Spending Budget Recalibration

[Jerry1]

Not sure I have all the elements considered, but wanted to run my concerns by the group to get your thoughts.

I was looking over my 2021 spending and firming up my 2022 budget. Generally, my budget is $100K and after I did my initial budget run I was at $110. My initial thought is that it was mostly due to inflation. I had bumped up my utilities, gasoline and food pretty significantly. Certainly I had some additional expenses in there too.

My thought was to revisit my retirement calculator and see how things looked at a spending level of $10K more than planned. In that thinking, I realized that there was a major assumption that was built into my calculations, and I believe this is common - that the rate of inflation and the rate of portfolio growth were the same. This, I thought, was a rather conservative assumption.

Understanding inflation and portfolio return are lumpy, at best, what assumptions would you make if you're doing or re-doing a retirement calculation today?

 

[RetiredHappy]

Along the same line, we have been overspending and exceeding our planned budget each year. In our modelling, we had $200K, including taxes, as our budget and a month ago I actually looked at last year's actual and 2022 Jan/Feb spendings and projections and realized that $240k is more realistic. I went back to the Fidelity tool which I use for projections, and updated with the new numbers. It said we are still fine and with money left for legacy after we pass. I let Fidelity do its own portfolio growth, taxes and inflation projections.

 

[djsander]

Wow, 100k and 200k per year. We budget about 35-40 and live quite well. I’m always curious to what people spend that much a year on. I’ve seen some where they travel a lot, property taxes, fine dining etc. On to your original question. I think something’s are higher than planned and the assumptions have used lower inflation rates. Plan accordingly and change withdrawals, budgets to compensate. Inflation will be a wild card as well as returns in the foreseeable future. But who knows. I tinker with the returns to see how it affects our budget.

 

[Jerry1]

. . .100k . . .per year. I’m always curious to what people spend that much a year on.

Be curious no more:

Auto & Transport	3,500
Education	600
Entertainment	2,000
Food & Dining	10,500
Gifts & Donations	6,000
Healthcare	8,300
Home	14,500
Insurance	9,500
Misc.	2,000
Personal Care-Fitness	1,500
Pets	1,200
Pool Expenses	13,000
Tax	18,900
Travel	5,300
Utilities	8,200
Total	105,000

A couple notes - In Home has $10K for some improvements I need to make this year. Pool Expenses are the payment we make because we financed the build. Otherwise, I'd have had to take a large tax hit from the IRA withdraw. Tax includes about $5K of property taxes on the home.

 

[Mulligan]

Thanks for the color Jerry. To me numbers provide clarity. Somebody living off 60k might think dang they are living large. But in reality there probably are some 60kers with paid off home, lower RE taxes, lower income taxes, and paid health care…. Suddenly the numbers look very similar then. Well except for the pool.. Sounds fun, enjoy it, I would!

 

[Jerry1]

Thanks for the color Jerry. To me numbers provide clarity. Somebody living off 60k might think dang they are living large. But in reality there probably are some 60kers with paid off home, lower RE taxes, lower income taxes, and paid health care…. Suddenly the numbers look very similar then. Well except for the pool.. Sounds fun, enjoy it, I would!

The reality that I've come to understand in my life is that you spend at the level you earn (have). Of course many on this forum live below our means, including myself, but it's not common to see someone who could spend say $200K living on $100K. Maybe $175K or $150K. Again, speaking in general terms.

The home is paid off but RE taxes in MI are not the best and the house was built in 1956. It doesn't stay in good shape for free. The pool was a decision we made on retirement lifestyle. If the money wasn't there, it would have been somewhere else. We were thinking of a small cottage or an RV but the truth is we're homebodies and thought the pool made the most sense for us. Income taxes are a bit high because I'm doing ROTH conversions up to the 12% limit. If not for that, I could manage my taxes to be much lower. Healthcare is expensive. I do have an employer subsidized plan and DW just went on Medicare last year. However, we go to a holistic doctor (an MD). He does a lot of lab work and we buy a lot of supplements. That alone is about $5K per year, but we've never been healthier. Also, I don't hesitate to get healthcare. I'm blessed to be able to afford it and it's an area I feel strongly leads to a better quality of life.

 

[djsander]

Be curious no more:

Auto & Transport	3,500
Education	600
Entertainment	2,000
Food & Dining	10,500
Gifts & Donations	6,000
Healthcare	8,300
Home	14,500
Insurance	9,500
Misc.	2,000
Personal Care-Fitness	1,500
Pets	1,200
Pool Expenses	13,000
Tax	18,900
Travel	5,300
Utilities	8,200
Total	105,000

A couple notes - In Home has $10K for some improvements I need to make this year. Pool Expenses are the payment we make because we financed the build. Otherwise, I'd have had to take a large tax hit from the IRA withdraw. Tax includes about $5K of property taxes on the home.

Thanks, along the lines of what I was expecting. That pool takes a bite and as usual taxes. Our taxes are quite low which the biggest one will be property. Being retired we watch what we spend on. We are at a 2% or so withdrawal rate and it will go down when I take SS. My DW is frugal and all our needs are met. I’m sure as she gets more comfortable with retirement we will splurge here and there. For those that say we can spend more, there really isn’t anything we want or need. We have our hobbies, our church, and go to a lot of free or very low cost things in our community. Anyway, I ramble. Thank you for the info. We live in the desert so that pool would be nice

 

[Dtail]

Not sure I have all the elements considered, but wanted to run my concerns by the group to get your thoughts.

I was looking over my 2021 spending and firming up my 2022 budget. Generally, my budget is $100K and after I did my initial budget run I was at $110. My initial thought is that it was mostly due to inflation. I had bumped up my utilities, gasoline and food pretty significantly. Certainly I had some additional expenses in there too.

My thought was to revisit my retirement calculator and see how things looked at a spending level of $10K more than planned. In that thinking, I realized that there was a major assumption that was built into my calculations, and I believe this is common - that the rate of inflation and the rate of portfolio growth were the same. This, I thought, was a rather conservative assumption.

Understanding inflation and portfolio return are lumpy, at best, what assumptions would you make if you're doing or re-doing a retirement calculation today?

I use the Firecalc and Fidelity calculators each year, as if I am reretiring each year from scratch.
So I just let the calculators use their natural assumptions.
Only 2k on entertainment?

 

[daylatedollarshort]

Understanding inflation and portfolio return are lumpy, at best, what assumptions would you make if you're doing or re-doing a retirement calculation today?

I would use the same methodology. We used a matching strategy for planning which takes into account real returns, after inflation - https://www.bogleheads.org/wiki/Matching_strategy. A zero real return provides a 3.33% safe withdrawal rate (100 / 30 years = 3.33%). When we retired, 30 year TIPS were at a 2% real return, and we just thought a TIPS ladder seemed like a good deal with the safety of Treasuries.

We have a fixed, low interest mortgage and our property taxes are capped at a low rate, so only the rest of our annual expenses are subject to high inflation, and those are much less than our TIPS and SS income, which are tied to inflation. So I think we are pretty well covered for high inflation. Plus we have pensions, stocks and other investments.

 

[Willers]

Understanding inflation and portfolio return are lumpy, at best, what assumptions would you make if you're doing or re-doing a retirement calculation today?

We follow a "retire each year" strategy. The assumption I had to force myself to change was the length of retirement. We retired in 2015/2016 so I've had to remind myself that we're 6-7 years in and don't have a same time horizon.

Also, our spending has been all over the map, so it has helped to just reevaluate every year and not try to follow a strict withdrawal strategy.

Willers

PS - we're also seeing more than the stated inflation rate in our budget. I read that if the CPI was measured the same as in the late 70's it would be closer to 12% (not 7%). I haven't seen the math on that though so who knows.

 

[Jerry1]

Only 2k on entertainment?

That's a couple of concerts I'm going to this year. There's some golf in Misc. and eating out is in the food budget. Honestly, we are home bodies. Entertainment to us is having the family over during pool season and doing the grilling for everyone.

I used to have football season tickets, but living in Detroit, it was pretty easy to give those up. I still go tailgate with friends on the first game of the season and usually one more. But, I don't go to any games. If I did, it would be one or two - not the season.

 

[aja8888]

I updated our budget from last year at the end on 2021. Basically, many categories went up about 10% from what I am seeing in recent charges (cable/internet, other utilities, property tax, insurances, discretionary items, etc). Overall, that's where we are and with no debt, it makes things AOK!

For the two of us , with a small dog, and living in a 55+ community, we spent last year about $70 K, including income tax. This year pencils out to be about 10% more. We are in our late 70's. So this year I am anticipating about $77 K overall.

Our biggest single expense is medical ($8 - $9 K) and we are on Medicare with supplemental insurance policies. Drug costs for DW are hard to control as she is on three Tier III medications and they are costly.

Expensive (or really any) travelling vacations are out as DW can't travel without a lot of issues and hauling around bulky equipment. Plus, she no longer drives and we still have two cars (I can't let go of my Mustang Convertible).

 

[RetiredHappy]

2021 expenses for those who are curious:

Country Club : $24K
Travel: $30K - Timeshare maintenance and exchange fees: $10K. $10K was my original budget and we travel about 3 months a year. My oops moment was that we spent another $20K when vacationing - golf and dining out, gas, car rental and airport parking. I usually use points to book business/first class tickets so air tickets are close to being free.
Home: $30K (HOA - $5.6K, insurance, property tax, utilities, pool and yard service make up the rest)
Auto insurance, dmv and umbrella policy: $2.5K
Medical insurance, copays, meds: $24K
Gifting/donations: $25K (son $15K, charity $10K)
Groceries, dining out (when home) and personal items: $45K
New golf clubs: $8K
Home improvement: $108K (New HVAC, garage doors/openers, home security and sound system, gas firepit, new pool equipment - pump, heating, salt water chlorinator, 2.5 bathroom remodel etc.) - This line item should drop significantly. So far this year, we are spending another $16K to rebuild the pool due to massive leakage caused by roots. My original budget was only $3K a year, silly me. We are going to bump it to $10K a year.

We don't set aside yearly budget for car but my husband hit a pillar and the car repair bill will be $3.2K and it is scheduled for March. There is always something...

I haven't taken a close look at how much taxes we were paying and just go with a ballpark number.

 

[corn18]

We just re-retire every day. I always have a line that represents the line we accepted as good enough when we retired last year. Then I run actuals to see how we are doing. What I am really interested in are the two bookends: How much can we spend and how little can we spend within reason. Those two lines help us decide whether to spend $12k on a custom closet and $26k on a kitchen for the basement.

 

[foxfirev5]

Our wild fluctuations in income over the years prepared us well for retirement. Instinctively we adjust our spending when things get a little tight. Really no budget beyond having all the nondiscretionary expenses covered with monthly income. We keep an eye on the overall portfolio balance and don't drift too far off course.

 

[audreyh1]

I withdraw based on our Dec 31 portfolio value at the end of each prior year. As such our portfolio performance drives our available spending money. It can go up or down each year. For a long while now our withdrawal has exceeded our spending and very rough budget. Travel spending can vary wildly from year to year. Taxes are also extremely variable, driven by unpredictable investment income, and set aside from the withdrawal first thing. Whatever is left after estimated taxes is available for spending that year.

So overall our available withdrawn funds drive our spending. And we have spending categories like travel and gifting that can expand or shrink easily.

Budget these days is more looking backwards at where we spent money rather than driving our spending.

 

[levindb]

Budget ...Smudget

...we do not live within the tight constraints of a formal budget. We know our income from SSA and a small rental. We then calculate how much we can possibly spend, on average, every year to run out of savings/investments at age 105. That becomes our MAX budget, which is about 60% more than we would normally spend. We use coupons, Groupons, and woot.com to get a better price on things.

This flexibility allows for those chunky expenses that pop up for repairs or special travel events. Our health care costs have reasonable annual maximum out of pocket expenses and we do tax planning each year.

We assume our investments will grow 3% over inflation, our SSA benefit will match inflation, and our mortgage will be fixed for the next 28 years.

If we did not have that spending flexibility, we probably would be looking at a budget more carefully.

 

[Jerry1]

We assume our investments will grow 3% over inflation, our SSA benefit will match inflation, and our mortgage will be fixed for the next 28 years.

This is an example of my main concern. When inflation is at todays levels and market returns, including bonds, does it still make sense to assume the market will return something equal to or greater than inflation. I guess if you look at the long term, current times are just a point in time and one needs to look at historical averages. I feel I bit uncomfortable doing that as I never expected this level of inflation.

 

[Helen]

Budget these days is more looking backwards at where we spent money rather than driving our spending.

This is what we do too. I haven't computed last year's spending, I usually do that when preparing for taxes. Our withdraw rate is about 2% (no international travel lately) and we are five years away from 70 when we will draw Social Security.

We've really noticed an increase in the cost of eating out. Before we'd spend $30 - $50 now it's $50 - $70.

 

[audreyh1]

Because I import all transactions into Quicken where they are automatically categorized, I get a spending report for any time frame with a couple of mouse clicks.

 

[Phroig]

We use coupons, Groupons, and woot.com to get a better price on things.

.

I didn’t know about woot.com. Thanks!

 

[Sunset]

We don't have a budget, but I do track how much I spend to the penny. DW does an approximate tracking.

It's a pretty vague way to manage our money, but we are both naturally [-]cheap[/-] frugal, so the issue really is it's hard to spend.

We are below the 4% rule, so as long as this high inflation doesn't last too long, it won't make a difference in the end.

We also have the cushion of great returns above inflation (increased purchasing power) for many years, before our retirement.

Stagflation is a concern, but not much I can do about it.

My spending has decreased a little over the past 2 years due to no travel, so I compensated by doing some extra spending to save costs in the future.

 

[corn18]

This is an example of my main concern. When inflation is at todays levels and market returns, including bonds, does it still make sense to assume the market will return something equal to or greater than inflation. I guess if you look at the long term, current times are just a point in time and one needs to look at historical averages. I feel I bit uncomfortable doing that as I never expected this level of inflation.

Using average anything over a 30 year retirement is dangerous, for sure. The worst year to retire for our model was 1969. The average real return for a 60/40 portfolio over 30 years starting in 1969 was 5.64%. If I plug that real return into my deterministic model, I am rich! It's the sequence of the returns that kills ya.

But I like having a deterministic model so I picked the worst 30 year rolling average real return since 1872 to use as my real return. I don't put a lot of faith in the deterministic output, but it is nice to look at.

The first chart is a plot of the 30 year rolling average for various metrics. The blue line is for my 60/40 AA. For now, I just use the minimum it has been since 1872 which is 2.92%.

The second chart shows the output of my model. The thick green line is based on that 2.92% average real return. The dotted red line is the worst case (1969) output from my firecalc model. As you can see, the dotted red line is a lot worse than the solid green line.

I would recommend picking something for deterministic calculations but always consult the firecalc output to make sure it still works. I could spend a lot more money if I just ignored firecalc and went with the average model. Although I have found that in my case, 0% average real return closely tracks the fireclac worst case output. But I think that is more coincidence (third chart).

 

[youbet]

This is an example of my main concern. When inflation is at todays levels and market returns, including bonds, does it still make sense to assume the market will return something equal to or greater than inflation. I guess if you look at the long term, current times are just a point in time and one needs to look at historical averages. I feel I bit uncomfortable doing that as I never expected this level of inflation.

Jerry ……. The issue is sequence of returns. Historical averages mean nothing at best, or are very misleading at worst.

Edit: just noticed the post above covered that nicely.

 

[aja8888]

Budget these days is more looking backwards at where we spent money rather than driving our spending.

Because I import all transactions into Quicken where they are automatically categorized, I get a spending report for any time frame with a couple of mouse clicks.

Basically, looking back is what I do as it's a base for us and nothing really is changing, spending wise, anymore. It's really that a some point in your life, day to day living gets pretty constant. (There are surprises, though)

I gave up with Quicken as all I use it for is our checking account and balancing the checkbook each month. I track spending by keeping monthly records of the use of two CC's and the one checking account.

Somehow, I am starting to feel like "imoldernu" is helping me post this.