Budgeting for Big, Non-Annual Expenses

[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]

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]

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]

"Accrual Account"

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]

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.

 

[TheWizard]

When I retired seven years ago, I aimed to have roughly the same net income in retirement as I did when working.
This was/is two or three times my basic expenses.

This approach has worked out well and allows me to spend thousands on travel. I try to keep a healthy $10k in checking to buffer expenses.
This works for me, thus far...

 

[NotYourAverageJones]

Kidding aside, few if any of us are actual savers anymore, so there's no need for a separate [-]piggy bank[/-] sinking fund.

Exactly! Retirement is about spending, not saving..

 

[HFWR]

Exactly! Retirement is about spending, not saving..

Most of my net worth is in a IRA, but the separate accounts for emergencies/new car, as stated previously, either taxable or Roth, are designed to be more tax efficient. If I had to pull IRA money to replace my a/c, it would throw me into a higher bracket and affect how much SS is taxable.

 

[rk911]

Exactly! Retirement is about spending, not saving..

it should be about having a long, happy, interesting, carefree and financially stable life. spending like congress won't accomplish those goals.

 

[teejayevans]

Some large expenses are optional, I don’t budget for these, if times are good...buy...if not, I don’t.

 

[scrabbler1]

I actually have a large expense coming up, and I have known about since late November. So, when I had a chance to "prefund" my slush fund to use later to cover the expense, I did it. This will keep the slush fund from becoming too low.

 

[NotYourAverageJones]

Most of my net worth is in a IRA, but the separate accounts for emergencies/new car, as stated previously, either taxable or Roth, are designed to be more tax efficient. If I had to pull IRA money to replace my a/c, it would throw me into a higher bracket and affect how much SS is taxable.

We are just fortunate enough that we will have all of our annual fixed living expenses covered by secure, recurring income consisting of 2 pensions and a generous VA tax free disabilty annuity, with SS being pushed off down the road until 70. We planned as if we never would have that SS income, so that is also "extra". The rest of our invested money is gravy and we will just spend that as we wish and won't need to follow any specific withdrawl rate percentage because our living expenses and misc are already covered by lifetime, secure income..

Our invested assets were strategically positioned in mostly tax efficient accounts in buckets which contain 1/3 in Roth, 1/3 in taxable and the rest in cash and equivalents. We tax planned way ahead and didn't put too much of our assets in any one account, like all IRAs, in order to maintain better tax efficiency in our retriement years. So far this plan has worked very well for us.

What I meant about retirement being about spending Is that's exactly what we intend to do! Spend, not accumulate or save That is what our working years were for. Others may have a different approach or circumstance which doesn't allow such freedom to spend as they want. We also don't plan to leave a dime behind and are going to enjoy spending all of our money when alive and have fun sharing it with those we love now, which allows us to see the benefits of that charity before we are gone.

Obviously each persons circumstance and approach is different, but think the main goal is making sure you dont run out of money before you run out of life...

 

[jkern]

I've tracked these type of expenses for the last 30+ years. Including college for my daughter, upgrading and remolding the home, car replacements and everything else, these expenses have averaged about $12K per year.

As long as I'm fully sustainable when I add $1K per month to all other costs, I'm good to go. As far as paying for something, I just transfer cash from the portfolio to the checking account as needed.

I have a name for this expense category, I call it "Save to Spend". Now that I'm retired it's not really "save" anymore, but I still use the name.

 

[tmm99]

No special for big non-annual expenses. Unspent money up to 3.5% WR goes to a rainy day fund and hopefully, that will take care of it. I currently have close to 20K in there. Even if it doesn't, we keep our WR low enough that we shouldn't have to worry about it. That's at least what I'm hoping...

 

[Dtail]

No special for big non-annual expenses. Unspent money up to 3.5% WR goes to a rainy day fund and hopefully, that will take care of it. I currently have close to 20K in there. Even if it doesn't, we keep our WR low enough that we shouldn't have to worry about it. That's at least what I'm hoping...

That is exactly how I do it conceptually, just with different numbers.