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Never good at tracking spending/budgeting
Old 10-08-2018, 11:55 PM   #1
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Never good at tracking spending/budgeting

I know the mantra about retiring early is to know your expenses. I have never been good at tracking our expenses down to the penny or even having a budget. It has always been ball park figures.

So I thought of two ways to to get a rough figure of what we spend or what we would need to replace to be as comfortable in retirement as we are now.

One was to just calculate our net pay from all w*rk. If we were to copy that number on an annual basis we would be golden as it is working for us now and would have a cushion as far as anything extra we are saving beyond what is taken out of our checks (401(k)) etc.

Just using a round figure lets say that total is $100k. That would mean that the general 4% rule of thumb would be a nest egg of $2.5M which seems high to me and more than what my ball park 'retirement' number was to begin with.

The second way to estimate spending was to basically add up our mortgage payments, utilities and add that to what we spend on our charge card for the year as we charge everything that can be charged for the rewards available on our card. Of course there is a few cash purchases but I would estimate those are less than 1% of the total.

This round figure was approximately $75k, meaning a nest egg of 1.875M, which was closer to my ball park 'retirement' number.

The benefit of either method is that the house is expected to be paid off and if all goes according to plan a downsize will occur with saving(s) on property taxes, utilities and the like.

Those of you who didn't track every penny, how did you come up with your magic number for retirement and replacement income?
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Old 10-09-2018, 12:41 AM   #2
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The only time we tracked everything was when we bought our first house while we were in grad school. Things were tight and we needed to make sure we had enough.

Before we retired we used the credit card method. Virtually everything went on the card. The thing that did not were easy to identify. Health insurance is a bit difficult as the rate of increase is not well predicted by in general.

Also, if you are planning for a 30 year retirement, then the 4% rule may be ok. Longer retirement not so much. You may want to try firecalc or RIP.

For health care I assumed paying the insurance and max out of pocket each year.

Do you have a plan for LTC?

You also need to budget for things like maintenance... care replacement, home repair, car repair, etc. You don't put a new roof on every year. Thus your method may miss some longer term expenses.

I'm sure others will have much better advice.
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Old 10-09-2018, 04:22 AM   #3
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Your first method is probably closet to reality. In the second method I expect that you missed some things and that is why the number is lower. Even in the first method, you can lose track of taxes and health insurance. In addition to those items, you need to account for rare expenses like furnace or roof replacement. Unfortunately, the higher figure is what you need.
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Old 10-09-2018, 05:05 AM   #4
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When I first started getting serious about this stuff, I did something like your 2nd method:
I looked at 1 year of credit card statements and checking account statements and tallied everything by category.

Some of that was guesswork but I think it was pretty close. Credit card charges at gas stations or grocery stores are easy to categorize. Credit card charges at Amazon - hard to categorize unless I dug into details of those purchases (I didn't). Things paid in cash were impossible to categorize this way, but at least I could tally all of the ATM withdrawals from my bank and that gave me the total of all cash expenses - for me this was very small compared to my credit card charges.


Later on I did start tracking expenses pretty carefully, but I think the above exercise gave me a very good idea of what my annual expenses were.
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Old 10-09-2018, 05:56 AM   #5
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My way of tracking spending now in retirement is outflow from my checking account. Everything flows through there including credit cards. I don't spend out of my investment and savings accounts; money gets transferred to checking, and then paid out. I don't bother with categorizing expenses. That would be a reasonable starting point, or you could do take home pay, less money invested if you put aside money outside of your paycheck.

The main issue is that any system based on pre-retirement expenses may not be accurate. Your life is changing, so will your budget.

Possible/probably increased spending:
- Income taxes (no longer just taken invisibly out of your paycheck)
- Health insurance (EDIT: plus possibly larger out of pocket limit)
- more vacations?
- more hobby expenses?
- more utilities, as you spend more time at home and keep the house heated/cooled all day

Some reductions:
- Commuting expenses
- Wardrobe, possibly
- Savings--you're no longer putting money away for retirement
- Possible downsizing of home
- Fewer restaurant meals if you eat lunch out

These are just a few examples. So you've got to figure out these things and add and subtract them from your current spending.

Another issue is that people may track expenses for a couple years and lock that in as their budget, but they forget that cars need to be replaced, and various things in your house need to be repaired and replaced (roof, appliances, painting, carpet, etc). Figure on a fund for both, either an actual separate one or just on paper. If you figure $5k/yr to replace a car and $5K/yr major home maintenance and you don't have any of those expenses, you'd better be $10K ahead of budget for that to work.

IMO this is not the time to be lazy about planning. Put some effort into how much you are really spending and how that will change. You don't have to track every penny, but the more effort you put in to make it accurate, the better idea you'll have of when you can retire. Right now it seems that you don't know if it's going to be $100K or $75K or some other number. I think you have to assume the worst, because once you leave a higher income job it would be unpleasant to have to make up for a shortfall. But $100K may be more than the worst case, so figure out what it really is.

And then in retirement I recommend you do at least a tracking of total expenses like I do, outflow from checking accounts, which is simply beginning balance - ending balance + any money transferred in from other accounts. (edited to + money transferred in, not -)
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Old 10-09-2018, 06:03 AM   #6
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I tracked every penny for 25 years. But those numbers had little influence on determining our magic number. For one, the actual spending changed radically over time and was riddled with large one-shots that won't occur in retirement, like used cars for the kids in high school and college tuition. The only meaningful baseline was the most recent year, and then only for a few categories of regular monthly expenses. I did look at patterns of spending on lumpy things like home improvements/repairs and travel to get an idea of the annual average.

Others may be different, but for us, spending in retirement is completely different than while working. We paid off the mortgage. Income tax dropped to almost nothing. The kids were out of college, so no tuition/R&B, plus they were off our payroll for things like health insurance, car insurance, cell phones, laptops, etc. With no commute, we spend significantly less on cars, gas, maintenance, tolls, etc, as well as no work clothes, shoes, dry cleaning, lunches. We hire out less for home repairs and we have time to research big purchases, as well as things like insurance and cutting the cord. On the flipside, we travel more, spend more on hobbies and home improvements, and pay more for health insurance. Completely different profile of spending in so many ways... AND significant known changes coming such as downsizing the house, Medicare at 65, etc.

YMMV, but I would not have been comfortable retiring without a reasonably detailed estimate of what spending would actually look like across 30+ years of retirement. Seems to me this is the crux of retirement planning and it's not hard at all. You just need a blank spreadsheet and a cup of coffee. The methods described in the OP seem to me like high-level sanity checks of the plan... not the plan itself.
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Old 10-09-2018, 06:10 AM   #7
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I tracked every expense for 4 years before retirement, not knowing I would retire.
We cut our expenses by 60% in those 4 years, which led to the surprise decision of being able to retire earlier than expected.
I would have not retired at 57 yo without knowing my detailed expenses.
BTW - I continue to track expenses, as that allows me to also sleep better at night.
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Old 10-09-2018, 06:31 AM   #8
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I’ve tracked expenses for the last 3-4 years. The original intent was to maximize savings. I pay myself in savings first, but then also when anything is left over, but how can you tell what’s left over if you don’t track expenses? It’s almost like a game. I have increased my savings every year since I started doing it.
I have a simple spreadsheet. There are only a few categories, credit card, utilities, HOA, house, savings, insurance and other. The credit card captures most of the costs. Other is seldom used. It’s pretty easy. I also have a “mad money” category that I throw credit card rewards into or money from eBay. There’s always a few thousand in there that I spend without quilt.
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Old 10-09-2018, 06:54 AM   #9
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We tried the second method for a few years. The total was pretty close but not the detail.
But we have controlled spending out of necessity a couple of times without a detailed budget. We have been over achieving our financial plan since retirement, mostly due to a good market and living in a low cost snowbird location. So we can afford to skip the detail.
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Old 10-09-2018, 07:08 AM   #10
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Originally Posted by RunningBum View Post
My way of tracking spending now in retirement is outflow from my checking account. Everything flows through there including credit cards. I don't spend out of my investment and savings accounts; money gets transferred to checking, and then paid out. I don't bother with categorizing expenses.
This is how we did it both pre-RE and now 12+ years into FIRE. The monthly output from the checkbook + tax withholding pretty much tells the story. We have a reasonable grasp of the significant hitters without detailed, written tracking.

In making our FIRE decision, I did take a couple of afternoons with DW to brainstorm whether we thought any categories of spending would change significantly and, in our case, the answer was basically "no." Money we previously sent to the 401k and 403b's would be used for increased discretionary spending in our FIRE years and other spending would be similar to when we were working.

We've found this method to be more than detailed enough. Admittedly, we FIRE'd pretty conservatively (see low WR thread) so small inaccuracies wouldn't make much difference.

It seems like generally unpredictable big-hitters like LTC, law suites, black swan financial events, possible emergency help for the kids, health problems, etc., etc., far outweigh whether my electric bill goes up or down 10% or not.
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Old 10-09-2018, 07:15 AM   #11
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Why not have your cake and eat it too? Use some account aggregation service like mint, personal finance, etc. I use bank of America "My Accounts". The account aggregation service will track and categorize all transactions fairly accurately on auto-pilot. You can add your own category rules if you want to make it more accurate.
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Old 10-09-2018, 08:35 AM   #12
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I have never tried to track expenses down to the penny, either. I get a pretty accurate number for total spending by using this process:

* Look at my monthly checking account statements to get the sum total of all the checks that were written each month. This would include any electronic transfers to pay bills from the checking account. Deduct any amounts for checks written to investment accounts, since they don't represent actual spending.

* Add in any cash withdrawals from my savings account.

These two items represent all of my spending by cash, check, or credit card, since I pay for the credit card bills through the checking account. For me, this represents 100 percent of the money that I spend on a routine basis, including insurance and property taxes.

* At the end of the year, I can look at my tax return to see how much additional spending goes to income taxes.

* I also consider irregular spending for things such as replacement vehicles, house maintenance (repairs, painting, new roof, new HVAC system, and so on.) For each of these items, I consider what I spent the last time, how long each will last, and come up with an estimated annual amount that will cover each item by the time it needs to be spent again. I include these annual amounts as part of my annual spending needs. The annual amounts I include in my spending estimates are very generous, and higher than I actually expected to spend.

* Then I add in a cushion for unexpected expenses. The last time I went through this exercise, my cushion represented about four percent of my actual spending (not including income taxes).

Although this is not an itemized list, it does give me a pretty good number for total spending. We have always spent much less than we earned, so I never worried about tracking to the penny or the dollar.
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Old 10-09-2018, 08:56 AM   #13
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I didn’t track to the penny either, I don’t have that kind of personality. I took two previous years of statements from my bank and got a rough estimate. For example, if I paid cash, there is a cash row from cash withdrawal, also from bank statements. I can use cash to pay food, or anything. Then there is a row for credit cards. Then there is a row for gas, electricity, etc..
Your bank statement alone will do, that’s actual spending.
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Old 10-09-2018, 08:58 AM   #14
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I did a few SWAGs at budgeting, but I really, really sucked at it. My method (not recommended) was to examine what I took home and what was left at the end of the month.

I took home almost exactly 1/2 of my gross pay (maxed out 401K and had high HSA contributions).
10% of the take home pay went to traditional savings.
The only debt (for several years) is our mortgage.
We lived comfortably on the balance, but sort of lived paycheck to paycheck.
The savings always took care of the one off emergencies / repairs, etc.
None of my payroll deductions would carry over in retirement (insurances, SS tax, etc), and state/fed taxes would be lower.
The only real spending change of significance was travel, and that was factored in (and has been on plan).

We're 16 months in to retirement and spending has been right on track; a little higher than final working years overall, with a big chunk of additional (planned) travel spending.

YMMV!
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Old 10-09-2018, 10:36 AM   #15
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Ronnieboy, I do the same thing. We both max out our 401(k) and Roth IRA contributions, have a lot of things deducted pre-tax, and have automatic transfers from our checking account into other savings accounts for different purposes. We have adjusted to spending what is left, and sometimes if we run over or under for too long we make adjustments, but we don't keep a budget in the usual sense. I've used our net take home pay minus our regular transfers to figure out our monthly spending, like you, but recently I analyzed our current spending and put it into Fido's retirement planner to figure out how much we might need. Or, if your bank allows you to categorize transactions as some do, you can look at one or two months of spending in different categories, then do it again in 6 months or a year. Your credit card also likely offers a yearly spending breakdown, which could save you some work.
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Old 10-09-2018, 11:01 AM   #16
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I never tracked our expenses down to the penny or even dollar. Way too much work in my estimation. I (or should say we), first "paid" ourselves by putting a fixed percentage into IRA's and 401K's. Once that expense was taken care of, we put away enough money to fund vacations once or twice a year. After that, it didn't matter. As long as we didn't have to rob from savings, we just enjoyed living. Seemed to work out OK.
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Old 10-09-2018, 11:41 AM   #17
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Originally Posted by RunningBum View Post
My way of tracking spending now in retirement is outflow from my checking account. Everything flows through there including credit cards. I don't spend out of my investment and savings accounts; money gets transferred to checking, and then paid out. I don't bother with categorizing expenses. That would be a reasonable starting point, or you could do take home pay, less money invested if you put aside money outside of your paycheck.
...
+1

As a starting point, a simple estimate of your spend/cashflow can be done just by seeing how much is coming in and going out of your bank accounts.
When you want to get more granular, you can start pulling out specific categories though you then may have to pull numbers from your credit card statement.

I don't think people need to get extremely granular unless they want to try to be able to make adjustments to specific types of spends, eg. I'm eating out too much and want to try to cut down on that.
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Old 10-09-2018, 11:54 AM   #18
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I know the mantra about retiring early is to know your expenses. I have never been good at tracking our expenses down to the penny or even having a budget. It has always been ball park figures.
You are an intelligent man and you could easily "be good at tracking" if you had any desire to do that. It would take less time out of your week than taking out the trash. Obviously you refuse to be good at tracking, and it is your choice to make, not ours. It's kind of a routine task, I agree. In my case I like doing it, but I can see why somebody else might not.

Still, it's quite possible for someone to retire with only a vague idea of what expenses they will need to cover. You might end up working a little bit longer, in order to over-fund a little and cover the uncertainty of what you will be spending.
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Old 10-09-2018, 12:44 PM   #19
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As regular users of Quicken (I was an accountant by trade), we had lots of detail on our spending. However, for people like the OP that have never done such tracking, I think that the top-down (adjusting net pay) or bottoms-up (detail budget) both work... and it seems to work ok for the OP.

The one thing that the OP is missing in calculating how much they need is SS.
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Old 10-09-2018, 12:56 PM   #20
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I know the mantra about retiring early is to know your expenses. I have never been good at tracking our expenses down to the penny or even having a budget. It has always been ball park figures...
While working, we had always been LBYM and had plenty of money left over. Never needed to budget, nor tracked anything closely.

When I seriously thought of early retirement, it dawned on me that I did not know what my "means" would be. It was in the search for what I later learned to be called SWR, I came to this forum. And here, I was impressed by people who knew what they were spending. Wow! Why could I not know better what I spent money on?

My wife has always been taking care of monthly bills, but I needed to know for myself. It's more than knowing the total amount. I needed to have a handle on a bit more details. Like how much for housing costs, food costs, transportation, travel, children's college costs, etc... I discovered that just downloading my expenses into Quicken gave me all the info I needed, for not much work. I needed to know the amount in each category to know if I suffer from lifestyle creep, and where I could cut back if necessary. What are essential expenses, and what are discretionary? And that knowledge allowed me to pull the plug with confidence.

Now, having been retired for 6 years, I mainly look at the total expenses for the last 12 months every so often to make sure that it is low enough.

I still have no budget. It's interesting to see my expenses have been very lumpy. One year, I spent a lot on gifts & donations (helping children buy their 1st home). Other years, the 2 homes sucked up some money for repair and update.
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