Projected Budget in FIRE

[livingalmostlarge]

I was just wondering when you are still working, how do you project future expenses?

I was calculating and we spend about $2500/month living and $2500/month mortgage (PITI+HOA). So $5k/month, up to $65k/year. But whenever people talk about retirement and expenses I picture myself not having a mortgage and needing maybe $2500-3k. But that means we need substantially less nest egg to make do.

But that's why I struggle so much. I don't think I'll need an extra $2500/month in retirement after the mortgage is done.

How do you look at your monthly budget? And how to you calculate future expenses? Especially for early retirement.

 

[W2R]

I didn't retire until age 61.5, which is not all that early, I guess.

In doing this estimate I looked at my budget and subtracted things a retired person wouldn't need (work clothes, commuting expenses, and things like that). I added more entertainment expenses and medical expenses. If you intend to travel, you need to add money for that.

I retired in 2009. Once I retired I was surprised to find that taxes are much less than they used to be, and that medical expenses are so much more (despite being healthy and having the same insurance). Medicare does help once you are old enough for it, but still.

I tried different scenarios on my spreadsheet when trying to figure out whether or not to pay off my house. Finally I decided that I just wouldn't feel as happy depending on market conditions to make a mortgage payment, as I would if there wasn't any to begin with. So for me, paying off the house was the right move. But it isn't for everybody.

Once you figure out how much you will need in retirement, it is a good idea to try living on that amount for several years while working. Even though the details of your expenses are different, overall they may not be that much different in retirement.

 

[A Bird In Hand]

But that's why I struggle so much. I don't think I'll need an extra $2500/month in retirement after the mortgage is done.

Our future ESR plans depend entirely upon having no mortgage, and hence expenses low enough that will allow part time work. All my projections in Firecalc assume no mortgage.

How do you look at your monthly budget? And how to you calculate future expenses? Especially for early retirement.

I simply refer to our actual expenses over the last several years (you are tracking this...right?), and make the adjustments I can anticipate for retirement.

In ESR it's simple: start with current expenses; subtract the principal, interest, and extra payments I currently make on the mortgage; and add in some extra for entertainment/travel/hobbies.

In ER I'll also have to add back in estimated income taxes on retirement distributions and health care premiums.

For both ESR and ER I also add in a buffer to account for occasional larger costs like vehicle and appliance replacement/repair, and home improvement/repair.

 

[Senator]

I use Quicken religiously. There are many reports that help withthe planning.

I charge most of my expenses, so I looked at my credit card bills, added in property taxes and car insurance that are paid by check. I do not have a mortgage, so that’s out. But I charge some business expenses on my personal card, sometime. And personal expenses on my business card, so it was a bit tougher. And some business expenses become personal expenses if I no longer have a business.

Each item, no matter where it is charged, is allocated correctly in Quicken.

I then just figured I would need about double, assuming that I will live a bit larger than currently, and I want to error on the side of caution. I figured that $45K per year would be plenty. And I am planning on having ~$125K to be able to spend. Once again, if I am off, it should still be enough. If I planned perfectly, I will have ~4x what I need.

It all depends on your comfort level. I would rather have the problem of where to spend it, than where and I going to get the next bowl of soup.

 

[A Bird In Hand]

I then just figured I would need about double, assuming that I will live a bit larger than currently, and I want to error on the side of caution. I figured that $45K per year would be plenty. And I am planning on having ~$125K to be able to spend. Once again, if I am off, it should still be enough. If I planned perfectly, I will have ~4x what I need.

Erring on the side of caution sounds sensible. "Rounding up" by a factor of 4 sounds downright paranoid. However, I bet you'll sleep very well indeed during retirement.

 

[Trooper]

livingalmostlarge - $2500/month seems pretty low to me. Have you factored in healthcare, extra travel, a provision for a new car every 8-10 years, house repairs? Although most consider it a luxury, we have budgeted for long-term care as well.

 

[Mulligan]

Being single in retirement certainly helps in retirement budgeting. I can rob Peter to pay Paul and not catch any blowback from it. My expenses including entertainment run me pretty regularly around $3k a month, which includes a mortgage that won't be paid off for another 15 years. I have 5k a month after tax monthly income from a pension, but don't have significant assets, so I feel compelled to save about $1500 a month for future expenses. Paying off my mortgage down the road is actually one of my inflation hedges down the road. Make sure you do plan for unexpected expenses cause they do occur. In a little over a years time I have been hit with a water heater, dishwasher, outside a/c unit, and a roof. With my car approaching 200k it's only a matter of time before....


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[pb4uski]

I have used Quicken for about 20 years, so I had really good data on our actual spending for a few years that I used as the basis for our retirement expense projections.

If I had not had that data, I would have looked at the credit card charges, payments, checks written and ATM withdrawals for the two full years prior to retirement.

Another broadbrush approach is to take you annual take home pay and subtract from it what you save from that and if applicable, any unusual expenses for that year that will not be recurring.

Our lifestyle didn't change much so I only really needed to adjust our budget for more travel, change in health insurance costs and a couple other items.

We still have a mortgage (in fact, we refinanced for 3.375% just before calling it quits) so I just add the mortgage payments to the budget.

 

[Koolau]

My $.02 worth would be to first decide what you picture as your retirement life-style (no, I am not a broker/sales person). My point is that you may live differently in retirement than you do now. Once you know how you want to live, you may be able to determine how much it will cost.

My personal story (related elsewhere) is that we now spend about TWICE what we did when w*rking. We moved to a higher cost area and maintain essentially two residences. We also help out our kids financially.

To be honest, when we retired, we did not HAVE a budget. We could only estimate our costs. So, we started with what we thought we could spend in retirement (not what it would cost). Then, as we made our transition, we made sure we would not exceed the amount we could spend. Not recommended (by me or probably anyone else on the forum) but it DID work for us - so YMMV.

 

[scrabbler1]

In the months leading up to my ER in 2007-08, I was trying to figure out my expenses in ER. What I did was to start with my current expenses then sbutract my commutation costs and FICA taxes. I then had to figure out what my health insurance premiums would be (pre-ACA). It turned out that the money I saved from losing those 2 things was roughly equal to the added cost of my HI (at the time). There were some small changes to my income tax bills (they went down a little; I was working only PT at the time so I wasn't paying much already). My day-to-day cash expenses were about the same, as the money I spent on lunches at work went away but I had some more personal entertainment expenses after ER so that was a wash.

With the ACA my HI insurance premiums have dropped compared to 2009 which has been good for my ER budget going forward.

 

[Options]

Forever frugal, I've known what my "basic" budget has been since forever, so it was easy to figure out what costs would not go away in ER. I think it was FRIP, however, that allowed me to get more granular in thinking about what costs would be different (i.e., healthcare, estimated taxes, etc.). To estimate emergency spending, I thought back over the last 15 or so years regarding what categories of emergencies, unplanned expenses, or instances of going over budget occurred, padded a bit, and extrapolated that into the future. In the past, I've always done a great job of responding to emergencies and unplanned life events and intend to continue doing so in the future.

 

[RetireAge50]

Currently for a family of 4 we typically spend about $3,000 per month for normal monthly stuff (food, property taxes, gas, utilities, insurance, entertainment). Add another $1,000 per month for irregular maintenance items plus vacation.

So for retirement I'm going with about $6,000 per month so we can travel more and have a comfortable margin.

 

[Throwdownmyaceinthehole]

I tracked my expenses, no mortgage, and thought we would spend about 50k, but looks like we are about 12k above that, due mostly to food, wine, entertainment, clothes and travel. All things we could cut back on if needed, still working part time, so I'm covering those excesses.

 

[Ronstar]

I tracked expenses for the last 5 years while working. I worked 2 days a week in 2013, retiring 5/2/2014. I figure that 2 working days a week is not much different than retirement, so my current monthly budget roughly matches the average of my last couple of years expenses for their respective months.

 

[aida2003]

Currently for a family of 4 we typically spend about $3,000 per month for normal monthly stuff (food, property taxes, gas, utilities, insurance, entertainment). Add another $1,000 per month for irregular maintenance items plus vacation.

So for retirement I'm going with about $6,000 per month so we can travel more and have a comfortable margin.

I took the above quote for further questions to complicate things a little bit. So, let's say you're a couple of 40 & 50 (not exactly us, but close enough) with 2 little kiddos and the expenses in the quote above. I'm guessing "RetireAge50" estimated $6k/mo. in today's dollars. So, what's the Number for this couple? I've see expenses x 25, so $72k x 25=$1.8Mln. Is this for what retirement age? At 60, later, earlier? Does it assume spending principal? Seems not since 1.8mln x4%=$72k, but then $72k in the future will be way devalued.

Kind of confused.

 

[jkern]

I tracked expenses and spending for over twenty years before retirement, so I knew what my standard of living cost. My retirement plan was to basically maintain my standard of living, which I was content with.

Essentials (Housing, food, transportation, medical): $ 2250/month
Spending (Entertainment, gifts, vacations, recreation): $ 1125/month
Non-regular Spending (replacement of car, furniture, appliances, etc..) : $1125

Total: $ 4500/month (one person living in SF Bay Area)

 

[scrabbler1]

I tracked expenses and spending for over twenty years before retirement, so I knew what my standard of living cost. My retirement plan was to basically maintain my standard of living, which I was content with.

That part of your post I bolded was a crucial and non-negotiable element of my ER plan. While many posters here write about how they plan to move or downsize after they ER (which is fine, to each their own), for me and my already simple day-to-day lifestyle I had no plans to make any significant changes to it. If I wanted to go on a trip or otherwise go on some mild spending spree once in a while, I knew it would not bust my budget or cause me to make other offsetting changes to my lifestyle. I never want to have to say, "I can't afford to do that because I am retired." And in the 5 1/2 years since I retired, I have never been close to saying that.

 

[FUEGO]

I tracked my expenses to the penny for years before ER'ing. The expenses that we would carry into retirement were surprisingly constant at $22-23k per year. I called it $24k. Then I added in another $8000 of net increases in spending for a $32,000 annual early retirement budget.

I say "net" because there were additions and subtractions.

Gas expenses for DW's car will go to almost zero compared to commuting 12000 miles per year right now. I walk most places these days (in the city) and only drive the car a few times per week for hauling groceries or visiting friends on the other side of the city. So gas expenses dropped by $1500 per year. Car replacement expenses will go up, so I added in an annual expense to cover car depreciation/replacement.

Housing has a similar additional expense to cover major replacement items like roof, siding, HVAC, hot water heater, painting, etc.

Health insurance, though heavily subsidized by the ACA, will still be an extra expense in retirement, so I added a few thousand $ to cover that and actual copays and deductibles.

We are traveling more so I added $4000/yr extra to cover some travel expenses. That will almost cover our 5 week trip to Canada this summer. We'll probably do something similar (1+ month trip somewhere) most years. Guatemala/Belize/Mexico, Thailand/Cambodia (once the military coup settles down!), and Spain are all on the list for extended stays.

My specific costs are for a family of 5 (including 3 kids under age 10). Costs will vary based on your interests and preferences.

In summary, I would suggest:

1. track expenses
2. determine those work-related expenses that will disappear
3. determine additional spending during retirement (more travel? replacing big ticket items not recorded in your expense tracking)
4. take your baseline expenses from 1 and add/subtract expenses from 2 and 3 to determine your actual ER budget

 

[Rustic23]

Tracked expenses, made spreadsheets, read a lot of post on here, and in the end we spend about the same in retirement as we did before. We just spend it on things that are more fun!

 

[NW-Bound]

Being frugal and practicing LBYM all my life, I never had a budget as we always had money left over. But as I thought about ER, it occurred to me what when I stopped my part-time work, my "means" would take a drastic haircut, which also implied that I would need to live "at my means" instead of "below it". But what were my expenses? I did not know exactly, other than that it ran in the low 6 figures, and my stash could not support it.

After using Quicken for more than 2 years and doing nothing other than letting it download the charge card and bank accounts, I had the answer. Yes, I could ER once the children were out of college. Everything else pretty much stayed the same, as we already had to buy our own health insurance. And while waiting for the children to graduate, the stock market recovered and kept reducing the needed WR. The numerator was reducing while the denominator was rising. Nice!

Now, I am in the habit of looking at my Quicken spending screen every few days to see if my spending stays on track (3.1%WR in the last 12 months). Of course, I look at the Quicken investing screen a few times a day to see how my stocks are doing.

And by the way, a quick look at my expenses shows that I can simplify my life further and reduce my WR to 2%. It's nice to know what you spend your money on, and what you can do if things get tough again.

 

[dunkelblau]

I've never had a budget but I have a rough idea how much I've spent in total every year. Future living expenses in retirement I can't predict, I'm pretty sure they're going up but hard to say by how much. For me work-related expenses are negative mainly because it very effectively occupies my time and keeps me away from shopping malls and expensive hobbies. So adding up the cost of a nicer apartment to spend the day in and entertainment to fill the hours, my rough guess is somewhere between double and triple my spend while working. In later years entertainment will likely wind down but healthcare will increase no doubt, so I imagine the total outlay stays the same.

 

[NW-Bound]

It may take a bit of soul searching to think of what you want to do in retirement. I also thought that I might be spending more money in retirement because I would have more time. But it turned out that other than more travel, there were no other extra expenses.

My hobbies are low-cost, and speaking of travel, one can only do so much of it. Too much travel, and it becomes a chore, like work, for me.

 

[FUEGO]

It may take a bit of soul searching to think of what you want to do in retirement. I also thought that I might be spending more money in retirement because I would have more time. But it turned out that other than more travel, there were no other extra expenses.

My hobbies are low-cost, and speaking of travel, one can only do so much of it. Too much travel, and it becomes a chore, like work, for me.

I'm only 9 months in, but I'm figuring out the same things. My main pastimes are free or pretty close to it (reading, games, walking/hiking, gardening/yard work, tv/movies, writing, tinkering with electronics/computers, learning, etc).

For travel, we are somewhat constrained by the kids' school schedule for the next 16 years (barring homeschooling them). At the most, we could do 11 weeks in the summer plus a few shorter trips. I like being at home and doing fun stuff around town too, so I doubt we'll spend the next 16 summers being on the road the whole time.

 

[NW-Bound]

Most hobbies take a lot more time than money. It's because that they demand that one has the patience to develop skills and experience. Take for example photography that is a hobby most talked about on this forum. Putting aside the humongous tele lens that costs a 5-figure sum, it seems to me that most people can have a lot of fun shooting with equipment that cost less than $5K total. That's not bad at all.

Recently, I spent a month or so to refurbish my vintage speakers, and in the process learned a bit more about acoustics that I did not have the time to explore, though I always wanted to since teenage years. This was reported in another thread. The cost was minuscule.

 

[Mulligan]

It may take a bit of soul searching to think of what you want to do in retirement. I also thought that I might be spending more money in retirement because I would have more time. But it turned out that other than more travel, there were no other extra expenses.

My hobbies are low-cost, and speaking of travel, one can only do so much of it. Too much travel, and it becomes a chore, like work, for me.

I'm like you, NW. 5-6 days a trip, max. Destination air only travel, 3-5 times a year...Eager to plan and leave, just as eager to come home by the 5th day. Any more often than that and I start to dread all the work that goes into getting there and coming back.


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