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Budget adjustments?
Old 07-30-2020, 09:25 PM   #1
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Budget adjustments?

Just curious how much and for what reasons (if any) folks adjust their budgets year to year. Do investment gains/loses affect your next year's budgeting, or do you stay the course figuring the market will even itself out in the end? I'm just getting started and am thinking it would be hard to not reward myself for a really good year, or cut back immediately if there's a significant drop. But, it's the market so that's to be expected and fluctuations shouldn't affect short term spending. Right?
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Old 07-30-2020, 09:34 PM   #2
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I don't really budget, although I keep very close track of every penny I spend.

I allow myself a withdrawal rate of 3.5% based on the previous December 31st portfolio total. I withdraw that amount during the first week in January of each year and then don't withdraw anything else all year. For me, I think that's a sensible approach. This method would allow my spending to fluctuate with the market.

In reality I spend less than half of the allowed 3.5%, so I put the rest which is left over, back into my portfolio. I have come to the conclusion that after paying a certain amount for things like utilities and taxes, apparently I don't need or even want a whole lot more to be happy.
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Old 07-30-2020, 10:41 PM   #3
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Originally Posted by cat4ever View Post
Just curious how much and for what reasons (if any) folks adjust their budgets year to year. Do investment gains/loses affect your next year's budgeting, or do you stay the course figuring the market will even itself out in the end? I'm just getting started and am thinking it would be hard to not reward myself for a really good year, or cut back immediately if there's a significant drop. But, it's the market so that's to be expected and fluctuations shouldn't affect short term spending. Right?
I track my spending every year, I don't budget.

The fluctuations in the market good year vs bad year combine to hopefully be in a general upwards direction.
But if you Spend all the extra up one year, then there is nothing to fill in the hole from the bad year.

Then I think, well in a good year maybe person buys a boat has fun and the next year is bad so sell the boat and the dog .
It would be too much yo-yo effect for me.

I prefer to keep my spending fairly constant, at a Safe Withdrawal Rate (SWR) so my income is predictable and covers everything I want over time. Which is why I track spending.
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Budget adjustments?
Old 07-30-2020, 10:51 PM   #4
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Budget adjustments?

I donít budget, but I keep track of spending. Market conditions have no bearing on my spending. I spent about the same through the Great Recession as I did when the market was at its peak. I have a plan for how much money to spend based on past spending and I try to stick to the plan regardless of financial conditions.

I dedicate part of my portfolio for larger capital spending such as cars and big home improvements well in advance. And market conditions donít affect spending on these items because I have set aside the money already.
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Old 07-31-2020, 04:42 AM   #5
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I do budget each year and adjust it depending on the portfolio balances. I also keep track of all spending.
This process provides me a comfort zone.
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Old 07-31-2020, 05:32 AM   #6
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I dedicate part of my portfolio for larger capital spending such as cars and big home improvements well in advance. And market conditions donít affect spending on these items because I have set aside the money already.
This is the piece go back in forth on as to how to best handle. I have an allocation in my planned annual withdrawal that is basically a combination of contingency and lumpy expenses, but wonder what the best way is to handle those $$? One thought is to dump those $$ in a separate account each year and then let them sit until I need something (i.e. new car, home improvement, super fancy trip), or plow them back into the market relative to my AA and just pull from the main accounts when needed. How do most of you handle this?
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Old 07-31-2020, 05:33 AM   #7
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We don't budget. We track all spending and spend without regard to market fluctuation.
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Old 07-31-2020, 05:40 AM   #8
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This is the piece go back in forth on as to how to best handle. I have an allocation in my planned annual withdrawal that is basically a combination of contingency and lumpy expenses, but wonder what the best way is to handle those $$? One thought is to dump those $$ in a separate account each year and then let them sit until I need something (i.e. new car, home improvement, super fancy trip), or plow them back into the market relative to my AA and just pull from the main accounts when needed. How do most of you handle this?
I keep funds for future capital expenses in a money market along with emergency funds and only transfer funds from mm to checking as I spend on emergencies or capital big ticket items.
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Old 07-31-2020, 06:17 AM   #9
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For the purpose of setting quotas or limits on my spending, I don't do a budget. I do monitor my spending. At the start of the year, I create a projected checkbook register which keeps track of my day-to-day cash inflows and outflows. This is to see when I have cash surpluses and deficits due mainly to the lumpier expenses and income distributions. Sometimes, I have to carry forward cash surpluses to cover future (lumpier) expenses. I adjust this from month to month as I learn what the actual expenses are.


Until this year, I had an actively managed stock fund (going back to the mid-1990s) which generated erratic and sometimes large cap gain distributions at the end of the year. This had a significant effect on my income tax bills and ACA subsidies, often with little time to adjust to them. I sold off that fund and switched to a similar index fund which has made my income tax and ACA subsidy projections much more predictable while restoring a steadier monthly cash cushion.
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Old 07-31-2020, 06:23 AM   #10
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We don't budget. We track all spending and spend without regard to market fluctuation.
This is what we do.
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Old 07-31-2020, 06:26 AM   #11
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Originally Posted by cat4ever View Post
Just curious how much and for what reasons (if any) folks adjust their budgets year to year. Do investment gains/loses affect your next year's budgeting, or do you stay the course figuring the market will even itself out in the end? I'm just getting started and am thinking it would be hard to not reward myself for a really good year, or cut back immediately if there's a significant drop. But, it's the market so that's to be expected and fluctuations shouldn't affect short term spending. Right?
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Old 07-31-2020, 06:32 AM   #12
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We budget and track spending closely, started long before retiring. We don’t adjust spending based on market performance or portfolio balance, but we’re operating with a very conservative WR based on past history. However, I reevaluate at least annually and if we find ourselves seriously pushing the probabilities, we’ll adjust spending up or down. We haven’t made any adjustments in the past 11 years. Our budget is deliberately about 2/3rds essential, 1/3rd discretionary, so it would be easy to adjust.

IMO most people relying on a portfolio (vs secure pensions/annuities) should adjust not annually but periodically, e.g. rerun FIRECALC every 5 years and adjust accordingly if necessary.
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Old 07-31-2020, 06:35 AM   #13
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Portfolio balance and age at retirement are probably factors in how you choose to spend/budget. We retired at 55 and have a set budget which we adjust by 1.5%-2% a year depending on what essential expenses are expected to be. We usually do not spend it all, and put the remainder in an after tax MM account for down the road. SWR has been anywhere from 2-4% of portfolio. The next few years will exceed 4% until I take SS at 70, plus a planned vehicle purchase, but will drop to less than 3% after that.

We budget and track expenses. At the end of the year, I look at several matrixes to feel comfortable with our withdrawal and budget.

There is no one size fits all, and whatever you start with, you are likely to fine tune as you go. For us, being rather conservative with good longevity on both sides, making sure we had a good handle on expenses was key.
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Old 07-31-2020, 06:37 AM   #14
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I'm another who doesn't budget, but tracks overall spending. The classic withdrawal plan increases your annual spending with inflation, but does not adjust to up or down market years. There are two things I don't like about that. If you start off with a prolonged bull market, one of those sequences that Firecalc shows you with a huge end of life balance, it doesn't let you increase your spending. I get the impression that most people work around this by resetting their plan to allow for more spending. But it also doesn't have you decrease your spending if you start with a prolonged bear market or other failure case. My impression is that most people will eventually cut spending in this case, or get a part time job to add some income, but the longer you wait to take action in a failure case, the bigger hole you've put yourself in.

I use VPW (variable percentage withdrawals), which gives me a target spending amount each year, based on the start of the year balance on my investable assets, and a very slightly increasing % to spend. The % increase gives me a bump due to inflation, plus accounts for having less of my lifetime remaining. After a good year, it also gives me a little bit more spending room, and after a bad year it throttles me down a little bit. It's only a little bit, as it spreads the change out over your remaining years.

I like these small adjustments because in a prolonged downturn it immediately starts to reduce my spending target, but it won't be as drastic as it would be if I waited until I was really in trouble before making adjustments. Theoretically VPW never fails, but the reality is that if things go bad enough your % spending may not cover the true essentials for you. I believe that failure should come later (and therefore be less likely) than starting with 3.5 or 4% and increasing spending with inflation each year.
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Old 07-31-2020, 10:35 AM   #15
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We budget for all our normal expenses. Vacations, etc come out of savings.
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Old 07-31-2020, 11:31 AM   #16
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In general I don't budget, but I do watch what I spend. Still have some concern about sequence of returns risk (SORR) so I'm not going hog wild with my spending... I also still have kids under roof - which adds some uncertainty to things. (First full year of retirement, and first year on a hdhp my kids had a series of broken bones, second year one son had a major surgery.... both years maxed the deductible and OOP for the family).

That said - I'm withdrawing around 3% of the *starting* value from the portfolio, inflation adjusted. Since the portfolio is bigger than when I retired 6 years ago, it's all good.

That said - when the market plunges, I definitely pull back spending. Like in Jan/Feb of this year. And I consider larger purchases with less hesitation when the market is breaking records. That's just human nature.
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