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Handling discretionary expenses in RE
Old 10-27-2021, 07:48 AM   #1
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Handling discretionary expenses in RE

I am just beginning my transition into drawdown and I'd like some feedback on how you all deal with the discretionary portions of your 'monthly paycheck.'

I have budgeted approximately $1500/mo for travel/learning/fun above and beyond my essential expenses. I'm also setting aside money for taxes and to help offset the cost of a new car in 8 years (planning to replace every 10). The tax bucket stays in cash, while the car bucket will be invested conservatively and ramp down a glide path as years pass.

My question is around any unused portion of that discretionary travel fund. Do you leave that part in your portfolio and only withdraw it when needed, or do you put it aside and use it as a separate bucket to draw from as you go?

I guess I'm concerned that if I don't spend it I'll end up with a sizable cash pot earning .05%. Curious how you all handle this.
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Old 10-27-2021, 07:58 AM   #2
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I don’t physically separate my money. I keep a certain amount of cash on hand and the rest is invested (bonds and stocks . . .). If I wanted to think in terms of different “pockets” for different expenses, I would do it on a spreadsheet and not actually hold funds in different accounts.
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Old 10-27-2021, 08:03 AM   #3
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I fund my spending via a regular "paycheck" from a savings account to checking. The level is based on expected spending. I find that we under-run that and cash accumulates that can be used for major purchases, more travel, or whatever.

I do not bucketize for deferred purchases. I just keep that money in my portfolio. I use analysis to make sure I am staying within my overall quidelines.
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Old 10-27-2021, 08:06 AM   #4
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I do not bucketize for deferred purchases. I just keep that money in my portfolio. I use analysis to make sure I am staying within my overall quidelines.
+1
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Old 10-27-2021, 08:18 AM   #5
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I don’t physically separate my money. I keep a certain amount of cash on hand and the rest is invested (bonds and stocks . . .). If I wanted to think in terms of different “pockets” for different expenses, I would do it on a spreadsheet and not actually hold funds in different accounts.
+1.

My reasoning is as follows: On average, we expect our investments to grow. Even though this is a long term view, on average, over any particular time-slice, we would expect that return to be positive more often than negative. If I set some aside in cash for a future need, then I'm dragging down my portfolio with cash.

The only time it makes sense to me to hold cash for a specific purpose is if you can't get access to your other funds w/o a tax hit, or (unlikely for a FIRE type) you need *all* that amount, and it's most of your savings, so a short term downturn in the market would mean you simply don't have the money.

So if I occasionally need to sell when both bonds/stocks are down, in the long run, I expect to be ahead by keeping my money working for me.

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Old 10-27-2021, 08:30 AM   #6
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We do have a separate account annually for travel. We fund it and most years take a trip. Anything extra stays there and can be used on a future trip. We have not done overseas travel, and up til now have done mostly 2-3 week domestic, so the account is not huge.

Budgeted expenses are in a separate account for the year and we transfer the budgeted amount to checking once a month.
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Old 10-27-2021, 08:41 AM   #7
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A dollar is a dollar as it is fungible and there is not a need to earmark $ for certain expenses. I keep enough cash in my various accounts - investments and checking/savings accounts, to cover this year's and next year's expected expenses, as well as to meet RMD withdrawals. I do that to ensure that I minimize selling investments in a prolonged down market. I have also turned off dividend re-investing as they go towards future income needs so it is pointless to invest and then have to sell off.
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Old 10-27-2021, 09:48 AM   #8
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Originally Posted by tmitchell View Post
..

My question is around any unused portion of that discretionary travel fund. Do you leave that part in your portfolio and only withdraw it when needed, or do you put it aside and use it as a separate bucket to draw from as you go?

I guess I'm concerned that if I don't spend it I'll end up with a sizable cash pot earning .05%. Curious how you all handle this.

I do a type of Variable Percentage Withdraw (VPW) to calculate my spend rate for the year. Then every month for the year, I have a specified amount transferred from a Marcus saving account to my checking account as my monthly spend amount (fed/state taxes are handled through my pension check withholding's). Any excess money within my checking account is moved monthly into an Ally saving account that I use as my slush and/or big ticket items fund. The Ally account is to be spent and not saved or invested. The Ally account also sits outside "My Portfolio" which I use to calculate my VPW rate for subsequent year(s).

Yes, I have a sizeable Ally account that is only yielding ~0.5%, and the only solution I have for this problem is to either spend and/or gift more.
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Old 10-27-2021, 10:34 AM   #9
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I've always just let the unspent funds stay in the portfolio.
This year is my first of managing MAGI for the next few years and almost all my investments are in a tIRA so I'll be pulling enough out to max out and still keep my ACA.
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Old 10-27-2021, 02:33 PM   #10
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I don't do sinking funds or buckets. FIRECalc and other models say we can afford all that stuff in the long run, and that's all I really need to know. Seems to me, segregating money doesn't make the plan more attainable, just more complicated.

That said, we do have a very small cash reserve (2-3%) that I keep at Ally. Everything else is invested and periodically rebalanced to our target AA. The small reserve just avoids having to sell stock to cover lumpy months, like when the annual insurance renews. I replenish in less lumpy months.

Our two pensions and taxable dividends cover all regular, recurring living expense. I sell shares to cover property tax, federal tax, and large discretionary expenses.

We have a fairly large discretionary budget for travel, home improvements, and other large non-recurring expenses. But I only withdraw at the specific time, and in the specific amount needed. Travel has been almost nonexistent for the last 18 months. So I'm glad that money has been in the market rather than a MMF earning nothing.
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Old 10-28-2021, 02:14 AM   #11
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No matter how I model it, holding any more than a few months cash is a drag on portfolio performance.
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Old 10-28-2021, 06:27 AM   #12
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Quote:
Originally Posted by Jerry1 View Post
I don’t physically separate my money. I keep a certain amount of cash on hand and the rest is invested (bonds and stocks . . .). If I wanted to think in terms of different “pockets” for different expenses, I would do it on a spreadsheet and not actually hold funds in different accounts.
+1. The only "bucket" I keep is a small amount of cash for a year's expenses. I periodically rebalance and top the cash up but not on a fixed schedule. In the event of a huge downturn I plan to use my TSP G Fund (sort of a Federal stable value fund). I could sell G and buy stocks or bonds in the TSP to balance out any losses I took elsewhere generating cash. So far we have never needed to do that. When DW hits RMD territory in a few years requiring her to sell large amounts each year in good times and bad, maybe that strategy will come into play.

If you are following or tracking a specific SWR strategy and want to create a "bucket" for big periodic expenses, I would recommend creating a pseudo bucket on a spreadsheet. Simply set aside an amount of "savings" each year and subtract that from the overall portfolio figure used to calculate the following year's SWR amount. Adjust the psuedo bucket number each year to account for the overall growth or decline in the total portfolio value. When the car purchase, boat, or whatever comes around withdraw from whatever accounts makes sense and knock of that amount off your psuedo bucket on the spreadsheet.
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Old 10-28-2021, 06:59 AM   #13
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Originally Posted by Jerry1 View Post
I don’t physically separate my money. I keep a certain amount of cash on hand and the rest is invested (bonds and stocks . . .). If I wanted to think in terms of different “pockets” for different expenses, I would do it on a spreadsheet and not actually hold funds in different accounts.
Yes, same.

When we RE'd, our budget plan was simply based on historical data, which we'd studied enough to be confident. We tracked our monthly outgoings to see a match for a few months. We looked at our annual total the first year. That was really it. We don't pull out a paycheck, or balance to it, or anything. We consult each other on big stuff. We keep a bigger cash balance than most here (2-3 years).

Of course, we've been in a bull (still) this whole time except for last year's wobbling, so we've never been compelled to take another look at our regular spending.
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Old 10-28-2021, 08:42 AM   #14
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No matter how I model it, holding any more than a few months cash is a drag on portfolio performance.
Really? My big concern is SORR on drawing down equities during a prolonged (2-3 year) depression. In that case you'd still do better with only a few months of cash and raiding your equities, rather than keeping cash or bonds to use and hold your equities until they recover? That was kind of my plan, but I'd love to be convinced otherwise!
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Old 10-28-2021, 09:21 AM   #15
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I guess I'm concerned that if I don't spend it I'll end up with a sizable cash pot earning .05%. Curious how you all handle this.

Did you really mean .05%? I move it to an online savings account that pays ~.50% and if it gets too big I’d ladder some CDs up to a year or slightly longer. Actually if I had $1500/mo in discretionary funds, I’d flip the script ant have my “monthly paycheck” directed to the high yield account and auto transfer just enough to cover the monthly expenses.
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Old 10-28-2021, 09:27 AM   #16
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We spend what we need to spend and do not worry about it. Expenses are expenses, no difference between discretionary or otherwise to us. We are trying to downsize so we do think twice about buying "clutter" items.
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Old 10-28-2021, 09:32 AM   #17
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Everything stays in my portfolio until about a month before it is due to go out the door.
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Old 10-28-2021, 09:53 AM   #18
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We drawdown as needed and only as much as needed. Monies stay in our portfolio, a small amount in HISA, and a much smaller amount in our current account for payments coming due.

During covid our income items have exceeded expenses so we have been doing the opposite. When our current account exceeds $500 we transfer the excess to our on line bank HISA.

We absolutely do not keep separate buckets of cash sitting in low/no interest current accounts.
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Old 10-28-2021, 11:32 AM   #19
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Ok thanks everyone. Seems the consensus is no buckets.

It’s funny how drawdown feels so much more complicated than accumulation.

I made a typo on savings rate. It’s actually.5%. Whoopee!
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Old 10-28-2021, 11:38 AM   #20
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Ok thanks everyone. Seems the consensus is no buckets.

It’s funny how drawdown feels so much more complicated than accumulation.

I made a typo on savings rate. It’s actually.5%. Whoopee!
I felt the same way. I keep creating new brokerage accounts to hold stuff in buckets and then never fund them because it just cornfused me as to why I needed a separate fund. I have an account for weddings, cars, travel, real estate taxes, taxes and maybe a few I don't remember. All of them are empty right now and probably will be forever. I plan my withdrawals for each year and if I have a pop up expense, I just withdraw more. Turns out it's pretty simple.

Invest when you have money, withdraw when you need money.
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