Discretionary spending % in retirement

[hankster]

I'm interested in the percentage of retirement budget that others categorize as discretionary spending. My planned budget is about 25% discretionary spending.

For those of you who have found it necessary to tweak your spending in response to market conditions, emergencies etc.

1. Was it a minor adjustment (drink cheaper beer ) or were more drastic measures taken?

2. Did the action taken give you confidence that lifestyle flexibility is indeed a powerful tool in retirement security?

 

[W2R]

I'm interested in the percentage of retirement budget that others categorize as discretionary spending. My planned budget is about 25% discretionary spending.

For those of you who have found it necessary to tweak your spending in response to market conditions, emergencies etc.

1. Was it a minor adjustment (drink cheaper beer ) or were more drastic measures taken?

2. Did the action taken give you confidence that lifestyle flexibility is indeed a powerful tool in retirement security?

I have been thinking about this, too. Surely this bull market can't last forever, and I want to be ready to axe my spending mercilessly ASAP if/when the market crashes. I like your thread topic because I think a very good way to prepare for the worst, is to cut essential expenses to the bone, but spend more on discretionary expenses that can be easily dropped.

I could cut back 29% pretty painlessly, by cutting back or eliminating spending on clothes, miscellaneous, video gaming, restaurants, home upgrades, utilities, and fitness. If more was needed, I could cut back on grocery expenses too.

This is only my 8th year of retirement, so I haven't had to cut back due to market conditions. Last year I wanted to cut back because I just bought my house, and wanted to prove to myself that I wasn't going to keep spending so much each year. Of course, I don't buy a house every year but I wasn't sure how much it would cost to live here. (Answer: about the same). I didn't *have* to cut back, since I have been averaging about 2% WR, but I wanted to just to reassure myself that I wasn't going overboard.

Anyway, I cut back a little but not enough to overcome the unexpected costs of a brand new HVAC system, and a lot of expensive dental work. These together comprised 25% of my spending in 2016. So, instead of my 2016 spending dropping by more than 16% in comparison with 2015, it was actually higher. This is why I'm thinking about the topic now. If the market crashed, unexpected expenses would still arise. I need to think about where else to cut back.

So, my answers are:
1) a minor adjustment, and
2) I've got to believe in lifestyle flexibility as a tool for retirement security, because what else do we have? Besides, I know I can be pretty good at it if a true need for that arises.

 

[jebmke]

We actually spent more during the '08-09 downtick than we have been lately because prices (travel, home improvement contractors) were so good back then and it was "too good to pass up". We went to Italy in '09 and did a bunch of home renovations.

 

[Meadbh]

I have not experienced a market crash since ER. My withdrawal rate is under 3% and I have already eliminated unnecessary expenses, such as cable TV. I mostly cook at home. So there isn't a lot more that I could willingly give up. Travel and golf are my two big discretionary expenses. If I completely cut out both, I could get by on about 20% less, but my quality of life would suffer.

There are some other strategies I could use if my cash flow was an endangered species. For example, I have been withdrawing from tax-sheltered accounts early in order to avoid a big tax hit after RMDs. I could stop doing that, withdraw only from taxable cash, and pay lower taxes in the short term. I could elect to start my CPP as early as 60, albeit at a significant discount. I could put a rental property on the market (which might be depressed also). However, I would not go back to work!

 

[hankster]

So, my answers are:
1) a minor adjustment, and
2) I've got to believe in lifestyle flexibility as a tool for retirement security, because what else do we have? Besides, I know I can be pretty good at it if a true need for that arises.

Thanks W2R. I can envision a more frugal life being pretty satisfying when considering plentiful free time and no more wage slavery

 

[Walt34]

I'm interested in the percentage of retirement budget that others categorize as discretionary spending. My planned budget is about 25% discretionary spending.

I dunno, I never calculated the exact percentage of discretionary spending but I'd guesstimate that it's about 30%. DW buys a lot of boxed meals from Jenny Craig but is generally frugal otherwise so I keep my trap shut about that. I have a photography hobby that can be pricey but I've pretty much leveled off on that for now. We eat out two or three times a month, and have a monthly cable bill that is approaching three figures. We buy clothes new, but not often, we could go the Goodwill route there. We could do with one vehicle if we had to so I guess my pickup truck is discretionary. I do most of the grocery shopping but don't look at prices much so if I had to I'm sure cuts could be made there.

Thinking about this more, I'd guess if we had to cut to the bare survival minimum and still stay in this house we could cut 50% but it wouldn't be much fun.

 

[Independent]

I'm interested in the percentage of retirement budget that others categorize as discretionary spending. My planned budget is about 25% discretionary spending.

For those of you who have found it necessary to tweak your spending in response to market conditions, emergencies etc.

1. Was it a minor adjustment (drink cheaper beer ) or were more drastic measures taken?

2. Did the action taken give you confidence that lifestyle flexibility is indeed a powerful tool in retirement security?

"Discretionary" is incredibly difficult to define.

One person considers twice-per-week meals in a tablecloth restaurant a necessity, another thinks that's a foolish extravagance.

 

[NW-Bound]

I just look at my Quicken tally of expenses, and see that if I just cut out travel and gifts/donations, I will knock off 20% already.

I can sell the 2nd home and reduce the expenses further, probably another 15-20%.

At that point, I still eat and drink the same, but just stay home to watch travel video and be an armchair traveler. I would still have the Web to surf, and still buy "stuff" for my hobby. It's not a bad life.

 

[tmm99]

Timely topic since I was just thinking about this looking at last year's spending.

I could lower my spending by removing my travel and fun money which comes to about16% of my current total spending. I could further reduce from my variable/daily spending category (groceries, toiletries, clothing, entertainment, restaurants) by another 9% or so, so the total of about 25%. And as Meadbh said, take money out of already taxed money to lower the income tax burden for the year. God, I hope I won't have to cut these categories to the bare bone all at once in one year because it just wouldn't be too much fun, but it is good to know some things are discretionary and it looks possible to cut quite a lot.


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[W2R]

Thanks W2R. I can envision a more frugal life being pretty satisfying when considering plentiful free time and no more wage slavery

Exactly! That's my thinking, too. I'm so happy just doing free things that I like to do. In my case these include activities like exercising, playing video games, listening to free podcasts that I have saved on my computer, and hanging out with Frank.

Thinking about this more, I'd guess if we had to cut to the bare survival minimum and still stay in this house we could cut 50% but it wouldn't be much fun.

That would be difficult but possible. I don't know if it would even be remotely possible for me, though, if I had a mortgage payment every month.

 

[Walt34]

One person considers twice-per-week meals in a tablecloth restaurant a necessity, another thinks that's a foolish extravagance.

So true, although I smile at the Hollywood divorces in which one claims they "need" $20,000 a month to survive.

Peel me a grape.

For those who don't "get" that phrase, here's the origin:

 

[audreyh1]

I would say about 50%. Probably more if I worked on it.

Why isn't this a pole?

Our portfolio has grown enough, that our annual spending budget plus taxes only uses around 80% of our withdrawal. (knocking on wood) The rest is available for a splurge or a rainy day (or both) and outside any budget.

But this also implies that we could take a pretty big hit to our portfolio before we notice a budget squeeze. More actually than the 20% implied by the above, because our taxes tend to drop drastically right after market crashes.

I have a pretty big war chest built up for spending even if my income drops substantially due to prolonged bad market conditions. (more knocking on wood)

 

[Teacher Terry]

If we cut traveling a lot and eating out/entertainment then we could cut spending by about 25% and still be happy.

 

[eta2020]

"Life, Liberty and the pursuit of Happiness"

If FI you are truly free to live anywhere you desire So you can move lets say to lovely Guanajuato Mexico, cut your spending by 80% and have not much change in standard of living. That is should market crash 50% and put you in situation where you really have to slash spending.

Or you can move to Cesky Krumlov and slash spending by 50% while living in fairy tale Czech Town.

I suspect freedom of taking such steps will come much easier to those of us who know few other languages besides English.

 

[tmm99]

"Life, Liberty and the pursuit of Happiness"

If FI you are truly free to live anywhere you desire So you can move lets say to lovely Guanajuato Mexico, cut your spending by 80% and have not much change in standard of living. That is should market crash 50% and put you in situation where you really have to slash spending.

Or you can move to Cesky Krumlov and slash spending by 50% while living in fairy tale Czech Town.

I suspect freedom of taking such steps will come much easier to those of us who know few other languages besides English.

In what circumstances would you take a drastic measure like moving out of the country? Would you if the market went down by 50% one year? Just curious.


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[Teacher Terry]

Also if you want to live by family that comes into play. Poland is a beautiful country with a low cost of living.

 

[eta2020]

In what circumstances would you take a drastic measure like moving out of the country? Would you if the market went down by 50% one year? Just curious.


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In our case if a bump in quality of life was worth the price of being further away from our DD.

But the point is you are living on the world where you free to do this to pursue your happiness.

 

[Meadbh]

In what circumstances would you take a drastic measure like moving out of the country? Would you if the market went down by 50% one year? Just curious.

Moving out of "the country" is not really a "drastic" option for those of us with more than one citizenship.

 

[RetireAge50]

My own "Lifetime Planner" says I can spend about twice my basic needs so I'll go with 50%.

 

[audreyh1]

I have not experienced a market crash since ER. My withdrawal rate is under 3% and I have already eliminated unnecessary expenses, such as cable TV. I mostly cook at home. So there isn't a lot more that I could willingly give up. Travel and golf are my two big discretionary expenses. If I completely cut out both, I could get by on about 20% less, but my quality of life would suffer.

There are some other strategies I could use if my cash flow was an endangered species. For example, I have been withdrawing from tax-sheltered accounts early in order to avoid a big tax hit after RMDs. I could stop doing that, withdraw only from taxable cash, and pay lower taxes in the short term. I could elect to start my CPP as early as 60, albeit at a significant discount. I could put a rental property on the market (which might be depressed also). However, I would not go back to work!

So your income would drop if we had a market crash? In my case it would because I use % of remaining portfolio so my income fluctuates wildly with market swings. Most people here though seem to use methods with less variation. With a low withdrawal rate like yours you can use a constant withdrawal (spending) method indexed to inflation (classic Trinity study) and your portfolio will survive just fine without tightening your budget.

You kind of have a catch-22 with your low (under 3%) withdrawal rate. You have trimmed down expenses so that you have a low withdrawal rate, but that means that in addition to low discretionary parts of the budget, you have (relatively) more invested and subject to those market forces that shrink portfolios occasionally. If, for example, you used 3.33% as your withdrawal - still pretty conservative - you would have 10% more for discretionary expenses, or that could be set aside for lean years when the portfolio is hammered.

 

[Marc]

We are anticipating 60% discretionary but even some of the non-discretionary could be decreased if necessary.

Marc

 

[aja8888]

Why isn't this a pole?

If big_hitter started it, the thread would be a pole for sure.

 

[Meadbh]

So your income would drop if we had a market crash? In my case it would because I use % of remaining portfolio so my income fluctuates wildly with market swings. Most people here though seem to use methods with less variation. With a low withdrawal rate like yours you can use a constant withdrawal (spending) method indexed to inflation (classic Trinity study) and your portfolio will survive just fine without tightening your budget.

You kind of have a catch-22 with your low (under 3%) withdrawal rate. You have trimmed down expenses so that you have a low withdrawal rate, but that means that in addition to low discretionary parts of the budget, you have (relatively) more invested and subject to those market forces that shrink portfolios occasionally. If, for example, you used 3.33% as your withdrawal - still pretty conservative - you would have 10% more for discretionary expenses, or that could be set aside for lean years when the portfolio is hammered.

Thank you for your thoughtful analysis, Audrey.

Actually, I do not follow the 60/40 rule. Approximately 20% of my investments are in rental properties. Currently, I also have a large cash allocation, in anticipation of buying opportunities after a market crash. A 50% drop in equities tomorrow would be greatly muted in my portfolio by noncorrelated assets. My property portfolio continued to generate wealth throughout the 2008-2009 market crash, which was very reassuring. I also have a holding company, which requires some strategizing to choose the optimal dividend to minimize corporate and personal taxes. Any surplus can be directed to my TFSA, where its earnings will never be subject to tax.

You are correct, of course, in postulating that I have perhaps been "too frugal", at least by the standards of the Trinity study. However, I do not live in the country where the Trinity study was conducted, and my expectation is that markets will not produce the same ROI in future as in past years. Furthermore, in the absence of a pension, risk management is crucial. I am now entering Year 5 of ER and if all goes well, I do anticipate loosening the purse strings a little as I move beyond the Retirement Risk Zone.

 

[athena53]

Of our 2016 spending, 40% was charity, travel, jewelry, entertainment, restaurants and 50% of home improvement costs. (The other half of home improvement was replacing the AC so not discretionary.) The big items were charity, travel and home improvement.

It would KILL me to cut charity to zero and especially to back out of a church pledge (they're not legally binding but mine would make a dent in the budget if I backed out) but I could certainly cut back expenses if necessary for a year or two without too much pain.

 

[Hermit]

I have been spending well over 100% of my living budget each year on building my house. I blew by the anticipated total cost of construction last year. I have also been spending over 50% of my living budget each year since retirement on my kids (unplanned education costs and a wedding that was always down the road sometime but not really planned for.) I am taking an unexpected 2.2% or so out of retirement accounts to cover extra costs. I don't break down living costs by discretionary vs non. I could sell a couple of unnecessary vehicles and cut expenses by about 15% per year. I have no pans to do that and I don't anticipate a downturn in the economy would have a major impact on my spending or income.