Handling discretionary expenses in RE

[tmitchell]

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.

 

[Jerry1]

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.

 

[Montecfo]

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.

 

[HarveyS]

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

 

[ERD50]

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.

-ERD50

 

[bizlady]

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.

 

[RetiredHappy]

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.

 

[Mark1]

..

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.

 

[GravitySucks]

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.

 

[Cobra9777]

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.

 

[Markola]

No matter how I model it, holding any more than a few months cash is a drag on portfolio performance.

 

[donheff]

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.

 

[Aerides]

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.

 

[The Cosmic Avenger]

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!

 

[jazz4cash]

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.

 

[ShokWaveRider]

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.

 

[jebmke]

Everything stays in my portfolio until about a month before it is due to go out the door.

 

[brett]

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.

 

[tmitchell]

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!

 

[corn18]

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.

 

[brett]

We have one investment account ,one on line HISA account, and one current account. The investment account gets reviewed quarterly plus a late November review for tax planning purposes.

We keep track of one number ...our after tax annual spend. Takes less than five minutes a month to total the payments and ATM withdrawals from our currrent account.

We don't budget by line item or keep track of what we spend on carrots, coffee, dining out, wine, dentist...whatever.

 

[RobbieB]

Me too. No budget, pull from investments (equities) when dough gets low.

 

[W2R]

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 don't travel, so my discretionary spending might be a little less than yours.

Social Security, my mini-pension, and my RMDs all come to my bank account on a monthly basis. At the end of the month, if I have enough for something I want, then I buy it. If I don't, I wait.

Normally if this develops into an unspent excess in my bank account by the end of the year, I invest it at that time according to my planned asset allocation. I seldom if ever sell any of my portfolio and withdraw it; money goes in, but not out.

In the unlikely event that I wanted to buy something extremely expensive, then I might leave the excess there in the bank and let it accumulate until it was sufficient. That's what I did during the 4 years when I was looking for my Dream Home. Once I found the right house and paid for everything in cash, well, that took care of the excess in my bank account plus a little more that had accumulated within my portfolio. After the house purchase I went back to investing the excess in my bank account at the end of each year and not selling any of my portfolio.

 

[SecondCor521]

+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.

-ERD50

This matches my thinking.

The only drawback I've found is that it's easier for my personality to get competitive with myself and leave my money in the portfolio unspent. If I set up a paycheck scheme then it'd be easier to spend the money piling up in the checking account.

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!

I think so, but I've never put pencil to paper to model it out. Here are some qualitative thoughts though:

It helps to have a low WR. Mine is sub 1%.

So the first thing to note is that most downturns do not last 2-3 years. A few have, but most haven't. Even for the ones that do, I'd only be pulling out 2% to 3% of my portfolio.

Next thing is that even the worst recessions are down about 50% (assuming broad diversification, which eliminates NASDAQ in 2000). So even my 2% to 3% of my portfolio at a 50% loss translates to a 1% to 1.5% portfolio hit.

Next thing is that recessions are not square shaped - they don't drop 50% on day 1, then stay down for 2 to 3 years, then bounce back up. So I'd have to be pretty unlucky for my equity sales during that time to *all* be down 50%.

Finally, for the majority of the time that we haven't been in a recession, I've been accumulating more. I retired in early 2016, and most of my investments are in S&P500 stuff. Annual returns:

2016 9.54%
2017 19.42%
2018 -6.24%
2019 28.88%
2020 16.26%
2021 21.18% (I'm assuming this is YTD)

(https://www.macrotrends.net/2526/sp-500-historical-annual-returns)

The above doesn't even include dividends, which are another 1% plus.

Finally, as an example of how average luck can help: in 2018 although the market was down that year, I only sold once, on 11/13, because that was the day I happened to need money. On that day, the market was up about 1.2% YTD. The negative return was mostly in December.

So at this point I'm playing with the house's money (yes, a logical fallacy, I know).

 

[Markola]

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!

First, you have to go see for yourself that the timing of rebalances makes little difference to a portfolio over long periods of time. You can model different rebalance schedules and schemes on Portfolio Visualizer. Once you understand that, you can then understand that for a person spending more of one asset class periodically, then rebalancing back to a set asset allocation afterward, is only “slow-motion rebalancing”.

What does make a difference, negatively, is:

1) Holding inert cash that loses ground to inflation through all the good years (which are most years, after all) waiting to deploy it in a stock downtown, the spending it down, then in recovery, selling rising assets to rebalance back the cash position. The portfolio would have been better off being fully invested in growing assets.

2) Changing up one’s asset allocation, which is just market timing.

Any benefit to a cash bucket strategy is purely psychological, but the damage is mathematical. If such “spend your cash during downturns” strategies were advantageous, wouldn’t mutual funds use those strategies rather than liquidating all assets proportionally as needed in times of major redemptions? Yes, they would carry significant cash, but they don’t, because, except for petty cash, they know that money is earned only by staying fully invested.