Budgeting for Big, Non-Annual Expenses

[Dtail]

Quote:

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

Effectively the same concept but called an emergency fund, although I don't include that account in my AA.

[caninelover]

I do think big expenses are a known unknown.

My FIRE budget has my regular expenses, padded for health care and post FIRE travel, etc. - then I have extra 5 k every 5 years, $10k every 10 years, new cars at $30k every 15 years and one major expense of $50k 20 years or so down the road.

Bottom line is life is unpredictable...I see posts about expenses of $xx per year, and wonder. No life circumstance is that steady over 30+ years. How do people not plan for some variability in spending?

[Alan]

I keep a separate cash account for these lumpy expenses, planned or otherwise. In my budget spreadsheet where I track spending I itemise the big expenditures so I can track when and how often they come up.

When we lived in the USA I used I-Bonds as a secure place to hold funds for the big expenses. In the UK I use Premium Bonds which are government bonds where the “interest” is pooled and every month there is a drawing where a couple of folks win £1m and the rest is paid in much smaller prices. The last couple of years the “interest rate” has been 1.4% which is what you could expect if you had average luck. Last year our prizes were equivalent to 2.4%, and the year before it was 1.7%. Clicking on the phone app when notified you have won something is fun, the most so far in any one month was 3 bonds winning a total of £575.

It is very easy to buy and sell bonds online and when cashing some in it is only 1 business day for the money to arrive in the account.

[DrRoy]

Last year we did a major remodel of our family room and laundry room. I had $65K set aside (before RE) from "regular" spending and did not count it as expenses until we went over that. For us, travel is a big regular expense. Going forward, we will count big irregular things as spending when we do them.

[DrRoy]

Quote:

Originally Posted by Midpack 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.

Pre-RE, I had $ in my estimate for car replacement and $10K/yr for unexpected's. (Is that a word?) Travel was 25K/yr but we have averaged more over 3 years.

[mrfeh]

Quote:

Originally Posted by Lewis Clark I try to ammortize the lumpy expenses, based on my past history with them. For example, if I plan to spend $30,000 on a new car in 10 years, I will treat that as a $3,000 expense every year.

+1

[scrabbler1]

Quote:

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

While my entire portfolio is basically a slush fund, I have a designated subset of it (which includes my second-tier emergency fund) which I will use first as the slush fund. This is to minimize any large cap gains or cap losses by selling a stock fund.

[CRLLS]

Quote:

Originally Posted by Midpack 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.

So true.

I did model the occasional car purchase before feeling comfortable with our plan. I also had "x+" dollars in the budget for home and car maintenance, along with medical deductibles etc. which hopefully accounted for any big, non-annual expenses.

[rk911]

we have a series of sinking funds..car replacement, vacations, home maintenance, out of pocket medical etc. $X goes into each fund each month as part of our monthly spending plan.

[CardsFan]

Well, just had a non-budgeted expense today (though not totally unexpected). The 12 year old low end furnace, that was here when we bought the place, shot craps. Cost to fix $900 (electronics). Cost to replace, $4,000. Went with replace, and they install tomorrow.

Tipping point was, we leave for 5 weeks at the end of the month. An iffy furnace in February, in MO, is not a good idea if you will be out of town.

Oh well. The furnace costs less than the place we are renting in FL for the month. Maybe this should be in the Blow The Dough thread.

[HFWR]

Most of my stash is in a tIRA, but I have a taxable account for the next vehicle, and a rather small Roth for the next HVAC unit or other household emergency. Thankfully, my normal “income” from SS/Pension/IRA has a fair amount of slack as well.

[GenXguy]

I've always had long term expenses factored into my budget going back 30+ years.

But I separate required expenses vs. optional ones when figuring my barebones expenses - the minimum expenses I need to account for. A roof will be mandatory at some point, but many home improvement projects are optional or can at least be delayed longer that you might prefer. The plan is to have enough retirement income to cover those optional things as well, but I like to know what the minimal barebones amount is if things were to become tight.

On average over the last 30 years, I've spent well under my budgeted amount for "required" home maintenance, but some of that excess budgeting is going to catch up with me some in the coming years as my roof and HVAC are both over 20 years old.

[GenXguy]

Quote:

Originally Posted by CardsFan The 12 year old low end furnace, that was here when we bought the place, shot craps. Cost to fix $900 (electronics). Cost to replace, $4,000. Went with replace, and they install tomorrow.

Yikes. My furnace is over 20 years old - 92% efficiency, and I've replaced some furnace parts over the years myself including the heat exchanger to keep this thing going. I have an intermittent issue with mine that is most likely due to the control board (that's the electronics in my furnace), but I can get a brand new control board for under $100.

[audreyh1]

Our annual withdrawals have exceeded our spending for many years, and we let the excess pile up in short-term funds. So we have that to tap into for large purchases, whether planned or not. Also available for gifting, which we have done recently.

[CardsFan]

Quote:

Originally Posted by GenXguy Yikes. My furnace is over 20 years old - 93% efficiency, and I've replaced some furnace parts over the years myself including the heat exchanger to keep this thing going. I have an intermittent issue with mine that is most likely due to the control board (that's the electronics in my furnace), but I can get a brand new control board for under $100.

yeah, the control board is my problem. My concern is, it is a LOW end furnace (Goodman), and we are leaving for about 5 weeks. We knew it needed to be replaced sometime soon.

The good news is, it happened BEFORE we left. AND I ordered a Wifi thermostat, so i can check the temp while we are gone!! (OK, I could have done that for less than $100, but it makes me feel better).

[foxfirev5]

Never having a steady income I feel I have a distinct advantage over those with a regular constant income. Big expenses are never life threatening. It just draws down the considerable short term funds while allowing the safe (reasonable AA) funds to grow. As long as your healthy ( the big caveat) you can't go wrong. Easier said than done.

[Emerson11]

I admit it's merely a psychological ploy, but I use an accrual account. At the start of every year I move a specific amount from my balance sheet accounts to an "off balance sheet" account, my accrual account. I don't use that account in planning future spending or calculating net worth. It's already "spent money." The accrual account is used for major home repairs, new cars, and, any other true family emergency that couldn't have been properly budgeted. When I buy a new car or a new refrigerator, it has no impact on my paper net worth, which gives me peace.

[NW-Bound]

My WR is low enough that I do not need to budget for large non-recurrent expenses.

However, I always want to have enough in after-tax accounts, so that I do not need to worry about tax implications if withdrawing from before-tax accounts.

I would still have to pay taxes on capital gains, but that is less than paying taxes on the entire amount withdrawn from IRA/401k.

I used to have a lot more after-tax money, but had to spend it down quite a bit while waiting for 59-1/2 to draw from before-tax savings. Even so, what I have left is good for more than 10 years of living expenses.

[gooddog]

Expenses are what they are. If a household is living well below it's means, then there shouldn't be an issue. My father likes to set up different accounts (much like a condo complex does) for the next time a roof has to be replaced *roof account, the next time the HVAC has to be replaced *HVAC account, and so on. I'm the opposite, just live frugal, and the rest takes care of itself...there is that option.

[esterhazy]

Quote:

Originally Posted by kgtest New Cars College Costs Remodels Weddings Those are probably most common...once you get through all those it's just water heaters, dryers and roofs...

Sorry but this isn't correct. We can look at actual data from the Society of Actuaries on what big, non-annual expenses retirees actually have to contend with and use that in our retirement planning.


"About one in five retirees (19%) and one in four (24%) of retired widows experienced four or more [spending] shocks during retirement."


"The two most frequently mentioned financial shock and unexpected expense items are home repairs (28%) and major dental expenses (24%)."


"Long-term care, divorce and long-term help to children were the most troublesome."



Some quotes from real retirees that the Society of Actuaries interviewed:


"Dental . . . I mean, you start to get into thousands of dollars sometimes and no insurance."


"I’ve had—our house upkeep, furnace, driveway. In the last month, I have spent $2,500 on one expense, $3,600 on another expense. That’s in one month."


"My daughter lives alone. . . . She was on her way to a teacher’s meeting, and she crossed the street and was hit by a car. Since then she has MS and they did not pay anything. We got nothing and now she has no job . . . it’s very expensive."


6% of retirees have lost money to fraud/scam/online theft. Cognitive decline is a real problem.