One important aspect of retirement planning that gets overlooked too frequently is paying for things that cannot be budgeted for or even planned on. I made references in the past to major house problems like the roof or plumbing, dental bills, vet bills and tires for the car.
If you've been reading this site for a while you know I am a believer in having some sort of job after "retirement," a secondary career or whatever. It occurred to me that maybe in the early retirement years someone could work enough to cover the monthly, budgetable expenses and use savings to cover the unexpected things that come up. I thought it might make sense to quantify the unexpected or at least try (I understand the inherent futility of this).
To do this I looked at our expenses for 2009. I subtracted the things we budget for like various insurances, utilities, taxes and so forth and just kept the things that are one off items like car repairs, the dentist, clothing, Home Depot and gifts. In telling you the gross number some will think we are cheapskates of the highest order and some will think we live like ignorant lottery winners. We are neither.
The gross number was $32,620. The single biggest one time expense in 2009 was $1065 for my wife to get a crown at the dentist. The second biggest one time expense was $877 for tires for the pick up truck, "dude you tires are like practically bald" and they were. So 6% from just two things. Another big one was vet bills which totaled $795.
The gross number includes two things that could be deducted. We don't budget for gas for the cars. We both work from home so our use is very lumpy. Our total for 2009 was $1594 (from eyeballing the Quicken report) so while this needs to be paid for if it is deducted from the one offs then the gross number for one offs drops to $31,026. The other thing that could be removed, maybe, is travel expenses. If I counted correctly the total (personal and business) was $5522. The potential reason to exclude it is that more than anything else travel is very discretionary (most of the time). If removing travel is correct (some will think it is reasonable and some will think not) then we are looking at $25,504 in unexpected items for a randomly chosen year (2008 and 2009 are the only two complete years in my Quicken).
Chances are you have some sort of reaction to the numbers (the $32k, the $25k or anything in between) as being high, low or about right. I would suggest you undertake the same task. I have to imagine that the actual number for you will be higher than you think and I don't think it would be practical to eliminate too many things from your planning either. Occasionally we all need clothes, some younger relative achieves a milestone that will cost you money and you will need more than an oil filter when you get the oil changed.
In circling back to the idea of working in a post retirement job of some sort to cover budgeted expenses and the portfolio to cover the one offs you still can't exceed 4% without running into trouble later, or more correctly increasing the odds of running into trouble later. Taking my $25,504, the portfolio would need to be $637,600 just to cover the one offs and of course next year the one offs could add up to a bigger number (we had no calamity with the house). There are obviously other things that pertain but that are not being mentioned.
Bugaboo!
What is a reasonable number for monthly expenses? Chances are you think that whatever you spend is a reasonable number. The rule of thumb about replacing 75% or 80% of your income is too simplistic but focusing too much on your known expenses is also incomplete.
The extent to which this subject can be complex knows no ends. The variables are unlimited. This is probably why so many people make their living trying to sort this out (writers and planners). Do-it-yourselfers can make a full time endeavor out of trying to get it right and then have their fate decided by random luck like the year they retire.
You most certainly won't find all the answers here but hopefully a couple of good questions. You can mostly control fixed expenses and while you are working you have some control over how much you put away. It most aspects of life it pays to focus on the things you can control as opposed to the thinks you cannot. I also think we have some control over trying to figure out innovative ways to help solve the problem which is why I write about things like my neighbor with his backhoe so often.
Was the Cardinals' win over the Packers about the craziest finish for a playoff game ever? It had to be up there. Just crazy.
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14 comments:
Spot on, Roger.
I'm already retired and could have written today's post. You nailed the big, unexpected items. Just coincidently, we have a vet appointment for lumps and bumps this afternoon. It won't be good, but the cost...? And I won't even comment on the compounded expenses of health care premia and utilities.
I would like to add, in my experience, that the unbudgeted one-offs actually increase in retirement. It's possible but not satisfying to sit in the Lay-Z-Boy and watch television all day. A couple of modest suppers out with friends, a little golf, some best-sellers, the grandkids (yikes) all add up very quickly...but that IS retirement, so it's harder to forego, at least for me.
Listen up, folks.
Well since you don't have kids you perhaps can't relate but children are a HUGE expense that dwarfs everything else and create huge unknown variables. Even more so if you do things like private school. sports camps, family vacations to somewhere nice (Disneyland?skiing?) music lessons, sports lessons. braces, etc. Then add in college (150+ K per kid?) and pontentially grad school. One hopes they grow up and become self sufficient, but one never knows when this will happen or at precisely what age..SO how on earth does one factor this in?? That is what I would like to know...After reading this my guess is youy will stick with dogs...
I would submit that most of the costs associated with kids come when working and some are budgetable--clearly some not.
The bigger problem with kids and retirement is when a 30 or 40 year old needs help from the parents. It seems as though this is becoming a bigger issue as we know people with kids about our age who need varying amounts and types of help.
I would assume you will need at least as much in retirement as when you were working. The myth about only needing 75 to 80% of your pre retirement income is not well supported IMO
I believe it's relatively accurate, especially if you compare it to what I spend NOW (with kids). 80% of what I spend at age 64, assuming I retire at 65, may not be accurate. For instance...
1. Budgeted savings go down (Roth IRA, 529, possibly the extra savings I work on)
2. Food expenses are down
3. No college expenses, though I don't have those yet
4. Smaller expenses on home improvement (I won't be doing any insulation projects, for instance)
5. Spending a LOT less on gas
6. Might not have health insurance (granted, that's only a few hundred dollars/year)
It all depends on where you set your comparison point. Are you comparing to the year before retirement? To peak spending years? Something in between?
Football is a very different game than basketball, but sometimes I think that Kurt Warner might be the (current) Michael Jordan of football. He just gets it done. More touchdown passes than incompletions - wow.
OT from Hussman and Hester
Bill remarked "this isn't a jobless recovery - it's a job-loss recovery."
This supports my view this bull market will be accompanied by a jobless recovery. I do not like it either, but you need to understand how things work whether times are good or bad. A Keynesian economic belief will not help you understand the economy because it is a discredited model loved by socialists but proven worthless in both the 1930's and more recently in Japan.
The Feds easy money policy should continue to support this bull even if it will not help jobs that much. Unfortunately, it will take many years to correct several decades of excess debt creation by households.
It is nice to see a glimmer of hope that we may revive Glass Steagall. Excessive bank lending is the problem not capitalism in general. We need to stop bailing out bank stock holders.
Roger,
I found your numbers to be very interesting but flawed for retirement given the fact that you are in your 40s and working. Your expenditures and requirements will be different in 20 years.
As a 62 year old now retired 10 years I can tell you that our "one offs" vary hugely from year to year.
Unexpected healthcare expenses can spike in any given year and in our case has ranged from a couple of thousand dollars to one year of $24,000 when I unexpectedly needed back surgery. That is on top of our BCBS monthly premiums of almost $1000. I will go on what's left of Medicare in a few years but my wife has 10 years of private insurance to pay for.
Home maintenance costs also vary widely from year to year and as you get older you will not be doing the stuff around your house (particularly on the roof) that you might do in your 40s. That translates to additional yearly expenses which can crop up suddenly. I can go on and on but you get the point.
That is why we budget each year to live a bit below our means so that we can absorb these unexpected shocks. It has worked for 10 years so far.
You're right on Roger,
Once retired, it is very easy with a little effort and thought to pick up some extra dough. I'm not talking about slugging it out in the work a day world but seizing an opportunity from time to time can make all the difference in the world. Having retired seven years ago, we get all our one-offs from making a deal from time to time on some kind of one of a kind opportunity. Example? we had a christmas tree seller that was way overstocked so I cut him a deal and then cut them up and made wreaths out out of them and then priced them with some signage, and sold them on his same lot with a commission to him. You'd be surprised how much extra dough that generated.
Mechanic just called:
catalytic converter replacement cost $1300...and it won't pass
inspection without it. Yikes
Gee, I guess I will have to skip
the dentist this month.
Wish me luck on my colonoscopy..
I can't afford to get sick.
We picked up a space heater...
that should help...we can spend
the rest of the winter in one room.
Roger,
Good questions. Finding a framework for one-offs that's workable is a challenge in retirement. I'd thought I'd budgeted for them, but my experience (their variability) is akin to retiredinprescott's.
After 8 yrs of retirement I've come to a plan I can live with: a strict base covering essentials ($22k/yr) and a budget including one-offs like repairs for $31k. (The total budgegt comes within the 4% rule.) Whatever one-offs do not occur are banked for the future, as they inevitably will need to be covered. It's not exactly an accrual, but a basket of activities that I try to price at market value. I accommodate the higher budget figure in my liquid assets x 2-3 yrs. This in case I'm hit by the "big one", an outrageous health expense. The longer term assets are invested differently.
What I've found is that I live with this comfortably and still do alot of "what ifs" (higher taxes, med., relocation). I figure adapting is a good retirement skill.
Based on family & friends, very few plan ahead for one-offs; regrettably some say they'll just have to die earlier.
Anna in NC (retired)
Any fool can understand what happens to demand (for anything) when money is cheap and the expectation that even greater fools will buy later is not entirely unreasonable; the trick is how to prepare for the day the music stops.
Ireland, a member of the European Union, is pursuing a strongly non-Keynesian, real business cycle approach to economic calamity: NO fiscal stimulus and NO quantitative monetary easing with the government slashing public expenditures to meet the new lower revenue level until the cycle of unemployment, wage and service cuts necessary to bring the economy down to a lower level has done its grizzly work.
I understand that those with money in the bank and/or a penchant for hair shirts are okay with this; everyone else is feeling a trifle peckish.
Here's the deal: (1) There is a difference between Keynesian and Real Business Cycle economic models; (2) that difference however is NOT central to any specific model of governance whether it be socialistic or democratic or (the usual) combination thereof and; (3) the economic history of the Great Depression and Japan's lost decade are well recorded and it is abundantly clear that neither economic model was consistently followed in policy during those periods.
The final point is critical in understanding our national predicament and why the nattering nabobs of ignorance must be counteracted: (a) Economic stimulus was withdrawn in 1937 over deficit concerns and the economic collapse that followed was as bad as 1929, lasting until the 'ultimate' stimulus of WW II in 1942, and (b) during the 1980's-90's Japan did not match their economic stimulus with reforms of the banking and finance system resulting in a vastly prolonged recovery period.
The US is currently committing the latter error and is in danger of committing the former in response to the noise-making of those who apparently had little problem with the incredible debts generated by the Bush tax cuts and Medicare Part D "reform" but, apparently now having discovered their inner deficit hawk, believe the United States should emulate Ireland.
How much money you will have for retirement may depend on how well you analyze this.
Get rid of the wife and the dog, they are stopping you achieving your potential!
did anyone mention a family with illness and kids with allergies, eye weakness, juvenille rheumatism and a mother with colitis and removal of a colon. If you didn't, you are very lucky, it can be devastating, I'm the grandfather.
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