Estimating retirement expenses...

[motley]

Wondering how others have gone about this. This is huge in determining what kind of retirement shape I'm in, ultimately.

Basically month to month

- I took current expenses which I know I'll have in retirement (utilities, food, etc) and rounded up a modest amount to allow for inflation.
- Medical I took into account my Medicare plans and again added guesstimating having various incidents over the years.
- I allowed myself X amount of "fun money" to spend on whatever I want which would easily be enough for travel and other things like eating out, etc.

And yet I still came up with a number that most of what I read says is fairly lower than "typical" expenses. Obviously this is mostly ballpark and some guessing, but still I'm paranoid.

 

[HI Bill]

The more detail you add to your expenses, and the more you track your non-routine spending, the more accurate your estimate will be. I have a 'base' budget that includes all recurring costs including groceries, etc. But we seem to spend 2X the base budget or more on discretionary items including travel, etc.

 

[SecondCor521]

I tracked all my expenses for years before I FIREd. I then adjusted for income taxes (which would be far lower in early FIRE), FICA (which would go away), and my kids' college expenses (which were paid for by a separate pot of money which I didn't include in my FIRE stash).

Some people intentionally plan to spend more in early retirement; if that's you then you should add $$$ for that extra stuff. For me, I was mostly content with my same lifestyle - simply being able to stop working was a big QOL improvement.

I considered myself FIRE basically when I hit 25x that adjusted number (4% rule). In my case I continued working another two years or so and had some income from non-portfolio sources, so at FIRE at 46 I was approximately at 2% WR and felt very comfortable. With my expenses rising less than 0.5% annually on a nominal basis and my FIRE stash doubling over the past nine years, I'm now at about a 1% WR at age 55 and trying to find ways to responsibly increase my spending.

The metric I keep track of is my last six months spending rolling average. That number varies from low to high by about a factor of 2 (so for example between $2K and $4K per month), but that is because I have lumpy expenses at the end of the year - holiday spending, holiday gifting, and property taxes are all due then. The yearly total is very consistent.

If you track all of your spending for about six months, that six month period is representative of your lifestyle, and you conscientiously and reasonably make most of the larger adjustments (in both directions: adding and subtracting), and have either reasonably margin/buffer or contingency plans, and you don't have any budget risk factors (such as a major unplanned lifestyle change), then you'll probably be just fine.

 

[Midpack]

Starting with detailed history of spending is essential to me, I can’t imagine projecting spending without a solid starting place.

What many people fail to plan for are lumpy expenses - large but infrequent spending. Replacing a roof, AC, furnace, hot water, cars, laundry and kitchen appliances, consumer electronics (computers, smartphones, tablets), bedding/furniture, etc. Remodeling your house. Re-landscaping. Re-painting inside and/or out. Unexpected home repairs (mold, water damage, foundation, termites, plumbing, electrical, septic). Bailing out family member. Uninsured medical. Long term care.

I’m finding lumpy expenses to be a good 20% over and above normal spending in retirement so far. Some plan for a substantial annual amount toward a “sinking fund” or “accruals” to cover all those large infrequent big ticket items. It could easily be $10-20K/year…

You see retirees in the news who can’t come up with money to cover lumpy expenses ALL the time. Most recent examples, special assessments at older FL condos. They sat on HOA boards and resisted dues increases to pay for major building maintenance funds - and it’s coming home to roost. Some (NOT all) did it to themselves.

 

[sakowitzm]

As others have noted, it's essential to get as good a grip as you can on *actual* expenses. I'll describe a method to do this in a simplistic way.... but you'll get the idea. You almost certainly can access a year's worth of checking account transactions and balances. Start by noting the balance at the beginning of a(ny) one year period (doesn't have to be January 1.) Then note all deposits into the account and finally note the ending balance. That's a starting point. If you pay any expenses outside of the checking account, then go get them. Voila! That should give you a good estimate.

And you might be able to cross check that by adding up all of your credit card transactions for a (given) year. You can almost certainly download these online. Then add in things you paid outside of credit cards and any ATM withdrawals. Etc, etc.

 

[FLSUnFIRE]

Since I had a goal to retire early from the start of my career (and a bit of nerdiness that I enjoy tracking stuff) I knew I needed to KNOW what I spend so I have tracked my actual expenses since I started my career in 1998. That's a bit overkill but tracking 3-5 years (long enough to catch some of the lumpy stuff) should give you a realistic idea of what your real costs to live. Post-retirement non-discretionary should not change much other than health insurance so then it's just a matter of making adjusting to add in medical and those new discretionary expenses (travel, etc) you anticipate in retirement. If you have high work related expenses (commuting, mandatory fun, work clothes, etc) you can adjust them down but in general I would not plan on things going down early in your retirement years.

In my personal experience during the first 3 years my spending has been less than I projected. I drive less and generally enjoy low marginal cost activities (outdoor stuff that costs near nothing other than perhaps initial equipment purchase) and am not very materialistic and hate clutter more than I crave stuff. Travel has gone up a bit but I travel fairly frugally, and being FIREd, I have the time flexibility to get better rates on fares and lodging than when working.

 

[Dtail]

I was tracking all expenses from 3 years before retiring. I made some non working tax and other adjustments and a detailed budget. I still budget for each year in retirement.

 

[latexman]

If you don't measure a variable (track expenses), you can't control it!

 

[scrabbler1]

When I was putting together my ER plan in 2006-2008 leading up to my eventual ER in late 2008, my overall projected expenses were basically the same as in the recent years. I knew I'd be eliminating my commutation and FICA expenses. Those savings would allow me to buy my own health insurance policy, which at the time was pretty expensive (this was pre-ACA). Other expenses either rose a little or fell a little, roughly canceling each other out.

In those first few years, however, the HI rate rose sharply, nearly 50% in the first 2 years, making me wonder how much further they would rise and would it endanger my ER plan. The ACA came in with its exchanges in 2014. I did buy, in the interim, a bare-bones, hospital-only plan for a few years while I waited for the ACA exchanges were created. Even with a small subsidy, I was still paying what I paid in 2009, my first full year of ER.

 

[Dalton]

If you've included all the monthly spending, and any annual expenses (auto and homeowners insurance, property taxes, etc), then that's probably the base you want to work from. I had my spreadsheets and calcs all in today's dollars, but right before I retired, I converted them to include inflation to get a better feel...crazy how much the numbers increase over time, due to inflation.

If your number is lower than the average then it is. I've tracked my spending pretty intensively for a number of years, so I have confidence in what I've been spending. It's easy as a single guy with no kids. So looking forward, I did my base budget of expenses that I need to survive in my house. Whoah, that number is 2/3rds of what I'd been spending for the last 5 years, and 2% of my portfolio. Then I added a weekly spending number for incidentals like eating out, household "stuff", couple short trips a year, hobby expenses, etc. That got me to about 20.7%, and I'd like to learn to spend more because what's the point of retiring young and having all this savings, so I bumped it up to 3%, knowing I can spend another 1% more if wanted/needed. I also helped both my parents with their investments and taxes before they passed, so have added examples of mom being "comfortable" on very little (lived on SS, wasn't spending any of her investments) and dad on SS & lowish pension with little additional savings and spending too much.

If it makes you feel any better, my spending numbers are way below the averages that get thrown around, like poverty level...but that's what I spend. It's consistent with what I've been spending for quite some time, and I've never felt like I missed out due to finances (I missed out on plenty because I was killing myself at work however). I'm not a traveler (anxiety), my hobbies are pretty inexpensive. I bought a new laptop at midyear to try to BTD, needed a small roof repair not too long after, now need some dental work, will go spend Thanksgiving with my sister (and combine it with our annual group trip with my mountain biking friends). Hopefully I can work up to seeing more of the world over the next dozen years, I know I can afford it, so that won't hold me back.

 

[jollystomper]

We have been using Quicken since the 1990s to track our expenses. To estimating my retirement expenses I looked at our previous 5 and 10 year average annual expenses to get a ballpark. I adjusted for big ticket items that occurred and would not be repeated, and added in expected big ticket items and an inflation factor. The only thing I was wildly of on was Medical, I overestimated our premium expenses by assuming the worst case. So far, in six years, our average annual spending has been below what I projected. I am fine with making an error in that direction .

 

[RetiredHappy]

I have an Excel spreadsheet / workbook that documents year end value of investments, withdrawals, annual expenses breakdown, annual and monthly projections for the next 10 years. Every item is detailed except for a lump sum bucket of personal which is about $50K. That $50K is really restaurant meals, groceries and personal items. That number is gleaned off past and current credit card spendings. Everything else is fairly detailed - golf, travel, insurance, utilities etc.

 

[Lorenzo]

I don't think this is the OP's situation, but if I may ask, what do people do who do not plan to live in the same place or do the same things in retirement as they did before? For example, retiring in a different country. Do they just wing it when it comes to trying to estimate the cost of a new life?

 

[Music Lover]

If you don't measure a variable (track expenses), you can't control it!

I don't think that's necessarily true for some people. I never tracked expenses and have never had a problem controlling spending.

My pension was going to be XX% of my salary. Since I was spending less than XX anyway while working I retired without a second thought.

 

[Car-Guy]

Before I retired I tracked my expenses in "some detail" but I didn't go overboard. I had a pretty good idea (IIRC) of where my money was going. Now that I've been retired more than a decade, I've gotten away from such detail. Now I track my cash/investable NW monthly and look at the trend over a year. Good enough.

 

[Surewhitey]

I don't think this is the OP's situation, but if I may ask, what do people do who do not plan to live in the same place or do the same things in retirement as they did before? For example, retiring in a different country. Do they just wing it when it comes to trying to estimate the cost of a new life?

Sorta wing it with local's help. Our main expenses were rent, food and HI. In hindsight, less than $2k/mo for us all in, plus travel...we know many who still live comfortably on this or less in Cozumel.

 

[CRLLS]

For the simple answer, at least for us, it was our Gross income minus withholding with the appropriate adjustments. That is what we were living on and should support our then-current lifestyle. Adjustments were things like eliminating retirement savings, medical insurance changes and add or subtract any Income tax due or refunds.

That should cover any pre-retirement expenses that we would expect in retirement. We could add on things we wanted to do beyond that. Honestly, we hadn't budgeted for over 40 years. Our needs and expenses were matched. We were, and still are, quite frugal. When we used Fidelity's retirement planner, we got very detailed with a lot of unknown "fluff".

 

[5Miler]

I also used Quicken from back in the 90's so had a good history of expenses. I used the goal feature to add a few virtual accounts to act as escrows for my annual lumpy expenses such as vacations, RE taxes, insurance, car registrations, Christmas/birthday spending and anything else that fell outside my normal monthly spending. Yeah, a bit of OCD but it served me well over the years as I was never caught unprepared to pay one of those large expenses as I just went to my virtual escrow account for funding.

In preparing for retirement, the Quicken records gave me ready access to my spending history and it just required a few adjustments for anticipated changes due to retirement. The lifetime planner in Quicken was also a valuable tool for me. I can say that I had no real surprises when I made the decision to retire 12 years ago. Fortunately, I have since eased up a bit on my Quicken tracking although I still utilize those virtual escrow accounts to handle any lumpy annual expenses.

 

[SecondCor521]

Another thought that I came across after I FIREd but would have been helpful to hear at the time: You can adjust, because you adjust now.

Working people have to deal with fluctuations in their income: on the positive side they get raises and bonuses, but on the negative side they might lose a job, have their hours cut back, get laid off, get fired, have to go on leave for childcare or eldercare responsibilities, quit, or have their employer go out of business. Also, they might have expenses that go up that are sort of out of their control, like tax increases, increases in health insurance costs, increases in the price of gas or groceries, etc.

Throughout all that, they adjust. And while some people do have tough times sometimes, most of the people on this board have resources, such as social networks, education, job and life experience, family, friends, and an adequate level of intelligence and health to adjust and work through those tough times.

The same thing will happen in retirement. You'll have better than expected income, dividends, or asset growth. Or the market will have a rough year. You'll find ways to reduce or eliminate expenses. Or new ones will crop up - after I FIREd all of my kids ended up going to private high schools, an expense I didn't expect or plan for. You'll adjust in FIRE just like you adjusted in your working life.

Yes, in retirement there is mostly no more job income coming in. But being able to adjust to your continually changing circumstances and the rest of your resources (social network, intelligence, the knowledge of how to adjust, etc.) will still be there and seem to me to matter more.

(The above is not my original idea; H/T to whomever it was who shared it with me.)

 

[brett]

I found estimating our retirement expenses fairly straightforward.

I simply started adding up our after tax spend for the four years preceeding retirement. It only involved adding up the monies that went out of our current account. Everything goes on a credit card, auto bank payment, or infrequent ATM cash withdrawal.

Next I added an amount for the estimated costs of retirement expeneses...primarily travel

Used an inflation factor, added ten percent for errors and ommissions.

Thirteen years later the after tax spend is still well within a 5 point plus or minus range even thought there have been changes in our lifestyle.

 

[Midpack]

I am curious how those who haven't mentioned lumpy expenses, accounted for them for projecting 20ish years of retirement expenses? There are some major expenses that only land every 10-20 years like replacing a roof, replacing cars, replacing AC/furnace, etc. Reviewing your last 2-4 years won't capture them?

All I’m saying is overlooking lumpy expenses when projecting 20ish years of retirement spending could be a painful mistake.

 

[SecondCor521]

I am curious how those who haven't mentioned lumpy expenses, accounted for them? There are some major expenses that only land every 10-20 years like replacing a roof, replacing cars, replacing AC/furnace, etc. Reviewing your last 2-4 years won't capture them?

A good way to do it is with a sinking fund. Figure out how much each item costs, how far away you are from the lumpy spend, then set up an initial amount and a monthly additional amount to be configured properly. I don't know very many people here who do that, but there are probably some.

A sinking fund seemed like too much hassle to me, so I "accounted" for them by FIREing with a 2% WR. I also haven't replaced my roof, car, AC, or furnace since FIREing 9 years ago, but the car and roof are getting close. At a 1% WR and with a modest car and modest house, the cost of replacing either of those is less than a good day in the market.

 

[brett]

I added a few K each year for capital items. Over 13 years it has only been a refridgerator and a dishwasher.

We replaced a roof during covid. The cost was offset by a decrease in our travel expenses.

Sinking fund or seperate account is too much bother for us. Ditto for spreadsheets detailing everything down to how much we spend of a can of peas. We only care about total after tax spend.

As above, our investments have fared better than the conservative number that we estimated. Ditto for inflation, less than our projection with the exception of travel costs.

We did not make a career out of this. It took me very little time to add up pre retierment spend. Then took an educated guess on travel, inflation, roi on investments, etc.

I believe the most important thing is not to fool yourself. Use real numbers, be conservative in your estimates, and add an amount for errors and ommissions. I think that you are wasting your time if you are attempting to get this down to the dollar or calculate percentage variances. Life is not like that.

Our yearly spend number can fluctuate becasue some of our travel expenses for one year may be consumed in the following year.

 

[Car-Guy]

I am curious how those who haven't mentioned lumpy expenses, accounted for them? There are some major expenses that only land every 10-20 years like replacing a roof, replacing cars, replacing AC/furnace, etc. Reviewing your last 2-4 years won't capture them?

Well I replace my cars every 12 to 18mos so that just becomes part of my annual expenses. For the rest, I no longer care/worry about expenses that happen once every decade or two. I just bought a new central AC and a new roof a few years ago. Probably my last of those.

 

[Koolau]

I don't think this is the OP's situation, but if I may ask, what do people do who do not plan to live in the same place or do the same things in retirement as they did before? For example, retiring in a different country. Do they just wing it when it comes to trying to estimate the cost of a new life?

We moved states and had to make some estimates. We did do a fair amount of looking at costs while visiting our new home state over the years. We had a fairly good idea what would be different and by about how much. Still there are always surprises - like lower taxes a lot lower (who knew?)