Where put money budgeted for lumpy expenses

[UpQuark]

I retired last year and am still learning how to reverse course from saving to spending.

I've seen that different people prep and transfer their spending money from investment account to checking account by year, quarter, or month. Or maybe they are prepping (i.e., taking IRA withdrawal and/or selling equities) it in their investment account by quarter or year but then setting up an auto-transfer monthly amount.

Anyway, I very much like the idea of setting up a regular 'retirement paycheck', but I'm not sure how to designate/organize money for lumpy expenses (property taxes, annual insurance premiums, vacations, dental work, etc).

Do people just leave that portion of the budget in the original investment, or do they sell/do a withdrawal and somehow set it in a separate investment position 'envelope' to be ready for spending at the right time?

Also, I had thought I'd maybe prep for a quarter or year but then put the money I withdrew from IRA/got from selling investments into short treasury bills (for example in a bond ladder for the upcoming year), but now I'm wondering if just leaving the money in a money market account is virtually equivalent?

And my Fidelity accounts always have a money market core position, but to organize the money could I have a second money market in the same account (like have both SPAXX and FZFXX in my Fidelity taxable account and keep my lumpy budget money or upcoming 'retirement paycheck' money in for example FZFXX while SPAXX remains the core position that dividends and surprise-cap-gains go into)?

 

[jazz4cash]

Everyone has their own technique but you have the right idea. Starting from an overall Sleep Well AA to a “bucket “ of 1-3yrs expenses in CDs, treasuries, etc. I lay out the maturities on a timeline and buy some that mature when property taxes are due for example. These are fairly small sums/short terms so getting the highest rate wont make a huge difference. MM are great right now but that was not the case a year ago. It’s trial and error, mostly

 

[RetiredAt49]

I think you could receive dozens of good ideas but only a few of them would work for your personal situation….

For me, my AA is 100% stocks (excluding rentals). I’m only 51 so any expenses that our rental income doesn’t cover, I pull “on demand” from our taxable account (e.g. dividends first then sell stocks as needed).

 

[Midpack]

The whole idea of lumpy expenses makes a regular ‘retirement paycheck’ problematic IME. So my AA includes 5% cash, which the OP might call an ‘envelope’ - I don’t do buckets or envelopes. I withdraw 4 times a year about 10 days before estimated taxes are due based on cash flows in and out including lumpy expenses. It’s been a few years since the last time I had to sell (taxable) shares of anything to make a withdrawal, my cash AA is plenty - but if I have to sell shares, I factor that in (taxes). Restoring cash AA can be part of normal rebalancing but since I retired I have all our dividends/STCG going to bank checking so cash is constantly being replenished and withdrawn automatically- I guess you could consider that a ‘retirement paycheck.’ In a few years Soc Sec and RMDs will become additional passive ‘retirement paychecks’ for us and we’ll have the opposite (first world) problem - too much cash.

And yes, money markets are back to decent yields again for now.

 

[Montecfo]

I set a funding plan annually. I pay myself twice a month from dividends, Interest and maturing treasuries in taxable account. The budget is intended to cover all types of expenses and is the same every month.

Since expenses vary by month I keep buffer funds in my checking and also in my MM account. This way I have extra funds if I need cash for something like new furniture or buying a car.

 

[racy]

My paycheck plan: (1) IRA fund quarterly dividends settle to my IRA Fed MM from which I setup automatic monthly withdrawals to a checking account. (2) Monthly social security is deposited in the same checking account. (3) Taxable quarterly fund dividends also go to the checking account.

Lumpy expenses are mainly paid for from MM cash or if necessary, a sale of securities.

(I'm not a bucket or envelope guy, but whatever works for you.)

 

[Sanstar]

Pensions are direct deposit to checking. I have a separate savings account for known lumpy expenses. Then, make sure to transfer a set amount each month to cover these periodic costs. Those expenses include: DGS tuition, house tax bill, HOA fee, combined biannual insurance. When these big bills hit, transfer money to checking and pay them.

 

[audreyh1]

I tend to have enough unspent funds accumulated to cover any lumpy expenses. Some of this is in CDs and Treasuries but something is always maturing. The rest is in high yield savings and MM funds.

 

[Dtail]

I fund a separate account monthly which is in a MM account and take from there as necessary.

 

[jldavid47]

We keep money for "lumpy" expenses (+ "emergency" savings) in a savings account at Ally Bank. I've been "bucketing" money in savings accounts for "lumpy" expenses since 1991 (I use a spreadsheet) and it was one of the best money management decisions I ever made.

 

[mystang52]

We keep money for "lumpy" expenses (+ "emergency" savings) in a savings account at Ally Bank. I've been "bucketing" money in savings accounts for "lumpy" expenses since 1991 (I use a spreadsheet) and it was one of the best money management decisions I ever made.

+1 Planning for lumpy expenses need not be complicated. I, too, use Ally for rainy day expenses. For known expenses such as Property Taxes, and similar, I keep the funds in my bank's MMA, then schedule the transfer and payment through my bank's Bill Pay.

 

[Amethyst]

This is what I do, too.

I fund a separate account monthly which is in a MM account and take from there as necessary.

 

[FlaMariner]

Right now, we live off dividends, interest and a pension......

$$$ are auto deposited into our ML Money Market account.......I treat this account as a TBA (target balance account) and transfer $$$ over a certain amount to our savings (Dominion Energy Reliability Investment account earning 5.25%).

Once a month, I tally up the monthly bills and transfer our "pay" into our ML checking account.

"Lumpy transactions" would just be included in the one monthly transfer from the savings account.

(If ML paid more for their money market, I'd skip the savings account but I'm too cheap/frugal for that...also, at the end of the year, we re-arrrange $$$ based on the balances, IRA withdrawal, taxes, budget for the coming year)

 

[levindb]

I created a "paycheck" from my investable assets the moment I retired. It was the same as my take home pay and have paid for lumpy expenses the same way I did before I retired...savings account many years ago, and MM or CD's in today's world.

 

[COcheesehead]

My paycheck is almost biweekly cashflow from a bond ladder. I don’t sell assets since the ladder throws off more than what we spend. I account for lumpy expenses on a spreadsheet, putting funds away for cars, taxes, house maintenance, insurance, etc, but do not separate it out physically in our brokerage account. So it’s mental accounting without actually creating any other accounts or keeping unneeded, idle cash anywhere. I am not a big advocate of keeping stashes of cash as long as I have a reliable cashflow.

 

[dknighd]

There are a million ways to solve this "problem."
When I was working I had part of my pay check deposited to a checking account, part to a savings account (for predictable, and unpredictable, lumpy expenses), and part to a tax deferred retirement account.
Now that I'm retired things are different. Most of my money is in tax deferred retirement accounts. And for various reasons I'd like to keep it that way.
What I think I have settled on is quarterly withdrawals from tax deferred into taxable MM account. Doing it that way keeps my taxable withdrawals to a reasonable number. I might eventually do this once a year.

Then once a month I move money from MM to checking to pay regular bills, and still have a reserve for unexpected lumpy expenses.

One day I would like to have most of my money in Roth accounts, but that is not likely to happen. If I can convert a little every year, the eventual plan is to have Roth accounts hold my lumpy expenses.


There is no one size fits all for this. You have to figure out how you want to do it now that you have no "paycheck." The answer might depend in part if your "nest egg" is taxable, or not.

 

[jebmke]

I stay fully invested with one exception. Three quarters of estimated taxes are parked every April in a HYSA and are used to feed EFTPS on known dates.

 

[RetireAge50]

Currently we have about a third of our money in safe stuff paying a little over 5% so all portfolio withdrawals (lumpy or not) come out of there. The rest is in stocks. No funds or accounts specifically earmarked for anything. We withdraw from whatever is liquid and tax efficient at the time.

 

[W2R]

I just take money needed for "lumpy" expenses, from my cash reserves. When I paid for my new roof last March, I took the money from my bricks'n'mortar bank account. Then I got a little nervous about that account being so low, so I moved $20K to that bank account from a Vanguard money market account where my dividends automatically go.

Yeah, I have a lot of cash but I am 75 and almost never spend anything from my dividends. Generally the sum of my SS + mini-pension + RMD's is enough for my preferred lifestyle so I don't spend the dividends (which make up the majority of my income). Some people might say I over-saved for retirement, but I retired before the ACA existed so I had to work a few extra years to qualify for retirement health benefits from my job.

 

[scrabbler1]

At the start of each year, I do a estimated cash flow spreadsheet, like a projected checkbook register which includes my monthly bond fund dividend "paychecks" and other, smaller cash inflows, along with all my best-guess expenses, from the monthly ones to the larger, lumpier ones.

By doing this, I can see where my surpluses are and where I need to carry forward those surpluses to cover the lumpier expenses such as income taxes and car insurance. I target a minimum balance in this "checkbook" so in some months I am able to invest some of these surpluses elsewhere.

I update the projected checkbook register as actual expenses replace predicted ones. This means some surpluses may shrink or grow. By keeping a small buffer, or cushion, in my checking account beyond the minimum balance requirements, if I have to dip into it sometimes it is not a big deal. I'll replace the deficit next month.

 

[Koolau]

I do a major estimated RMD withdrawal once a year - usually early. It all goes in the check book. If it looks like I'll need more, I hit the 401(k) again. Not as efficient as many here. I got no time for efficient.

 

[5Miler]

For the first 10 years of my retirement, I just had an automated monthly transfer from my IRA money market to my checking account to establish my monthly paycheck. I started SS 18 months ago and with that monthly income, dropped my IRA transfer.

For lumpy expenses each year I still do what I did while I was working. I use Quicken to setup goal accounts, one for a vacation fund and one for an "Escrow" account for all other lumpy annual expenses. The money is actually in my checking account but Quicken saves my brain from having to do accounting gymnastics to keep buckets and envelopes straight.

I use the "escrow" fund to pay RE Taxes, Auto/Home Insurance, lawn service, pest control, auto inspection/registration, Christmas budget, monetary gifts to grandkids for birthdays/graduations and other similar expenses. I even used to budget dog care when we had two dogs as Vets consume large amounts of income. I have an 30 year old spreadsheet I used to calculate my annual lumpy expenses and update each expense as they have all slowly increased over the years and others disappear such as Vet expenses.

To fund the goal accounts, I take my annual estimate and divide by 12 so I can move that amount into my phantom funds each month from my monthly paycheck. I do dip into my Roth on occasion for exceptional expenses such as a new roof, dental implant or other large item but thankfully, those have been rare.

I have actually found I overfund the goal accounts so occasionally use them for other purchase such as a new smoker grill, pressure washer or similar. The vacation "escrow" account funds my 5 week dive trip each year plus additional cruises or shorter local trips which we usually plan at least 9 months in advance. I prefer to just use already earmarked dollars to pay for these things rather than have to worry about what investment to tap.

I often thought I should use an account drawing better interest than a checking account but rates have been so low for so long it wasn't really a thing for me to worry about. Even now, my goal account balances never get real high as money is flowing in and out on a monthly basis so the gain from a higher interest rate would really be negligible. Not to mention I am basically a pretty lazy guy these days and all that money movement sounds like too much work.

 

[Koolau]

For the first 10 years of my retirement, I just had an automated monthly transfer from my IRA money market to my checking account to establish my monthly paycheck. I started SS 18 months ago and with that monthly income, dropped my IRA transfer.

A very good idea to establish "income" even though it's actually taken from your IRA. We tried to get a mortgage and almost didn't because we didn't have established income. We'd been spending from our taxable "savings." BUT, we had converted tIRAs to Roths and had to pay taxes (establishing our "income" on our 1040.) Got the mortgage. Your way is better IMHO but YMMV.

 

[brett]

We don't.

If an unexpected capital expense comes up we simply take the money from our cash allocation or from the equity account.

We do not budget for them nor do we set up separate accounts or suspense accounts for them. We are well past doing that.

 

[5Miler]

A very good idea to establish "income" even though it's actually taken from your IRA. We tried to get a mortgage and almost didn't because we didn't have established income. We'd been spending from our taxable "savings." BUT, we had converted tIRAs to Roths and had to pay taxes (establishing our "income" on our 1040.) Got the mortgage. Your way is better IMHO but YMMV.

I have to say that it did work out well for me. One area that I regret is I didn't take the opportunity to begin back door Roth conversions until two years ago so I still have the majority of my money in my IRA account. I have three more years until RMDs kick in so I should be OK in that regard but nowhere near where I would like to be. The funny thing is I lived entirely off of my IRA account for 10 years yet because of the great market, the account still almost doubled in that time. Not complaining. I assure you it wasn't due to any skill on my part.