Underestimating Living Expenses

[mountainsoft]

Over the last couple years I have been estimating what our living expenses will be in retirement, using bank statements and general logs I kept of our spending

However, now that we're half way through 2019, I thought I would take a more detailed look at all of our credit card and banking records. I downloaded all of our transactions, sorted everything into various categories, then added things up.

Our major expenses like utilities, groceries, etc. were spot on. No surprises there. Unfortunately, our recreation and miscellaneous spending were twice what I had been estimating. I was especially surprised since we really haven't taken any vacations this year, just small stuff around town. Granted, none of these items are requirements, and most could be avoided. Still, we don't want to be penny pinching in retirement either.

Our gasoline expenses were higher than I estimated, mostly because my wife has been running her mom to doctor appointments 2-3 times a week (about 3-4 hours of driving each trip). I wouldn't expect that to continue in retirement.

We're only halfway through the year, so I am still making some assumptions for the rest of the year. Things could change, but I'm off enough that I am increasing my estimated expenses for retirement. I will keep a close eye on our expenses over the next couple years to get a better average over time. However, we may end up working another year to have a little more breathing room in our spending.

 

[DeborahB]

I think I overestimated. But then interesting unexpected expenses come up every year so it’s just as well.

 

[ivinsfan]

Another option is to try living within the original projected budget and see if it feels doable. In fact with your DW's current job issues it might be prudent.

 

[Souschef]

When I calculated our WR at 4%, I found that between SS and pensions, that covers it!
Our RMD's cover taxes, cruises, donations, and gifts to our 4 sons.
I really do not track expenses, but track cash flow

 

[Jerry1]

I’m tracking my expenses the same way as the OP for my first couple years of retirement. My issue is a little different in that my max budget is quite a bit more than my necessities budget. But, I want to make sure that is real. As was said, those big one time expenses always seem to come into play. So far so good, but until I complete a couple years with a high level of tracking, I’ll remain cautious. DW is a couple years from taking SS and from taking Medicare so I’ll probably track things tightly until she hits both of those milestones. If we get to that point without missing our budget target, then a lot of risk will be eliminated and I’ll relax a bit.

 

[NW-Bound]

I am already in retirement, and have been using Quicken to download expenses, IRA withdrawals, stock trades, etc...

Just a few days ago, I looked at the expenses for last year for some info, and observed that there was no income tax listed. What? I knew I withheld some taxes when making IRA withdrawals. Where did that go?

It turned out that Quicken properly got the online report from the IRA custodian about the federal and state withholdings. However, Quicken will not show tax withholding under the "Expenses - Taxes" category, if the withholding is paid out of a tax deferred account. In order for it to show correctly in the Expenses Summary, I have to create a fictitious transfer of the withholding out of the IRA into my banking account, then another fictitious tax payment from the banking account. I found this workaround when looking on the Quicken forum.

And so, my actual spending was some $K's above what I thought it was. No biggie, as my WR was still below 3%.

How was that tax payment accounted for when it was not listed under expenses? It was simply some shrinkage of the IRA account, the same as an investment loss. The corollary of this is that while my actual expenses were a bit larger, my actual portfolio performance was also a bit better as well.

 

[brett]

I tracked spending for four years prior to retirement in the same manner that we still do today. Five minutes a month to take a tape on from our current account. Five minutes at year end to total it up.

Once we had that number we added an estimate for travel. Then added five percent inflation per year. Then added ten percent for error.

Our life changed considerably from those four pre retirement years. Downsized, much more travel, but our annual spending for the past eight years is still within that annual number even though from time to time we have had some unexpected expenses. The expense categories have changed. Housing is less, travel is much higher, etc.

I still follow our spending in the same manner. Don't really care if we spend $5 more on eating out or $20 less on gas or gifts. We only care about the bottom line. We do/did everything on an after tax basis.

 

[Dd852]

We always tracked expenses carefully from when we started to live together 34 years ago, so it was an ingrained habit. I think what I’ve learned is that there’s always going to be year to year variation- a repair here, an illness there, an extra holiday , replacing a computer - so while I look at year on year changes I also keep an eye on the rolling five year averages which smooth out the variability.

 

[mountainsoft]

Another option is to try living within the original projected budget and see if it feels doable. In fact with your DW's current job issues it might be prudent.

I had originally predicted expenses of 40K per year, now it's looking more like 44K or 45K. Of course, we're still only half way through the year and many of our expenses thus far aren't typical (meals at the hospital, lots of extra gas, items for mother-in-law, etc.). So once this episode in life is over, I would expect costs to drop closer to my original estimate. I also bought several items this year I ended up returning, but did not subtract the returns from the costs.

I'm sure we could still live on the original 40K/yr if needed, especially once work related expenses are gone. While the current job issues will only last 3-4 years, retirement will be the rest of our lives. So I want to be sure we are comfortable and not worrying about a random dinner out if we want to. Better to have too much than too little.

This just opened my eyes a bit. I thought I had been estimating accurately, so I was just a little surprised that we have spent so much more this year. It doesn't sound like much, but 200 or 300 more a month really adds up at the end of the year.

I just realized I need to track things in more detail than I had been for a more realistic estimate once we retire.

 

[DrRoy]

The first year I tracked everything by category. Now I just track the monthly total and travel.

 

[BeachOrCity]

May I suggest using an automated tool that automatically categorized and adds it up such as Mint? My personal philosophy was I needed several years of pre retirement spending to know what it really was. Then I added and subtracted for changes in retirement such as healthcare and travel and big capital items like New car , new HVAC etc. so far this approach seems to have worked for me.

If doing it this way doesn’t give you the green light it means you may not be able to afford the lifestyle you have and or want in retirement

 

[donheff]

When I was tracking these figures prior to ER I added in a substantial fudge factor because I wanted to be able to live large. Even if I wanted to keep discretionary exactly where it was I would build in a fudge factor to cover the unexpected and/or set a SWR with enough room to likely leave me with a lot of excess after the first 10-15 years.

 

[footenote]

DW is a couple years from taking SS and from taking Medicare so I’ll probably track things tightly until she hits both of those milestones. If we get to that point without missing our budget target, then a lot of risk will be eliminated and I’ll relax a bit.

We're in the same situation. I'm 3.5 years out from Medicare and 5 years away from FRA SS. Although various calculators says we can 100% safely spend 5-7 % of assets now, we're trying to be frugal during these interim years.

Even with surprise, one-time expenses totaling $3,600 this summer, I project we can end the year within spitting-distance of 4%.

 

[braumeister]

After a number of years in retirement, I just set an annual spending target and keep track of actual spending monthly. I only have seven categories, so it's easy.

Since much of the spending is "lumpy" due to travel (or maybe a new car or something like that), I just look to see if I'm on target to make my annual projection.

But even if it goes over the planned total I'm not worried about it because we're under 2.5% WR. No desire to spend more, even though we could.

 

[Senator]

No offense, but of you are worried about such small expenses like gas to do errands and a few small local trips, you are definitely not ready.

I assumed revenues would be half of what I projected, and expenses were going to be double.

 

[mrfeh]

Expenses are going to vary somewhat. Expecting estimates to be perfect is not realistic.

However, pre-retirees should do a detailed review of their expenses, and not just estimates. We started using mint.com years before retirement for this purpose - every transaction is recorded and categorized.

 

[pjigar]

I have been using account aggregation provided by Bank of America web site which basically uses Yodlee backend. Yodlee is a backend for every account aggregation service like Mint, etc.

I have all my accounts (Credit cards, Mortgage, Bank, 401K, IRA, etc.) aggregated so I can track spending, cashflow and net worth all in one place. The transactions are auto-categorized and auto-updated so you always see the latest status of your finances. The categorization is auto-trained and is rule based. I then download raw transactions every month into excel spreadsheet for further analysis. I have attached a template spreadsheet if anyone wants to use it or get ideas.

About the spreadsheet: I have a mix of personal and business income/expenses. I created this spreadsheet so I can separate business cashflow from earned income cashflow. The instructions are included in the spreadsheet. Some customization required.

PS: We have been tracking expenses for over a decade with this method.

 

[ivinsfan]

No offense, but of you are worried about such small expenses like gas to do errands and a few small local trips, you are definitely not ready.

I assumed revenues would be half of what I projected, and expenses were going to be double.

There is a middle ground here too Senator, in fact in your three year FIRE update you said you wished you had retired sooner. Obviously you could have done so.

 

[ivinsfan]

I had originally predicted expenses of 40K per year, now it's looking more like 44K or 45K. Of course, we're still only half way through the year and many of our expenses thus far aren't typical (meals at the hospital, lots of extra gas, items for mother-in-law, etc.). So once this episode in life is over, I would expect costs to drop closer to my original estimate. I also bought several items this year I ended up returning, but did not subtract the returns from the costs.

I'm sure we could still live on the original 40K/yr if needed, especially once work related expenses are gone. While the current job issues will only last 3-4 years, retirement will be the rest of our lives. So I want to be sure we are comfortable and not worrying about a random dinner out if we want to. Better to have too much than too little.

This just opened my eyes a bit. I thought I had been estimating accurately, so I was just a little surprised that we have spent so much more this year. It doesn't sound like much, but 200 or 300 more a month really adds up at the end of the year.

I just realized I need to track things in more detail than I had been for a more realistic estimate once we retire.

50 60 70 bucks might be easy to cut out, but it depends on how lean you made the budget to begin with. The smaller and tighter the budget the less room for cutting back....

 

[Dtail]

I tracked expenses for 4 years before retirement. I still track all my expenses 2 years into retirement.
We were always LBYM folks, but not to the extent that some members are here, so tracking expenses helps keep everything and everyone in line.

What part of your budget is strictly for discretionary expenses?
With your potentially projected new numbers, does your success rate change on Firecalc?

 

[38Chevy454]

I agree with Senator, if a 10% increase is causing so much concern you might be too close for comfort. Just a question, if a lot of the expenses are for the MIL, can you ask MIL to help pay for some of the gas and related expenses for her? Is she financially able to help?
I am not like many on here, I do track expenses in broad levels, but I just do not get caught up in the details and micro categorizing. Put almost all expenses on the credit card and as long as that is within reason, no concern. I do have a small home based side business and need to track my utilities and expenses related to that, for tax purposes. But for my overall house budget I just do not get to the level of detail most do. As long as the total is OK, I'm OK. If total is too much, then go to savings and pull the extra required for that month's outlying expense.

 

[brett]

I agree with senator. After eight years of retirement the only thing that matters to us is our total after tax burn rate. Keeping track of spending categories would just be busy work for me and yield no benefit whatsoever. I know what we spend our money on and it does not concern me.

 

[Teacher Terry]

When my teaching job ended I redid our budget to reflect the loss of income. We had been using the money for travel and fun so just reduced those areas. It wasn’t a huge change in lifestyle for the most part. We still have our savings. I am guessing you guys are in a similar position.

 

[NW-Bound]

Using Quicken, I normally just glanced at the annual expenses over the last several years to spot a trend, if there is any. My lowest year expense was 70% that of the highest. My expenses are fairly lumpy due to home maintenance and update costs. No car purchases, else it would be worse.

I am glad to have the details on hand to go back to look for an explanation of high some years are higher than others. As long as the total is within reason, no budgeting or agonizing over individual spending items.

 

[Jerry1]

I agree with senator. After eight years of retirement the only thing that matters to us is our total after tax burn rate. Keeping track of spending categories would just be busy work for me and yield no benefit whatsoever. I know what we spend our money on and it does not concern me.

I have several categories for the time being, but I really only have two main categories - necessities and discretionary. If I’m ever worried about spending, I know where I can look to reduce. It’s also comforting to know that my withdrawal rate for my necessities is about 2% and will be even lower once SS kicks in.