Best Practices - Lumpy Expenses

[DawgMan]

I am fine tuning my general plan for my withdrawal strategy and curious as to how many of you are handling your lumpy expenses. I have broken my lumpy expenses into 2 buckets: 1) Forecasted capital expenses such as 2 new cars every 5 years, new roof/HVAC every 15 years, appliances, etc. Eg. If I was to spend $50K every 5 years on a car, I would put away $10K/yr in this bucket. The thought here is I have a separate savings account for this and let it just build over the years until I need the $$. 2) Unbudgeted/Contingency expenses such as redoing the kitchen, refurnishing the bedroom, blowing out a ridiculous trip above and beyond the standard budget, buy the wife a fancy diamond ring. This is stuff that is purely discretionary and indulgent. One thought is to do the same thing as 1) and have a separate account I build and let grow, that we pull from time to time. Optically, I like this idea as it is separated from my invested accounts. However, since this is purely discretionary, I am wondering if I just keep it in my main AA mix and just pull it when/if I want to, just to make sure it stays invested and has some level of growth.

As a point of reference, I am somewhat backing into a gross withdrawal number (3% or less WR) and any excess falls into my 2) bucket noted above.

How do you handle your lumpy expenses?

 

[Dd852]

I have always looked both at average of trailing 12 month expenses and trailing 60 months. The 5 yr bucket gives me a look that grabs all my lumpy stuff - computer replacement, tooth replacement (sigh), home repair... looking at the two numbers gives me confidence as my desired withdrawal rate covers both with room to spare.

 

[skipro33]

I am not so 'graceful' with buckets, I just have withdrawals where I spend less than I take in by $2,000 a month. When the checking account gets above $50,000, I look for what needs financial attention for us; updates, improvements, whims and wishes. Last year spent $20K on landscaping. This year would have been 3 months on Maui except for the virus, so maybe redo the driveway in pavers instead. Eventually roof, AC and other home maintenance will need attention, but until then, I just want to hold that single bucket at $50K tops.

 

[DawgMan]

I have always looked both at average of trailing 12 month expenses and trailing 60 months. The 5 yr bucket gives me a look that grabs all my lumpy stuff - computer replacement, tooth replacement (sigh), home repair... looking at the two numbers gives me confidence as my desired withdrawal rate covers both with room to spare.

So you let any excess roll forward in the same account, taking the same basic withdrawal each year? Eg. You take $100k yr1, spend $80K, next year take $100k and now your balance is $120k, rinse and repeat?

 

[skipro33]

So you let any excess roll forward in the same account, taking the same basic withdrawal each year? Eg. You take $100k yr1, spend $80K, next year take $100k and now your balance is $120k, rinse and repeat?

That's what I do to the tune of $2K a month, average. It seems to flush itself every 3 to 5 years and is a great buffer if I ever needed to hold off a draw based on market timing. This past spring for example.

 

[DawgMan]

I am not so 'graceful' with buckets, I just have withdrawals where I spend less than I take in by $2,000 a month. When the checking account gets above $50,000, I look for what needs financial attention for us; updates, improvements, whims and wishes. Last year spent $20K on landscaping. This year would have been 3 months on Maui except for the virus, so maybe redo the driveway in pavers instead. Eventually roof, AC and other home maintenance will need attention, but until then, I just want to hold that single bucket at $50K tops.

I thought about something like this... if the excess $$ got above a threshold, either spend it or dump it back into main investments

 

[brett]

We withdraw 30-50K at a time depending on our projected needs. Put the money in a so called HISA. It may last a year, it may last longer. For one time items, for income tax installments (largest use) , and for general day to day living/vacations.

The withdrawal might not take place at one time. We are cognizant of the tax impacts and time the withdrawals accordingly.

 

[mystang52]

I have 3 sinking funds for Car, Vacation (wow this one is quite large now for obvious reasons), and for medium sized house projects. Large rare expenses just come out of savings.

 

[SecondCor521]

I just keep it in my main AA mix and just pull it when/if I want to, just to make sure it stays invested and has some level of growth.

This is pretty much what I do.

I also don't forecast large lumpy expenses except for my kids' college, which is paid for from separate accounts anyway. In fact, I don't do much budgeting or forecasting; I generally only look retrospectively to observe my spending patterns in various categories.

For me, I also lead a pretty boring and frugal life, so how much I would spend on the items you listed would probably be less than $5K a year in sinking funds. Not worth it to me to have a separate process and account.

I will point out that my "draw as needed" approach does encourage frugality to someone with a mindset like mine. If you're trying to ensure that you spend money on those kinds of things, then having a separate account will actually encourage the spending, which may very well be what you want. For me, I'm actually considering approaches to get me to spend more money; my "draw as needed" approach frugality is beginning to be a negative.

 

[sengsational]

Partitioning off money for a car purchase, or things like that, 5, 4, 3, 2, or 1 year in advance isn't the way I do it. Not saying that way of doing it isn't great, it's just not how I go about it.

For me, I have a hard segregation between spending and savings accounts and forecast on the spending accounts. Depending on my ongoing burn rate and the size of my portfolio at the moment of a decision, that would determine if I felt comfortable "blowing the dough", so segregating those funds in advance isn't required.

I have what I call a "multi-year cash flow" spreadsheet that has a column for each month, and goes out a few years. There's a row at the top with the month-start balance of all my spending accounts. And a row at the bottom with the month-end balance of those accounts. In between is one row for my burn rate (the same for all months of the year, just a guess from the previous year). The burn rate includes almost all the usual actual spending we do, including those I pay once a year, like home and auto insurance; I don't care if it's off by a few thousand bucks. Then there are rows for transfers between "savings" and "spending" accounts, and rows for big lumpy things (lumpy things being cars, big home improvements, and income tax). I've recently had to add rows for income yipee! (SS and pension). So the minuses (spending) and pluses (income) take the month start balance down to month end balance. It's slightly more complicated than that because I put in actual and calculate planned balances. This way, I can see where the line goes in the future, given future planned lumpy spend items, burn rate, and transfers from savings.

 

[audreyh1]

Since we routinely underspend our annual withdrawal, we have let plenty of short-term funds build up over the years that will cover larger expenses such as new cars or extra travel. We prefer to take the entire withdrawal and bank any excess, because we’re not getting any younger. Our withdrawal rate is probably too conservative as it is.

In fact it got big enough that we recently gave a large chunk of it away to heirs - just ahead of the pandemic.

 

[sengsational]

For me, I'm actually considering approaches to get me to spend more money; my "draw as needed" approach frugality is beginning to be a negative.

I never thought about it this way. Although I don't budget, I do run reports that show historical spend by category, and use that to "justify" blowing dough. But I think you might have something there. Even if it wasn't segregated in a separate account, you could have your own accounting of unspent fun money that would grow by whatever amount you allocated. Then it would stand a better chance of "burning a hole in your pocket"

 

[Midpack]

Good timing, I was just doing some updating on my spending-budget spreadsheet - so I had it open. I keep "lumpy" expenses (less than annual) separate for budgeting purposes, but they're included with all expenses as they occur. I assign those expenses as accruals (misnamed) - it's a worksheet I don't need to look at often. The ONLY reason I did the detail below was to arrive at an average annual $ amount - knowing the actual annual expenses would be lumpy. It came to just under $10K, so that's what I've planned. It was a good exercise in that it forced me to think about how often we'd trade cars (we trade less often than shown below), how often there might be major home expenses (roof every 20 years, HVAC replacements every 10 years, etc.).

What I've found was that $10K per year wasn't too far off. And that the expenses are "lumpier" than I planned - but that hasn't come at a surprise. The chart below is (obviously) before inflation adjustments. The chart below is the one I did in 2009, I've updated it since but I don't choose to share that one for privacy reasons.

And congrats on thinking about it. Some people here only budget for the routine stuff that happens monthly, quarterly, annually - and there are lots of major expenses that just don't work that way. If you overlook the latter, you end up with some budget shattering "surprises."

I AM NOT SUGGESTING ANYONE ELSE SHOULD FOLLOW MY CHOICES, IT'S ONLY TO ILLUSTRATE ONE WAY OF PLANNING FOR "LUMPY" EXPENSES. There are other ways that may well be better.

 

[tb001]

It’s a great question. We’re going through this exercise as well. In general, our strategy has been to leave it invested and draw down as necessary. For some of the big expenses though that may have some tax and aca disadvantages, so it’s worth thinking through the things you can forecast. The flip side is that it probably makes us more frugal knowing we have to withdraw extra to cover the taxes on whatever we’re buying!

Will be interested to see how others are handling this.

 

[JustCurious]

Read this thread...

https://www.early-retirement.org/fo...ount-for-large-infrequent-expenses-75829.html

 

[Dtail]

I fund my smaller lumpy expenses each month into a separate account and keep track of each expense as it occurs.
I have an additional separate account for larger lumpy expenses like a new roof/new car, etc.
I keep daily track of all expenses, so my example is not typical.

 

[chassis]

Monthly reserves, or accruals, are the Accounting way to handle lumpy expenses. Pay for them every month.

 

[Dd852]

So you let any excess roll forward in the same account, taking the same basic withdrawal each year? Eg. You take $100k yr1, spend $80K, next year take $100k and now your balance is $120k, rinse and repeat?

That’s how it ends up working. In reality I spend what I need but I do the accounts monthly. If my spending, both over the 12 and 60 month periods, is below my target I relax and forget it. If not I cut back a bit or delay a “lump” until it fits. So I might have a conversation with DW along the lines of “Your old computer is about to drop out of the accounts, do we need to buy anything? Do you want to upgrade”? Thankfully at the moment we are spending way below our targets so we tend more to ask, anything we need? Than “anything we can delay or do without “?

 

[jebmke]

When I need money, lump or not, if my pension and social security don't cover it I simply sell something. Money is money.

 

[ERD50]

Good timing, I was just doing some updating on my spending-budget spreadsheet - so I had it open. ....

And congrats on thinking about it. Some people here only budget for the routine stuff that happens monthly, quarterly, annually - and there are lots of major expenses that just don't work that way. If you overlook the latter, you end up with some budget shattering "surprises."

I AM NOT SUGGESTING ANYONE ELSE SHOULD FOLLOW MY CHOICES, IT'S ONLY TO ILLUSTRATE ONE WAY OF PLANNING FOR "LUMPY" EXPENSES. There are other ways that may well be better.

At some point, I did something very close to what Midpack shows. I had already added a "phantom" annual expense in my budget tracking for replacing the cars every 10 years. But I wanted to get a better handle on other major expenses, so that year-to-year estimate for HVAC, water heater, roof, driveway, house painting, appliances, remodeling/repair, etc, really helped to provide something far better than a 'feeling'/guess. I should review and update it, a lot of those have been done recently.

I've never kept a separate account for these, I have ~ 6 months cash balance, and can plan ahead for most of these. ETFs/funds are liquid, I just sell if needed. I don't worry about selling at a low, if I keep those funds in cash all the time, I've just lost out on the growth that is expected over the long run.

-ERD50

 

[Montecfo]

I track expenses and forecast lumpy expenses based on prior experience. That way I know my FORECAST withdrawal rate is reasonable.

But my ACTUAL withdrawal rate is based on my plans for the coming year. I do not pull out funds for major purchases before they are needed. I simply keep funds invested until needed in accord with my AA.

And I'm under-running that mainly due to a large unspent option of the travel budget.

 

[RobLJ]

My situation may be too singular to be relevant, but I've been taking out to the top of the 12% bracket and dumping the funds into a Schwab brokerage account. The account retains what we don't spend so has doubled over the last 3 years.

I've invested it in Vanguard Total World ETF and a few income and stock closed-end funds, with 20% in a short-term muni CEF (It's up about 10% in 2.5 years but did take a short-term hit in March) that I can cash out in an emergency and 20% in cash, so I've got about 40k in available cash for emergencies/large purchases.

The CEF distributions dump into cash, so the cash pile will grow, to the point I'll eventually start putting cash into another short-term bond or floating fund and then the ETF and a few more CEFs. This allowed me to do tax-loss harvesting in March where I sold several CEFs I had bought in previous year (at a loss) and immediately bought somewhat similar CEFs on my list. When I estimate taxes in December, I'll probably pull more money out of the 403b since the tax loss will allow me more withdrawal room up to the 12% tax line.

After I begin drawing SS in 4 years, I intend to contribute some excess funds to the grandson's college fund and increase charitable contributions.

 

[W2R]

I keep over $50K in my bricks'n'mortar bank to cover lumpy expenses. I live a fairly modest lifestyle so that is way more than enough. The interest rate is pitiful and it doesn't get the return that the rest of my portfolio gets. My attitude is "so what". Any reduction of worry and aggravation when facing lumpy expenses is money well spent, IMO.

For example, recently I had a roof leak and thought I might need a new roof. No worries! I knew that I had enough to cover it, in the bank and just knowing that lessened my fears and was worth a lot to me. (Turned out all it needed was some minor repairs.) A few years ago I thought I might want a new SUV. Again, "so what". No worries. I could just write a check for it. I never did buy it, though. I really haven't used that lumpy expense money in the bank but it is there if I need or want it.

I could consider that $50K+ as either part of my portfolio, or as spent money, I suppose. Thanks to SS and mini-pension, the amount that I withdraw and spend in order to live my preferred lifestyle averages only about 1.4% either way. Gone are the days of living on the edge, paycheck to paycheck, thank heavens and I truly appreciate the peace of mind that this brings to me.

 

[Sunset]

I keep over $50K in my bricks'n'mortar bank to cover lumpy expenses. I live a fairly modest lifestyle so that is way more than enough. The interest rate is pitiful and it doesn't get the return that the rest of my portfolio gets. My attitude is "so what". Any reduction of worry and aggravation when facing lumpy expenses is money well spent, IMO.

.... Gone are the days of living on the edge, paycheck to paycheck, thank heavens and I truly appreciate the peace of mind that this brings to me.

I keep the majority of cash in Ally bank, and about $10K at a brick & mortar bank.
I do this to earn some interest (few hundred per year), knowing I can transfer it in 1->3 days should I need it.
I cannot think of an emergency where I need to spend more than $10K in less than 3 days.

 

[W2R]

I keep the majority of cash in Ally bank, and about $10K at a brick & mortar bank.
I do this to earn some interest (few hundred per year), knowing I can transfer it in 1->3 days should I need it.
I cannot think of an emergency where I need to spend more than $10K in less than 3 days.

Honestly I don't need the interest, and I'd much rather just have it at the bank down the street. Different strokes for different folks! IMO the difference in interest between Ally and my regular bricks and mortar bank is utterly trivial on this small emergency fund and would not affect my annual spending in any way whatsoever. I still have an extra 2.1% of my portfolio that I could spend, but that I am not spending, each year.

If it helps you, just consider the $50K as money that I spent years ago and is no longer part of my portfolio. It doesn't change my WR if I consider it that way.

My attitude is "so what".