4% Rule (xx% "rule" or 25-30x expenses) Question

[razztazz]

When thinking about the 25x spend, do you include some annual placeholder for the lumpy expenses? [/B] They are lumpy in nature and you may not spend anything on one year, but have surprises or planned in other years. Thoughts?

I do have a category called "Other" or you can call it "Miscellaneous Expenses." Car repairs, clothes, the odd plumber call, new tires etc. All things within the "Swish & sway" of paying the bills.

More to, what I think is, your question: When I retired I kept several, ahem, tens-of-thousands of dollars "off the books", so to speak, not included in my actual retirement stash. This was to cover unexpected big expenses which could not have been accounted for in normal budgeting without altering the survivability math of the retirement finds. Sort of covering sequence-of-return risk from the other side. Sequence-of-expense risk...?

Over time as I have had to make some big drops from this money, I have just back filled it to top it off. This might not have been possible in a 1966 et al retirement environment but I didn't have to find out. (Whew!)

Some people call this a "cash drag." I call it "Sominex."

 

[disneysteve]

Another thing to think about:


If you subscribe to the 4% rule but you are able to retire with a 3.5 or 3% WR, you have a built in cushion for some of those lumpy things. You might just draw 4% that year.

 

[JJpop]

Our Social Security covers all our basic expenses. We have enough money saved to not worry about lumpy expenses so we don’t sweat it. No spreadsheets here, thank you.
We look ahead knowing there will be stuff like a new AC or painting the house.
Our assets are invested extremely conservatively so no worry about the stock market. This current inflation is not a problem and if it stayed this way for 10 years it is still not a problem.

 

[HMMY]

My expenses are very predictable, so when I planned my early retirement, I took that number and added $10k for buffer and saved 25x that sum. I retired at 28x. During Covid, I never spent the buffer nor did I spend all of my typical expenses and my portfolio grew, so I now have 40x expenses.

 

[eyenitnoy]

I don't want to get into the debate on the specific number 4% or 3% or 25x vs. 30x (that is for another thread).

I have a question how people think about their annual expenses, they can be broken down into fixed and variable, or recurring & non-recurring etc.

• For instance, utilities, property taxes, groceries, cell phone, insurance etc. are all "Fixed" or "Recurring" in nature. You could argue that you can cut out the cell phone or save a few $$ on groceries.
  
• Then there are things that are discretionary like travel, charitable giving, hobbies etc. I would classify these as variable and would likely include in "recurring".
  
• Then there are lumpy expenditures like, automobile purchase, hot tub, deferred maintenance on home (house painting, furnace, irrigation fix, fence repair).

When thinking about the 25x spend, do you include some annual placeholder for the lumpy expenses? They are lumpy in nature and you may not spend anything on one year, but have surprises or planned in other years.

My point is that it looking at 25x or 30x of regular expenditures is very different than also including ALL lumpy expenses and definitionally unpredictable. Maybe this is why some plan for 30x or 40x, depending on inclusion of these lumpy expenses as well?

Thoughts?

I amortize EVERYTHING that is even a little bit "lumpy." 12 years for refrigerator, 25 years for the roof, and so on and so forth. Each year I also make an inflation adjustment, so that the amount I am setting aside each year actually reflects the future purchase prices.

I think it is important to properly account and plan for these infrequent, but absolutely predictable, recurrent expenses.

If you miss any of these, it can really throw your spending and withdrawal projections off.

 

[Dd852]

I look at a three year rolling average of expenses which smooths out most lumpy things

 

[RobbieB]

I sorta know what I want (or need) to do next year and plan my January "hit" on the equities accordingly.

 

[rvindave]

Something to include in your retirement expenses: income tax on your investment sales. That's typically cap gains on your non-deferred accounts and regular income tax on your deferred accounts. I always knew it was a factor, but I should have built it into my spend plans. While I was in the working world, my tax expenses were sort of masked by withholdings; call it "out of sight, out of mind". It has caused me to "spend" about 10-15% more than I planned in my retirement budget.

 

[jebmke]

Something to include in your retirement expenses: income tax on your investment sales. That's typically cap gains on your non-deferred accounts and regular income tax on your deferred accounts. I always knew it was a factor, but I should have built it into my spend plans. While I was in the working world, my tax expenses were sort of masked by withholdings; call it "out of sight, out of mind". It has caused me to "spend" about 10-15% more than I planned in my retirement budget.

We are very tax efficient but income taxes are still the largest expense we have every year.

 

[ERD50]

I amortize EVERYTHING that is even a little bit "lumpy." 12 years for refrigerator, 25 years for the roof, and so on and so forth. Each year I also make an inflation adjustment, so that the amount I am setting aside each year actually reflects the future purchase prices.

I think it is important to properly account and plan for these infrequent, but absolutely predictable, recurrent expenses.

If you miss any of these, it can really throw your spending and withdrawal projections off.

I agree with this. Years ago, I made a simple spreadsheet to make this easy. I don't worry about inflation, just look at the overall running average in today's dollars (the same as FIRECalc does).

I did something like this (easier to do than to explain!): Put 30~40 years out in the columns from left-to-right. List the big 'lumpy' items in rows top-to-bottom. Any big expense that I expect to hit within the next 10 years, I just tallied and took that right off my portfolio, considering it as already spent. Then I enter the cost in the year(s) I expect the expense. Then amortize that across the years between these.

In a short time, you get a pretty good handle on it. I don't get too hung up on details, costs and times will vary, but if you are reasonable the estimate errors +/- should average out pretty well.

Off the top of my head, cars, roof, HVAC, appliances, landscaping, driveway, remodels, furniture? Smaller stuff should be covered by looking at your average spending over the past few years, if those are fairly typical - maybe some adds/deletes required for those 'lumpy' items.

I look at a three year rolling average of expenses which smooths out most lumpy things

Might work for some, but I've had three year periods that were vastly different from each other. In one 3-year period, I replaced a car, roof, HVAC, house painted, some siding replaced, driveway (long, expensive replacement), had some fairly major landscaping done (tree removals, regrading to move water away from the house, reseed near the driveway replacement, etc), some fairly expensive dental work for me and DW, etc. And other 3-year periods with nothing major at all.

-ERD50

 

[ERD50]

... When thinking about the 25x spend, do you include some annual placeholder for the lumpy expenses? ...

Well, is anyone else going to pay them for you? Unlikely, so yes, you need to account for them!

... My point is that it looking at 25x or 30x of regular expenditures is very different than also including ALL lumpy expenses and definitionally unpredictable. Maybe this is why some plan for 30x or 40x, depending on inclusion of these lumpy expenses as well?

Thoughts?

No, I would not just bump it up some arbitrary amount to account for 'lumpy' expenses. These sorts of expenses can vary a lot from person to person. It's your budget and your portfolio and your life, not someone else's.

I saw below, Gumby has to allow $18,000 for house painting every 9 years. Other people would have zero expense for this. Like most things, it is not 'one size fits all'.

-ERD50

 

[eyenitnoy]

I agree with this. Years ago, I made a simple spreadsheet to make this easy. I don't worry about inflation, just look at the overall running average in today's dollars (the same as FIRECalc does).

I did something like this (easier to do than to explain!): Put 30~40 years out in the columns from left-to-right. List the big 'lumpy' items in rows top-to-bottom. Any big expense that I expect to hit within the next 10 years, I just tallied and took that right off my portfolio, considering it as already spent. Then I enter the cost in the year(s) I expect the expense. Then amortize that across the years between these.

In a short time, you get a pretty good handle on it. I don't get too hung up on details, costs and times will vary, but if you are reasonable the estimate errors +/- should average out pretty well.

Off the top of my head, cars, roof, HVAC, appliances, landscaping, driveway, remodels, furniture? Smaller stuff should be covered by looking at your average spending over the past few years, if those are fairly typical - maybe some adds/deletes required for those 'lumpy' items.





Might work for some, but I've had three year periods that were vastly different from each other. In one 3-year period, I replaced a car, roof, HVAC, house painted, some siding replaced, driveway (long, expensive replacement), had some fairly major landscaping done (tree removals, regrading to move water away from the house, reseed near the driveway replacement, etc), some fairly expensive dental work for me and DW, etc. And other 3-year periods with nothing major at all.

-ERD50

I've also noticed big differences in three year time frames. I've actually tracked all my expenses and every single expenditure (yeah, I know, it's over the top ) since 1991.

What I have found is that, often times, these expenses time out together. For example, when it's time to replace an appliance, it's often a good time to replace *all* the appliances. And when it's time to replace the carpet, well, that's often a good time to replace other stuff. And so forth.

But it all works out well when you have been saving for everything, so long as you are saving enough and correctly keeping tabs on current costs, which is going to be especially important now that inflation has fired up. I'm expecting a big jump in the prices of every single thing on my spreadsheet which will require a jump in the amount I set aside on a monthly basis. (I am working on that adjustment now, in fact.)

 

[scrabbler1]

I can see why many of you need to do some sort of accounting for lumpy expenses such as expensive and infrequent home repairs. But for me, it doesn't really apply. I live in an apartment in a large co-op complex, so any of those large expenses are spread out over many, many co-op apartment owners. My co-op is managed well, by both our managing agent and co-op board. We had to replace the roofs on all 3 buildings in the last 5 years, but there was no special assessment needed because (s) the reserve fund covered it, and (b) they refinanced our co-op's mortgage and that big savings helped pay for it, too.

As for my own lumpy expenses, I don't worry about major appliances like an air conditioner because my normal budgeting can cover it, as it did in 2019 when it unexpectedly died. Most months I have a surplus of dividend income over expenses, so all that happens is I forgo the surplus to pay for the unexpected, lumpy expense.

I bought my latest car in early 2007, about 2 years before I ERed. This meant my car expenses would be low for the next several years. The car is 15 years old now and is running fine (I rarely drive it, averaging less than 3,000 miles per year). But when I decide to replace it, I will tap into my second-tier emergency fund, perhaps call it a "slush fund," to allow me to replace the car at some point. I don't rely on that second-tier EF or its income (it's a national muni bond fund) for my day-to-day life.

In about 6 months, I turn 59.5, so the first of my "reinforcements" will become available - my traditional, rollover IRA from my old job. I don't want to tap into that unless I really need to because it would decrease my ACA premium subsidy.

 

[GravitySucks]

I like to account for lumpy expenses by assuming there will always be a car loan and home maintenance will cost 1% of value each year.
I haven't had a car payment in 4 years but if I had to it wouldn't put me over my maximum safe spend limit. The house maintenance ran over two years, but over all the 1% guesstimate is holding true.
So the years the lumpies hit (new roof, new patio, etc.) they're accounted for, the years they don't hit I don't just spend the money just to meet my maximum withdrawal.

 

[Timeisprecious]

Since I put together a fairly detailed budget, there is a line for lumpy expenses. Since we are in our 5th year of retirement, we have some history on these costs.
Plus we have a separate emergency fund for a potential very large unexpected expense.

+1

 

[freedomatlast]

I normally spend less than half of what Firecalc says I can for 100% portfolio longevity probability, so even in the years with lumpy expenses, I'm still well below what I consider a reasonable level of spending.

 

[mickeyd]

I treat all expenses the same. I treat all income the same. If expenses are more than income, I draw on savings (a rare event). EZPZ lemon squeezy.

 

[tb001]

We approached lumpy expenses in a couple of categories. Home expenses were the hardest to model as we moved to a new home shortly before pulling the plug. I found lots of estimates like % of home value, etc…, but I think what was most helpful was pulling out all of the major stuff and looking at average lifespan and cost. And then adding in a buffer for the extras you don’t think about. We bought a 20 yr old home, so have front loaded an lot of expenses. We also underestimated the number of improvements we would want to make.

Other lumpy expenses like cars/kids college, etc… are more straightforward and I modeled those out in a spreadsheet by year.

 

[BuysToys]

Our budget includes one major project per year. So far, after eight years, that has worked well. We're almost done with the "wanted" home projects, so I suspect we'll start to reinvest those monies when we don't use them. Right now, our cash bucket is a little full, but we're OK with that.

 

[Surewhitey]

Got me to take a look at my spreadsheet. We have spent $52k the past 2 years even with a bit of travel and no one-off lumps.

We plan to spend $65k+ inflation + lumps for health, maintenance and car replacement every 6-7 years ($5k-$40k annually). These gradually increase $15k-$65k annually over a 30 year period.

So far, so good.

 

[Out of Steam]

We mentally set aside about 20% for lumpy, "whatever happens/whatever we need" expenses. Some years are better than others.

We've mostly been trying to put off those lumpy expenses until we start my wife's Social Security. Our luck has been fairly good so far.

Our adult daughter recently needed a car, so we decided to replace my wife's car a year earlier than planned and hand down her old one. My wife has gotten more hours than expected in her part time job, and the expense seemed reasonable.

The main expenses we're postponing are a new driveway and recessed ceiling lights (about 15) for the house.

 

[Physics Guy]

Yes. You have to.

The 4% (or 3% or whatever number you want to use) includes all money being spent, not a subset.

Depends on how you think about it. I have planned based on 3% yet I trust the 4% number. That extra 1% is my lumpy expense fund. I have also done spreadsheets with the annual accounting fiction of earmarking funds for designated expenses (new car, large house maintenance, and so on) but as we rapidly approach retirement and all of the possible changes in lifestyle that it will include I don't think that predicting lumpy expenses at that level is any more accurate or useful.

 

[donheff]

Depends on how you think about it. I have planned based on 3% yet I trust the 4% number. That extra 1% is my lumpy expense fund. I have also done spreadsheets with the annual accounting fiction of earmarking funds for designated expenses (new car, large house maintenance, and so on) but as we rapidly approach retirement and all of the possible changes in lifestyle that it will include I don't think that predicting lumpy expenses at that level is any more accurate or useful.

That seems to be another way of saying the same thing. Your have identified
your ultimate SWR as 4% which includes all spending including potential lumpy expenses that may never occur. Sounds like your actual spending tends to be below your SWR which is a safe place to be. I do something similar at a slightly lower SWR. I track the unspent $ in a virtual account that I can tap if I want to splurge on something way beyond lumpy.

 

[Physics Guy]

You could say that although 1% is much more than what I estimated by lumpy costs would be if spread out evenly.