pension are sufficient for most months, but in Nov we have property taxes and insurances due so there is a lump and I make a special withdrawal for those.

 

[walkinwood]

My portfolio is all invested following a single asset allocation. However, in my mind (and spreadsheet), I divide it as follows

Portfolio = Withdrawal portfolio + Emergency Funds.

I calculate the annual budget as a percentage (~4%) of the Withdrawal portfolio. The Emergency funds is large enough to fund the purchase of a car or a big repair or a large medical bill (our out-of-pocket max is around $13,000) or even a big strategic tax bill.

I find it simple to manage & very flexible. We do however need less than our planned ~4% to live on, so by carving out funds before calculating our annual budget, we're not skimping on our lifestyle.

We do not have a detailed budget or even a monthly budget. Rather, we keep track of past 12 month spending (Thank you Kaderlis) and try to keep it below the annual budget amount. Our spending, like most people's, is lumpy.

 

[FLSUnFIRE]

I don't do no stinkin' sinking funds.

Seriously, never made sense to me... sort of like playing with your zipper.

I have a monthly "paycheck" that is an automated withdrawal from one of our retirement investment accounts to the checking account that we use to pay our bills. That paycheck along with my small pension are sufficient for most months, but in Nov we have property taxes and insurances due so there is a lump and I make a special withdrawal for those.

I always felt the same. Money is fungible (except for tax shenanigans) and it does seem silly to me even as I play with the idea. For the last year I've been living off my "allowance" (pay going directly into investment account vice checking) without any sinking funds -as I always just diverted cashflow in the past/transferred as needed for the lumps. Once I don't have the earned income stream (or more likely a trickle of earnings being paid for having fun) and I am and intend to keep near 100% invested, I view the funding of the sinking fund as a bit of forced asset allocation to build up a bit more cash (driven more by known unknown expenses than AA criteria). I guess another way to look at it is that I am DCAing withdrawals to build cash for the lumps so I can maintain stability in my withdrawals from the nest egg.

 

[Montecfo]

When I was in early accumulation mode, I used to allocate money in my emergency cash to deferred expenses. Then I out money into it every month.

So maybe I projected a need for auto repairs, auto re replacement, auto insurance, vacation, etc. I would fund those over 12 months using a flat monthly transfer that I recomputed quarterly. I tracked it on a spreadsheet. Using this tool I made sure I was not spending the money I would need to buy a new car, for example.

Once I achieved my emergency cash goal, I was able to handle these expenses more informally, and no longer felt the need to track a sinking fund.

In retirement, by expected annual expenses all come from the same place anyway, so no sinking fund needed. I simply pay myself twice a month from a money market account at an amount reflecting expected annual expenses.

 

[GreatLaker]

I keep a sinking fund / savings fund for large irregular expenses that may have been easy to fund when I was earning, but in portfolio spending mode could be difficult. Specifically it is for vehicle replacement and major household expenses including new roof, driveway, HVAC, and major appliances. I estimated a lifespan and cost for those items and annualized it to an amount I must save each year. I keep that amount in my brokerage account in a low-cost balanced mutual fund, accumulating annually and drawing out of it as those expenditures are needed.

I would not use that fund for home renovations or upgrades that are totally discretionary. The reason I keep it in a separate mutual fund is so I don't need another account, yet I can always see how much I have, including investment returns.

At the start of each year I liquidate enough investments to cover my expected spending for the year. I put my annual allocation into the sinking fund in that mutual fund, and I move the rest of my planned spending into a HISA. It takes away the stress of having enough money set aside for big expenses that would really stretch a retirement budget.