Year to year spending variation

[Navigator]

* I recently retired and am living entirely off my savings. I’m trying to figure out how to best withdraw my money each year, which seems to depend on factors that have a large amount of uncertainty. There are several articles that suggest spending decreases between 0.5 and 2% per year in retirement, depending on the level of spending of the retiree. However, these are aggregate amounts. I’m not sure anyone actually follows this curve since almost everyone will have unexpected and periodic expenses (such as buying a new car every 10 or so years). At the same time, SWRs depend on future market returns and can vary by a factor of more than 2.5, depending on what a portfolio does.

My question is this: how much does your spending vary year to year? Do you have a strategy for increasing or decreasing your spending each year that takes into account market returns?

 

[Teacher Terry]

Our spending varies depending on how many vacations we take and if we have any major expenses such as cars or home repairs. We also have 2 pensions and work p.t. so mostly just use that $. Sometimes we use our savings.

 

[Meadbh]

My spending has been remarkably consistent during the first three years of retirement, because I set a budget and kept to it. It's as simple as that.

 

[Bamaman]

I draw a little off my 401K's that are in mutual funds. I'll project what I need for a year ahead and make one withdrawal per year if the stock market's up somewhat. If the stock market's taken a dive, I'll put off making the withdrawal until it's on the upswing.

 

[jazz4cash]

Not sure what you mean by this. It is not the way I use SWR:
"SWRs depend on future market returns and can vary by a factor of more than 2.5, depending on what a portfolio does."
As for me, I use my cash allocation and/or a CD ladder to keep next year's spend safe and liquid. I use a set of sub-accounts to accumulate funds for extraordinary expenses like auto repair/replacement, appliances, new roof, etc. I haven't been retired very long so I am feeling my way.


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[FUEGO]

The annual variations in our spending are mostly of our choosing.

Here is where we are so far, after 3 years:

2014 Budget: $32,000 / Actual - $34,000
-included a large exterior renovation for $8,700 (new windows, new siding, major roof repair)

2015 Budget: $32,400 / Actual - $24,000
-increased budget by 1.25% for inflation; no big lumpy expenses; we spent 7+ weeks on vacation in Mexico that was part of the budget

2016 Budget: $40,000 / Pro Forma Estimate: $36,000
-we increased the budget to $40,000 due to rising portfolio value several hundred thousand larger than when I first retired; my side hustle also picked up steam
-most of the increase went to travel, a purely discretionary expense
-We spent $8200 on a new (used) car - 2009 Toyota Minivan; hopefully it lasts 7+ years


We confirmed our baseline expenses are around $24,000, but those "one time" lumpy expenses like major house repairs or new(er) cars push that total up a bit when we experience them (and they will be present as often as not it seems; it's averaged in the budget).

2017 will probably see us getting a new roof ($5-6k) AND spending $10,000+ on a summer vacation in Europe, so we will bust right through $40,000 in spending by a small margin unless everything else runs perfectly smooth.

If our portfolio drops by 20-30%+, I'd start looking at cutting expenses. Tilting more toward budget travel in summer 2017 could be one way, and taking cheaper vacations in 2018 and beyond would be another (I'd love to spend another summer in Mexico and another one on a cross country road trip - that's cheap!).

Conversely if our portfolio keeps going up, I'll think about clever, new ways to spend more money.

 

[W2R]

I retired in November, 2009. So, 2010 was my first full year of retirement. My annual spending so far, expressed as a percentage of my 2010 spending, has beem as follows:

2010: 100%
2011: 86%
2012: 87%
2013: 101%
2014: 104%
2015: 121% + 244% for cost of new house purchase, fix-up, and move
2016: 134% so far (HVAC cratered, dental work)

Basically, I was averaging 2.0% WR where my plan was to spend 3.5%. I figured I could afford to kick up the spending a bit, so I bought a house in 2015. I love my house. It's all good.

But, now that I'm all moved in and settled, I wouldn't mind if the irregular big expenses would just stop for a while.

 

[EastWest Gal]

Still finding my way too. I "officially" retired 7/31. I planned to retire in 2014, but was sucked into filling in the schedule on an "emergency basis" for 22 months. Given that I made a lot of $ filling in I splurged on some long desired toys (musical instruments) and an unexpected trip to Italy. Now I am working on staying within budget but it's really easy with home cooking and next year's travel already set and mostly paid for.

I am trying to beef up my cash reserve.


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[Navigator]

Not sure what you mean by this. It is not the way I use SWR:
"SWRs depend on future market returns and can vary by a factor of more than 2.5, depending on what a portfolio does."
As for me, I use my cash allocation and/or a CD ladder to keep next year's spend safe and liquid. I use a set of sub-accounts to accumulate funds for extraordinary expenses like auto repair/replacement, appliances, new roof, etc. I haven't been retired very long so I am feeling my way.


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I mean that you cannot know your safe withdrawal rate (SWR) in advance - it depends on future market returns. If we take a look at historical SWRs for a portfolio of 60% diversified stock index funds and 40% short term bonds, the SWR for a 30 year retirement varied from a low of about 4.5% in 1937 to a high of 10.7% in 1975. Right now, we are in uncharted territory - the P/E of US stocks is quite high, interest rates are low and projected GDP growth is declining due to an aging population. We have never been in this situation before, and so estimating a SWR for a thirty year retirement is difficult.

 

[jazz4cash]

By your definition, the safe rate would be 4.5%. Done.


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[Alan]

I would never expect year to year spending to be constant since there are major purchases to be made from time to time. (New car, new furnace, etc.)

What can more easily be controlled is the amount withdrawn each year. The annual budget can include saving for big ticket items so that most years the spending will be below withdrawals.

 

[Z3Dreamer]

To OP. Potential tax savings are more prominent in my short term planning than this year's market returns.

 

[Danmar]

Our spending since retirement (10 years) has varied a fair bit. In order to reduce the need to liquidate investments to fund these "blips" I keep a fairly high cash balance on hand. Drags the returns down a bit but in the long run reduce some sequence of return risk. My plan is to selectively sell some stock from time to time when the markets are good to bolster the cash balance.

 

[OverThinkMuch]

Recently retired can mean a year like another other, or it can involve a relocation with plenty of spending. So your first year being retired might not plot the path for future years. It depends if you dealt with many one time issues like moving, new cars, and a pent up need to travel.

 

[kcowan]

Our annual spending was pretty flat for 3 years and has declined since then. 06 through 15:
100 95% 97% 99% 81% 81% 83% 68% 70% 71%
This substantial drop is partly due to us buying a snowbird property in Mexico in 2007 and spending 5+ months living there. We also began to rent out our property up North.

Eventually we will see an increase in annual flight costs to Europe when our airline points get used up. The SWR was established in 2005 so these declines represent underspending, establishing a buffer for future unexpected expenses.

 

[FUEGO]

Our annual spending was pretty flat for 3 years and has declined since then. 06 through 15:
100 95% 97% 99% 81% 81% 83% 68% 70% 71%

That's a pretty drastic reduction! Is that expressed as a % of portfolio each year or you're spending less year over year in absolute terms?

 

[Trawler]

Retired in 2012 and our spending has not varied more than 12% from the most expensive year to least expensive year. Funny thing is the unexpected expense each year is almost the same every year but the purchases are always different stuff.

 

[FUEGO]

Retired in 2012 and our spending has not varied more than 12% from the most expensive year to least expensive year. Funny thing is the unexpected expense each year is almost the same every year but the purchases are always different stuff.

We've noticed that too. Our price tag is $8-9k for that stuff. Used minivan, new siding/windows, and in the next year, new roof. By year 4 of retirement we'll only have 1 year WITHOUT one of those big lumpy expenses.

 

[Cobra9777]

Retired in 2012 and our spending has not varied more than 12% from the most expensive year to least expensive year. Funny thing is the unexpected expense each year is almost the same every year but the purchases are always different stuff.

That's been my experience as well. I retired in 2013 and expenses have been fairly steady overall, but the big ticket items are different every year. It's not my intent necessarily, but I suppose I manage it that way. If there's a big unexpected repair, I might defer a planned home improvement. We're buying a new car next year, so I informed DW that we can't go crazy with travel planning. Maybe take a car trip.

 

[rodi]

We've noticed that too. Our price tag is $8-9k for that stuff. Used minivan, new siding/windows, and in the next year, new roof. By year 4 of retirement we'll only have 1 year WITHOUT one of those big lumpy expenses.

Yup. Same here. We tend to plan (and spread out) major home improvements. (remodel the kitchen one year, new windows the next, new driveway the third.)... This all ends up around the same $$ per year - within a few thousand.

We have a fund for these predictable big ticket items - which we refill each year when we withdraw from investments. If an unplanned expense comes up - we might skip a planned expense... or pull from our emergency fund...

 

[braumeister]

I estimate my expenses (both essential and planned discretionary) for the coming year, rounding up a bit for everything. Then I look at what WR is required to meet those expenses. As long as that is an acceptable percentage, that's what I use.

Anything not spent out of that withdrawal goes into the slush fund, which is another column in my spreadsheet.

Some years the slush fund grows, other years it shrinks. It has never gone below zero.

That has been my practice for 15 years now and works for me.

 

[racy]

Using the average of the 4 years prior to retirement as base, our post retirement spending has been:
94%
97%
104%
Last year was high due to son's wedding and my 2 root canals...

 

[kcowan]

That's a pretty drastic reduction! Is that expressed as a % of portfolio each year or you're spending less year over year in absolute terms?

It is based on real dollars with 2006 as the base year. And as I have said before, the decline is driven by shifting our COL from Vancouver to PV for half the year. Since our Firecalc was based on the 2006 level of spending, we have a lot of buffer building for LTC.

 

[Options]

I estimate my expenses (both essential and planned discretionary) for the coming year, rounding up a bit for everything. Then I look at what WR is required to meet those expenses. As long as that is an acceptable percentage, that's what I use.

Anything not spent out of that withdrawal goes into the slush fund, which is another column in my spreadsheet.

Some years the slush fund grows, other years it shrinks. It has never gone below zero.

That has been my practice for 15 years now and works for me.

My plan as well. I will amoritize big ticket items much the same way condo associations do. Having saved/spent in this manner for all of my life, it's what is easiest and makes the most sense for me. YMMV.

 

[jj1981]

I take out $30,000 twice per year. This is right @ 2.00% WR. I (we) continue to live BYM. I WILL CONTINUE TO CHECK IN FOUR TIMES PER YEAR.



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