Budgeting for Big, Non-Annual Expenses

[jollystomper]

When planning my retirement I looked at Quicken data over 5, 10, and 15 year averages to get a sense of the impact of large non-annual items. In the 10 years before I retired we did a lot of large, non-annual spending which included auto purchases, new roof, new bathrooms, appliances, HVAC system, etc. I also looked at the replacement costs for the major appliances in our home, so those are factored in as well. Our planned yearly spending takes that into account, so we know we may have years where we are well under the outgoing cash flow plan (like last year, even with the purchase of an additional car and replacing a well pump), and years we will go over. Then there are also things like future costs we want to potentially help out children with, costs associated with moving to a lower cost/tax area, etc. that are factored in.

We do not have a separate "reserve" area, but we have enough cash to cover potential major expenses before we choose to take SS. In fact, that is a "debate" I am mentally having now. Our mortgage balance is down to about $52K. However, the rate is very low and the monthly cost is easily managed from pension and investment income. Paying it off all at once now would save interest, but reduce our cash in case a major expense did occur. We will probably find some middle ground method to handle it.

[Lewis Clark]

Quote:

Originally Posted by Jerry1 My question is, what does anyone do with the budget money? For example, my 2019 budget was $80K and I think I should allocate $1000/month for a new car in the future. What do you do with the $12K? Do you actually withdraw it or move it into a separate account? Or, do you just add it to your total to evaluate how you’re doing compared to your maximum success withdrawal rate?

I keep it invested as normal, then withdraw it when I need it.

[athena53]

It's easier done in the rear-view mirror, but I retired 5.5 years ago and have kept the average withdrawal rate below 3.5%. 2016 was a very expensive year because we downsized and there were a lot of expenses associated with that, but if I look at what I could have withdrawn over that period at 3.5% and what I actually withdrew there's a surplus of about $15,000.

My car is a 2012 and running well (knock wood), my roof has 40 years left on the warranty and I'm not planning any major renovations. Hopefully that surplus will continue to build before anything major happens.

[PatrickA5]

I don't budget, but I do keep track of expenses in Quicken. Other than savings, every outflow of money is an expense. So, if I buy a $40K car one year - I show it as an expense.

At the end of the year, I have a spreadsheet that "backs out" large, irregular, expenses (such as college) to get an idea of where I would likely be most years in retirement (in the future) - knowing full well there will probably be other items to replace them.

Back in our "leaner" years, we used to have multiple savings accounts with monthly additions for various large items. It worked well. Don't need to do that anymore.

[brett]

Seems to me that there is little difference once retired for those who have been successfully managing their personal finances for years. Matching expenses in retirement is no different that in our working lives. It is of no surprise to us that we will need to replace roofs, appliances, etc. in retirement just as we did in prior year.

There have always been surprises...medical and capital included. There always will be. Plus the planned events such as vehicle replacement, renovations, etc.

We certainly do not keep sub ledgers and/or segregated funds to cover these items. We decide on affordability and then draw down from our investment accounts as required.

It sounds like a lot of busy work to me to keep quicken and record everything down to the last dime, keep ledgers and sub ledgers, and YoY comparatives.

[Midpack]

Quote:

Originally Posted by brett Seems to me that there is little difference once retired for those who have been successfully managing their personal finances for years. Matching expenses in retirement is no different that in our working lives. It is of no surprise to us that we will need to replace roofs, appliances, etc. in retirement just as we did in prior year. There have always been surprises...medical and capital included. There always will be. Plus the planned events such as vehicle replacement, renovations, etc. We certainly do not keep sub ledgers and/or segregated funds to cover these items. We decide on affordability and then draw down from our investment accounts as required.

I probably didn’t make it clear, but I meant it was important to factor those expenses in before pulling the trigger on retirement. I have seen occasional posts over the years with retirees who didn’t stop to think about all the non-annual big ticket expenses and find they’re spending more than expected a few years in. IMO those non-annual expenses can easily average 25-35% of annual spending. I’ve continued to track those expenses in retirement to verify what I estimated 8 years ago - a 5 minute Excel exercise and share so why not?

I don’t care how people do it, just that they factor in those expenses before they pull the trigger. Though many here are still LBYM/low WR in retirement, I see others considering retirement with (far) less than a 95% probability of success.

[GravitySucks]

Don't budget as rigorously as many here but I put estimated expenses in the Fido planner and come up with around $6k a year for the house and car. If I don't have those expenses like 2018 I consider it 'spent' when I look back at the year figuring if I stayed below my safe maximum spend. Years like 2019 where I had around $15k of those type expenses, if I went $7k over my max, I would not have been worried.
So far I've had to replace a car and a roof and a few other household expenses. That $6k estimate has pretty well held up over 6 years.
The money stays in the general portfolio when not spent and pulled as needed. No separate sinking fund.

[JustCurious]

I asked the same question back in 2015...

http://www.early-retirement.org/foru...ses-75829.html

[JustCurious]

Quote:

Originally Posted by socca In contrast to many folks who visit this website, I ignore the current market value of my assets (and thus don't calculate a withdrawal rate to help manage spending). Instead, discretionary income is my favorite measure of wealth. I've been using this approach for the last 13 years with no regrets.

How do you calculate discretionary income?

[Montecfo]

Quote:

Originally Posted by COcheesehead I use a planning tool, RetirePlan, that allows you to input all kinds of non annual expenses like car replacement, house maintenance, etc. I may not have these occurring in the right years, but I at least have a slot for them in the budget.

I also have a slot. I looked back at those expenses over the previous 5 and 10 years and used that as a basis for autos, and home-renovation/upgrade type purchases.

I am not sure forecasting the year is all that important, since I already have the $ for these purchases.

[Bryan Barnfellow]

We tried before pushing the ER button, to budget for all knowns and as many unknowns as we could estimate. We continue to do so now that we are in ER (and learn while we are doing).

For example, every five years we have to pay about 300 chf for resident permit renewals, so we budget 60/year and mark the line item as "Rollover=Y". Likewise, we have these major "non annual" expense categories: Capital Improvements to our home; General Contingency/Emergency; Automobile Replacement; and Exchange Rate Contingency. The latter is vital in a volatile dollar:swiss franc exchange rate environment where one could see swings of 10% or more in a given year.

Capital Improvements include those to our lives...such as a new hi-res large screen TV, or hi-fi equipment upgrades (which are eternal, as my wife has begun to appreciate) :-) We rent, so roofs, heating equipment, window replacement, etc. are provided for us.

-BB

[brett]

Bottom line for me is that people who have been successful at managing their personal finances and preparing for retirement years pre retirement will be successful post retirement. And there are many ways, many approaches to successfully managing finances.

Those that are not successful by the time they retire, will not likely be successful in retirement. I have a few in-laws like that. They never 'got it' and they certainly did not get it in retirement.

[ncbill]

Quote:

Originally Posted by socca I treat allocation to reserves as just another annual expense in my budget. This allows me to arrive at a reasonable number for discretionary income. In contrast to many folks who visit this website, I ignore the current market value of my assets (and thus don't calculate a withdrawal rate to help manage spending). Instead, discretionary income is my favorite measure of wealth. I've been using this approach for the last 13 years with no regrets. I don't overthink my allocation to reserves expense. Coincidentally, my $13k number isn't far from your $15k number.

The MaxiFi planner I'm using also projects "fixed" (to cover non-discretionary expenses) & discretionary income annually over my & spouse's lifetime.

Ratio is currently around 2:1 (discretionary:fixed) so it appears I have a good bit of slack.

Though I can include fixed lumpy expenses...e.g. I projected $X in 2025 for multiple vehicle replacements, but just spent ~1/3 of that end of last year for a used truck, so I now will decrease that projected 2025 expense proportionally.

[Gumby]

If I were really squared away, I would have a dedicated sinking fund for larger expenses that I know will come some day - like repainting the house in 10 years or installing a new gas furnace in ? years. But I'm not. I guess I'm relying on the fact that we have so much margin in our budget that we'll just pay for it when it comes along.

[Midpack]

Quote:

Originally Posted by Gumby If I were really squared away, I would have a dedicated sinking fund for larger expenses that I know will come some day - like repainting the house in 10 years or installing a new gas furnace in ? years. But I'm not. I guess I'm relying on the fact that we have so much margin in our budget that we'll just pay for it when it comes along.

Your portfolio is your sinking fund like all of us... Kidding aside, few if any of us are actual savers anymore, so there's no need for a separate piggy bank sinking fund.

[Teacher Terry]

Big expenses are a part of life and are to be expected. We did remodeling and buying 2 cars before retiring but things will still come up. It’s life.

[Moemg]

I just take any excess from my yearly budget and put it in an account marked slush fund .

[RobbieB]

I don't budget. Never have and never will. I just live within means.

[NW-Bound]

No, I don't do any planning for large non-recurrent expenses, nor spend much time thinking about it. I figure my regular WR is so low, I can "blow the dough" once in a while and still have the long-term average below 4%.

I did not have that confidence when I first stopped working, but become more confident when I see over time that my regular expenses have been shrinking. Hello Mr. Bernicke. The bull market over the recent years helps too.

[karen1972]

I used a spreadsheet modeled after the HOA Reserves spreadsheet we had as its basically the same thing. Then I knew how much i would need added to the yearly budget to cover it and I can easily see whats coming up.

The nice thing also of having an HOA template its adds a whole hosts of items I likely would have not thought about as they may be 50 year items, but oops the house was turning 40 so 50 isn't that far away.