Budgeting for Big, Non-Annual Expenses

[Midpack]

Seems to me that there is little difference once retired for those who have been successfully managing their personal finances for years. Matching expenses in retirement is no different that in our working lives. It is of no surprise to us that we will need to replace roofs, appliances, etc. in retirement just as we did in prior year.

There have always been surprises...medical and capital included. There always will be. Plus the planned events such as vehicle replacement, renovations, etc.

We certainly do not keep sub ledgers and/or segregated funds to cover these items. We decide on affordability and then draw down from our investment accounts as required.

I probably didn’t make it clear, but I meant it was important to factor those expenses in before pulling the trigger on retirement. I have seen occasional posts over the years with retirees who didn’t stop to think about all the non-annual big ticket expenses and find they’re spending more than expected a few years in. IMO those non-annual expenses can easily average 25-35% of annual spending. I’ve continued to track those expenses in retirement to verify what I estimated 8 years ago - a 5 minute Excel exercise and share so why not?

I don’t care how people do it, just that they factor in those expenses before they pull the trigger. Though many here are still LBYM/low WR in retirement, I see others considering retirement with (far) less than a 95% probability of success.

 

[GravitySucks]

Don't budget as rigorously as many here but I put estimated expenses in the Fido planner and come up with around $6k a year for the house and car. If I don't have those expenses like 2018 I consider it 'spent' when I look back at the year figuring if I stayed below my safe maximum spend. Years like 2019 where I had around $15k of those type expenses, if I went $7k over my max, I would not have been worried.
So far I've had to replace a car and a roof and a few other household expenses. That $6k estimate has pretty well held up over 6 years.
The money stays in the general portfolio when not spent and pulled as needed. No separate sinking fund.

 

[JustCurious]

I asked the same question back in 2015...

http://www.early-retirement.org/for...ount-for-large-infrequent-expenses-75829.html

 

[JustCurious]

In contrast to many folks who visit this website, I ignore the current market value of my assets (and thus don't calculate a withdrawal rate to help manage spending). Instead, discretionary income is my favorite measure of wealth. I've been using this approach for the last 13 years with no regrets.

How do you calculate discretionary income?

 

[Montecfo]

I use a planning tool, RetirePlan, that allows you to input all kinds of non annual expenses like car replacement, house maintenance, etc. I may not have these occurring in the right years, but I at least have a slot for them in the budget.

I also have a slot. I looked back at those expenses over the previous 5 and 10 years and used that as a basis for autos, and home-renovation/upgrade type purchases.

I am not sure forecasting the year is all that important, since I already have the $ for these purchases.

 

[Bryan Barnfellow]

We tried before pushing the ER button, to budget for all knowns and as many unknowns as we could estimate. We continue to do so now that we are in ER (and learn while we are doing).

For example, every five years we have to pay about 300 chf for resident permit renewals, so we budget 60/year and mark the line item as "Rollover=Y". Likewise, we have these major "non annual" expense categories: Capital Improvements to our home; General Contingency/Emergency; Automobile Replacement; and Exchange Rate Contingency. The latter is vital in a volatile dollar:swiss franc exchange rate environment where one could see swings of 10% or more in a given year.

Capital Improvements include those to our lives...such as a new hi-res large screen TV, or hi-fi equipment upgrades (which are eternal, as my wife has begun to appreciate) We rent, so roofs, heating equipment, window replacement, etc. are provided for us.

-BB

 

[brett]

Bottom line for me is that people who have been successful at managing their personal finances and preparing for retirement years pre retirement will be successful post retirement. And there are many ways, many approaches to successfully managing finances.

Those that are not successful by the time they retire, will not likely be successful in retirement. I have a few in-laws like that. They never 'got it' and they certainly did not get it in retirement.

 

[ncbill]

I treat allocation to reserves as just another annual expense in my budget. This allows me to arrive at a reasonable number for discretionary income. In contrast to many folks who visit this website, I ignore the current market value of my assets (and thus don't calculate a withdrawal rate to help manage spending). Instead, discretionary income is my favorite measure of wealth. I've been using this approach for the last 13 years with no regrets.

I don't overthink my allocation to reserves expense. Coincidentally, my $13k number isn't far from your $15k number.

The MaxiFi planner I'm using also projects "fixed" (to cover non-discretionary expenses) & discretionary income annually over my & spouse's lifetime.

Ratio is currently around 2:1 (discretionary:fixed) so it appears I have a good bit of slack.

Though I can include fixed lumpy expenses...e.g. I projected $X in 2025 for multiple vehicle replacements, but just spent ~1/3 of that end of last year for a used truck, so I now will decrease that projected 2025 expense proportionally.

 

[Gumby]

If I were really squared away, I would have a dedicated sinking fund for larger expenses that I know will come some day - like repainting the house in 10 years or installing a new gas furnace in ? years. But I'm not. I guess I'm relying on the fact that we have so much margin in our budget that we'll just pay for it when it comes along.

 

[Midpack]

If I were really squared away, I would have a dedicated sinking fund for larger expenses that I know will come some day - like repainting the house in 10 years or installing a new gas furnace in ? years. But I'm not. I guess I'm relying on the fact that we have so much margin in our budget that we'll just pay for it when it comes along.

Your portfolio is your sinking fund like all of us... Kidding aside, few if any of us are actual savers anymore, so there's no need for a separate [-]piggy bank[/-] sinking fund.

 

[Teacher Terry]

Big expenses are a part of life and are to be expected. We did remodeling and buying 2 cars before retiring but things will still come up. It’s life.

 

[Moemg]

I just take any excess from my yearly budget and put it in an account marked slush fund .

 

[RobbieB]

I don't budget. Never have and never will. I just live within means.

 

[NW-Bound]

No, I don't do any planning for large non-recurrent expenses, nor spend much time thinking about it. I figure my regular WR is so low, I can "blow the dough" once in a while and still have the long-term average below 4%.

I did not have that confidence when I first stopped working, but become more confident when I see over time that my regular expenses have been shrinking. Hello Mr. Bernicke. The bull market over the recent years helps too.

 

[karen1972]

I used a spreadsheet modeled after the HOA Reserves spreadsheet we had as its basically the same thing. Then I knew how much i would need added to the yearly budget to cover it and I can easily see whats coming up.

The nice thing also of having an HOA template its adds a whole hosts of items I likely would have not thought about as they may be 50 year items, but oops the house was turning 40 so 50 isn't that far away.

 

[Dtail]

I just take any excess from my yearly budget and put it in an account marked slush fund .

Effectively the same concept but called an emergency fund, although I don't include that account in my AA.

 

[caninelover]

I do think big expenses are a known unknown.

My FIRE budget has my regular expenses, padded for health care and post FIRE travel, etc. - then I have extra 5 k every 5 years, $10k every 10 years, new cars at $30k every 15 years and one major expense of $50k 20 years or so down the road.

Bottom line is life is unpredictable...I see posts about expenses of $xx per year, and wonder. No life circumstance is that steady over 30+ years. How do people not plan for some variability in spending?

 

[Alan]

I keep a separate cash account for these lumpy expenses, planned or otherwise. In my budget spreadsheet where I track spending I itemise the big expenditures so I can track when and how often they come up.

When we lived in the USA I used I-Bonds as a secure place to hold funds for the big expenses. In the UK I use Premium Bonds which are government bonds where the “interest” is pooled and every month there is a drawing where a couple of folks win £1m and the rest is paid in much smaller prices. The last couple of years the “interest rate” has been 1.4% which is what you could expect if you had average luck. Last year our prizes were equivalent to 2.4%, and the year before it was 1.7%. Clicking on the phone app when notified you have won something is fun, the most so far in any one month was 3 bonds winning a total of £575.

It is very easy to buy and sell bonds online and when cashing some in it is only 1 business day for the money to arrive in the account.

 

[DrRoy]

Last year we did a major remodel of our family room and laundry room. I had $65K set aside (before RE) from "regular" spending and did not count it as expenses until we went over that. For us, travel is a big regular expense. Going forward, we will count big irregular things as spending when we do them.

 

[DrRoy]

I probably didn’t make it clear, but I meant it was important to factor those expenses in before pulling the trigger on retirement. I have seen occasional posts over the years with retirees who didn’t stop to think about all the non-annual big ticket expenses and find they’re spending more than expected a few years in. IMO those non-annual expenses can easily average 25-35% of annual spending. I’ve continued to track those expenses in retirement to verify what I estimated 8 years ago - a 5 minute Excel exercise and share so why not?

I don’t care how people do it, just that they factor in those expenses before they pull the trigger. Though many here are still LBYM/low WR in retirement, I see others considering retirement with (far) less than a 95% probability of success.

Pre-RE, I had $ in my estimate for car replacement and $10K/yr for unexpected's. (Is that a word?) Travel was 25K/yr but we have averaged more over 3 years.

 

[mrfeh]

I try to ammortize the lumpy expenses, based on my past history with them. For example, if I plan to spend $30,000 on a new car in 10 years, I will treat that as a $3,000 expense every year.

+1

 

[scrabbler1]

I just take any excess from my yearly budget and put it in an account marked slush fund .

While my entire portfolio is basically a slush fund, I have a designated subset of it (which includes my second-tier emergency fund) which I will use first as the slush fund. This is to minimize any large cap gains or cap losses by selling a stock fund.

 

[CRLLS]

Your portfolio is your sinking fund like all of us... Kidding aside, few if any of us are actual savers anymore, so there's no need for a separate [-]piggy bank[/-] sinking fund.

So true.

I did model the occasional car purchase before feeling comfortable with our plan. I also had "x+" dollars in the budget for home and car maintenance, along with medical deductibles etc. which hopefully accounted for any big, non-annual expenses.

 

[rk911]

we have a series of sinking funds..car replacement, vacations, home maintenance, out of pocket medical etc. $X goes into each fund each month as part of our monthly spending plan.

 

[CardsFan]

Well, just had a non-budgeted expense today (though not totally unexpected). The 12 year old low end furnace, that was here when we bought the place, shot craps. Cost to fix $900 (electronics). Cost to replace, $4,000. Went with replace, and they install tomorrow.

Tipping point was, we leave for 5 weeks at the end of the month. An iffy furnace in February, in MO, is not a good idea if you will be out of town.

Oh well. The furnace costs less than the place we are renting in FL for the month. Maybe this should be in the Blow The Dough thread.