Budgeting in Retirement – 2016 Edition
It’s a new year so it’s time for a new budget. For the past two years I used this budget of about $32,000 per year. We spent $34,352 in 2014 and $23,802 in 2015, for an average of $29,077 over the last two years. We ended up an average of $3,000 under budget in spite of undertaking a major home renovation including new siding, new windows, and a roof repair in 2014, and a seven week trip to Mexico in 2015.
The $32,000 per year budget was my first attempt at developing an early retirement budget. I tracked our expenses for a few years before I retired in 2013 and figured out that we spent about $24,000 per year on core expenses that would continue into early retirement. To that $24,000 figure, I added extra expenses to account for increased costs in early retirement like health care and traveling the globe.
It’s time for another budget update based on two more years of living expense data now that we are mostly retired (Mrs. RoG is still working a few days per week with plans to quit soon in 2016).
What Can We Spend?
We realize that we can budget more than we have been spending given our portfolio size and the successful income stream generated by this blog and other ventures that popped up because of the blog. The question we will answer in 2016 is whether we will actually spend more money if we explicitly budget for a higher amount than past years.
We are using a “variable withdrawal rate” of four percent of our portfolio value each year. Yale University’s incredibly well run endowment fund spends between 4.5% to 6% of it’s endowment value each year so I figure spending 4% of our portfolio value is more than prudent.
After setting aside some funds for the kids’ college expenses and other future specific liabilities, we had around $1.25 million in our investment portfolio at the start of the year. The market fell apart in the first few weeks of 2016 and we are currently at $1.15 million (after setting aside funds for specific future liabilities), a $100,000 drop from January 1, 2016.
Applying our magical four percent variable withdrawal rate to the $1,150,000 current value gives us an annual withdrawal of $46,000. Add to that an estimate of $20,000 in Root of Good, freelancing, and consulting income for 2016 (about two thirds of the 2015 income), and we could spend up to $66,000 in 2016.
What Will We Actually Spend?
I don’t think we will spend $66,000 during the year. That’s almost triple the amount we spent in 2015. $66,000 in spending would represent a huge change in our day to day habits that we’re pretty happy with already.
We are still at a very early point in our early retirement journey, so we still have plenty of life left to spend more money if we find valuable and enriching ways to do so. In the meantime, we put some thought into specific categories of spending that would bring us more value and hope to spend more money in those areas. We came up with a $40,000 annual budget for 2016 that represents a 25% increase from our previous $32,000 per year budget. We know we could spend up to $66,000 without pulling more than 4% from our investment portfolio, and will certainly spend more than $40,000 if we want to or need to.
The two main categories receiving increases in the 2016 budget are “entertainment/toys/fun” and “vacations”. Both of those are purely discretionary spending.
The good thing about discretionary spending is it’s easy to reduce if the stock market crashes and we suffer a 30% loss in portfolio value. If that happens, we’ll be back to our $32,000 per year budget (plus whatever side income I earn from Root of Good). Which will be totally okay since we were happy with that level of spending in 2014 and 2015.
Housing costs are our single largest expense even though we don’t have a mortgage. We still have to maintain, repair, heat, cool, insure, pay property taxes, and furnish our house.
By tracking expenses, I know that we routinely spend about $1,000 per year on maintenance items. To that figure I added $1,500 per year to cover things that eventually need replacing, upgrading, or may require major fixes:
- HVAC system
- hot water heater
- plumbing or electrical,
- doors and windows
- carpet or other flooring
- interior and exterior paint
For each system or item on the list, I took the rough cost to replace or upgrade the system and divided by the years the system typically lasts to get an annual cost. For example, I expect to get around 10 years of service out of the HVAC before needing major service or total replacement. I figure $4,500 should cover the replacement. That amounts to $450 per year. I repeat this exercise for the roof ($4,000 to replace every 20 years), appliances (~$350 to replace various units at 8 to 20 years), and all the other items on the list.
We just replaced the siding (for about $6,000) and ten out of thirteen windows (for $2,500) during 2014. The roof, HVAC, and hot water heater will likely require replacement at some point in the next five to ten years. These won’t be “unexpected expenses” since we explicitly budget for them. We won’t spend the extra $1,500 every year, but then again we’ll have years like 2014 where we spent almost $9,000 on these major items.
Our home insurance has increased over the last decade, though by shopping the policy we lowered the cost to around $600 last year. Property taxes also increased in the last few years to $1,600 for 2015, however with a recent drop in assessed property value we may owe less in 2016.
Now that one or both of us have been at home during the day, we have better estimates for electricity, natural gas, and water consumption. Surprisingly, we aren’t consuming a lot more of those services in spite of being home more. Electricity and natural gas are about $1,100 and $700 per year, respectively. Water consumption has increased as the kids grow older and as we’ve added new members to the family. The water bill, which includes sewer and trash service, runs about $100 per month or $1,200 per year. For all utilities, we pay around $3,000 per year.
I have $500 in the home furnishings/furniture line item. That might be a new piece of furniture or replacing some interior decor. Or a treadmill (our most recent large purchase in this budget category).
Phone and Internet
Home phone service is free through Google Voice. Our home phones are hooked into a Obihai VOIP adapter that costs $30-50 at Amazon. Excellent call quality and with the Google Voice integration, we have one number so that anyone who calls our home phone gets automatically forwarded to my cell phone. Did I mention it’s all free?
I’m using Freedompop service for my smartphone and I’m loving it. It’s free, the service is reasonably good, and I can do what I want without paying a cell phone bill. I have a Samsung Galaxy S3 and it still works well in spite of being a few years old. Definitely worth a look if you aren’t a heavy cell phone user and aren’t overly reliant on voice calls for critical business (their VOIP call quality can be spotty if the signal isn’t strong).
We also have a grandfathered T-Mobile dumbphone plan that’s $10 per year (though I budgeted $20 in case the plan goes up or we change providers). It also works all over the world which is handy for very infrequent calls while we’re traveling abroad. It saved our butts a number of times in Canada and Mexico.
I’m still trying to figure out a way to get free high speed internet, but so far I haven’t found a way. We pay around $35-40 per month to Time Warner Cable for high speed internet. It’s usually $65, but we bought our own cable modem for $25 (saving the $4+ monthly lease fee) and I call every year to get a lower promotional rate applied to my account. We use the internet a lot. Mrs. RoG logs in remotely for work. I use it for Skype for my Early Retirement Lifestyle Consulting biz. At any given time, someone in the house seems to be streaming Netflix or Youtube videos. Our home phone is VOIP-based.
Altogether, we don’t pay more than $500 per year for all telecommunications needs. That’s amazing considering we have multiple mobile cell and data devices, high speed internet, and unlimited local, long distance, and some free international service. If I had a time machine, how could I explain this overabundance of cheap, reliable telecoms to someone from the 1970’s or 1980’s that paid more than $500 per year for a simple land line with basic long distance service?
Our car expenses have dropped a lot since Mrs. Root of Good began working from home in September 2015. Even before that, we did a great job of keeping auto expenses low.
We are thinking about cutting back to one car now that Mrs. Root of Good isn’t commuting to work, which will save on insurance, maintenance, registration, and taxes for the second car. I don’t really drive more than two or three times per week now that I’m retired, and it is mostly with the rest of the family. Cutting back to one car should be fairly easy given our access to transit and walkable destinations around the neighborhood.
However, our oldest daughter starts middle school in the fall. Depending on which school she attends, we may need to drive her to and from school. A second car might not be absolutely required but it could be handy.
2016 might be the year we finally upgrade to a minivan. I’m looking at used minivans that are 6-8 years old and sell for around $10,000. After selling Mrs. RoG’s car for a few thousand dollars, we will end up spending a net of $7,000 to $8,000 on our new (to us) car purchase. If we do this every seven or eight years, we’ll have a $1,000 per year car replacement expense.
Our insurance runs about $500 per year for the two of us without comprehensive or collision coverage. Maintenance expenses have been about $500 per year (mostly routine maintenance like oil changes, new tires, and replacing the timing belt). Since we don’t drive that much, maintenance costs remain fairly low.
I’m estimating our gas at $400 for 2016. This represents 4,000 miles at 30 miles per gallon with gas at $3 per gallon (a huge overestimate if gas remains around $1.75-$2.00). If we undertake a crazy road trip adventure this summer, I will count the gas we buy as a vacation expense.
Medical and Dental
2016 will bring a lot of changes in our medical and dental spending. Once Mrs. RoG quits her job, the adults in the household will be on a private health insurance plan with Affordable Care Act subsidies. Though the full price of the plan is $600 per month, we will qualify for subsidies bringing the cost down to $130 per month for a plan with $0 deductibles and a $1,000 maximum out of pocket expense. That’s based on an AGI of $42,000 per year.
In addition to the $130 per month (or $1,560 per year) for health insurance premiums, we might spend another $440 out of pocket for doctor’s visits and getting a few things checked out that we postponed while on a high deductible plan for the past several years.
Since our AGI will be rather low, the kids won’t qualify for an exchange healthcare policy with subsidies, but instead will receive the NC Healthchoice insurance for free. Our family doctor is in network, as are most (all?) of the local hospitals. Since we don’t consume a lot of medical services right now, the NC Healthchoice plan seems more than adequate for our kids’ needs. We can always switch to a paid health insurance plan if we need better coverage in the future.
Right now we have dental coverage through Mrs. RoG’s employer. Once she quits, we’ll be self insured. Our dentist offers a $99 special for a cleaning, x-rays, and exam. Between the two of us, we visit the dentist five times per year for routine care. I figure we’ll have another $500 per year (on average) of non-routine dental work (cavities, root canals, or other major procedures). The kids get free dental care as part of the NC Healthchoice insurance and our current dentist participates in that plan.
Overall, we’ve budgeted $3,000 per year for medical and dental expenses which seems ridiculously low for a family of five until you consider the extent of the subsidies we expect to receive. As a policy matter, we don’t necessarily think we should qualify for all of these subsidies, but we’ll certainly accept whatever subsidies are tossed our way. “Git while the gittin’s good” as they say down here in the South.
We don’t spend much on clothes. The thrift shop has some great stuff, and other stores are inexpensive. The kids are all growing so I’m sure we’ll be buying plenty of new (or lightly used) stuff in 2016. And Daddy needs a new pair of shoes. All that should be $800.
Mrs. RoG and I don’t need to worry about a professional wardrobe any more. T-shirts and shorts or jeans are perfectly acceptable attire in early retirement.
Food is our second largest major expense. Between the $7,000 budgeted for groceries and the $1,000 for dining out, we expect to spend around $8,000 in 2016.
$8,000 represents an increase over the amounts we have spent over the last several years. Maybe we’ll buy even fancier ingredients and go out to eat more? We already spend a considerable sum on imported spices and seasonings for the Asian and Hispanic dishes we create. Our wine, champagne, and fancy cheese expenditures are a little embarrassing for someone who pretends to be frugal (thanks, Trader Joe’s!).
If you’re curious why our grocery expenses are so low (or so high!), check out this example of all the groceries we bought in one month. Here’s how we keep grocery spending to a minimum without using coupons.
In the past we’ve budgeted $1,000 per year for the fun stuff. I’m upping the amount to $2,500 per year with the goal of having even more fun. In 2016, this might mean I get a kayak, canoe, or bike. We’ll also take more trips to the swimming pool and indoor water park for fitness and recreation (a smoking good deal at $11 per visit for the whole family).
So much recreation is free or very cheap that $2,500 will go a long way.
I have $1,000 budgeted for electronics in a separate category, and in the past several years I have purchased a Playstation 3 with a bunch of games for $125, a few flat screen TVs for under $500 each, a new gaming computer for $400, a few laptops for $200-300 each, and a stack of tablets for $60-70 each. It’ll be a stretch to spend all $1,000 this year unless I buy an ultrabook laptop (which would be a business expense, right?).
In the past two years, we have taken two international vacations per year. In 2014, we set out on a five week road trip to Canada that ended up getting cut short because we were exhausted (our two year old and the really dirty Airbnb rental didn’t help any!). We also went on a week long cruise to Mexico, Honduras, and Belize.
In 2015, we started the year with a cruise to the Caribbean. In the summer, we spent seven and a half weeks traveling around Mexico.
Each of our cruises usually costs under $2,000. The total cost of the Canada trip was $1,316 for 2.5 weeks. Our seven and a half weeks in Mexico was $4,450. One thing we learned was that we only spend half or three quarters of what we actually budget for travel. Once we are on our trip, it’s easy to economize in small ways to save money.
I’m also a big fan of “travel hacking”. I get a lot of free airline miles and hotel points from credit card bonus offers and using the right cards to maximize rewards and cash back. Travel hacking makes our vacations incredibly affordable. Or viewed a different way, we can stretch a $10,000 vacation budget pretty far when we can get free or cheap flights and hotels.
For example, we saved $3,000 on five plane tickets to Mexico by using miles. Then we saved another $1,000 on a week’s worth of hotels by using Starwood hotel points. Without travel hacking, our Mexico trip would have doubled in cost!
The Canadian dollar, the Euro, and the Mexican peso are all very cheap right now, so now is a better time to travel than in the recent past. With $10,000 we could do a really epic road trip and still have money left over for a cruise or two during the colder months. We also want to visit Europe and could spend $8,000 to $10,000 on six weeks traveling across the continent.
Or we might take a vacation from vacationing and spend the summer at home for once. The kids really enjoy going to summer camp, playing, swimming, and relaxing at home. After a few summers on the road, I think the kids might be on to something. If we do end up buying a minivan in 2016 (mostly to use for road trips, by the way), then that would consume any unspent vacation budget for the year.
There are a lot of possibilities for us when it comes to travel, and it’s great to not be limited by money.
Gifts and Charity
We don’t have a lot dedicated to these two categories at $1,000 for gifts and $100 for charities.
The $100 for charities might seem very Scroogish of us, but I’d rather give to charity when it makes more sense financially. Right now we would get almost zero tax benefit from charitable contributions. If our portfolio continues it’s march upwards over the next several decades, contributions to a donor advised fund at somewhere like Vanguard will save a ton in taxes which translates to even bigger gifts to charity.
Update: After taking some heat in the comments on my almost non-existent charitable contribution budget, I wanted to mention that I do contribute my time much more than I did when working. I serve on a board, help out at the kids’ deep in poverty Worst School in the District, and do a lot of small things for friends, family and neighbors. I guess I could go provide menial minimum wage type labor at a variety of charitable non-profits, but I don’t think that’s a particularly good use of my time or skills. Nor is it fun; I’d rather go back to work. I’m also busy taking care of my own kids (and sometimes others’ kids too!) so it’s not like I’m doing zero to better the future.
Even this blog (in spite of it being monetized, so more like a market-based exchange than pure volunteering) is a way to help others by sharing knowledge. I’ve received many comments to the effect that I’ve radically changed people’s lives for the better. At least some of those people will go on to help other people even sooner since they will be better off financially.
I’m planning on spending $1,750 for 2016’s tax liability. I’m targeting an AGI of $42,000 per year which will come from a combination of self employment income (income from this blog mainly), Roth IRA conversions, long term capital gains, dividends, and interest.
Federal taxes should be around $500, which is self employment tax on the self employment income (minus a $3,000 child tax credit).
State taxes of 5.75% in North Carolina will end up being about $1,250 after the standard deduction and a small child tax credit. Once again we’ll be paying a lot more in state income tax than federal income tax.
While working, we were pretty good at managing our tax liability by paying $150 in tax on $150,000 in income. In retirement, our overall tax picture remains the same – we’ll owe very little in taxes. The biggest change is self employment income which comes with an extra 15.3% self employment tax.
So that’s the plan!
Whether we actually spend $40,000 in 2016 is anyone’s guess. It really depends on what we decide for summer travel and whether we end up purchasing a new(er) car in 2016. Overall, I’m feeling very fortunate that we have the financial flexibility to program in plenty of fun in the budget.
My long term goal is to enjoy our money by spending what we can. Since we’re only spending three to four percent of the portfolio each year, I expect the portfolio to increase in value in real terms over the years and decades. As it does, we’ll do our best to spend money in areas that bring us the most value.
I also wanted to publish our budget to answer the question I read a lot after releasing my “Zero to Millionaire in Ten Years” post. When Business Insider republished that post, some of the comments suggested that it is impossible to live on $40,000 per year, especially if you have three kids. This budget allows us to live where we want, eat what we want, and travel where we want.
Want to develop your own budget?
While we were saving for retirement and still working, we didn’t budget. But I did track expenses very closely. I started out using an excel spreadsheet. It was somewhat complicated and took about an hour per month to update. This is a good method as long as you are diligent in keeping the spreadsheet up to date.
A few years ago I switched to Personal Capital to track all of our expenses (review). Personal Capital also tracks all our income (including dividends and interest), and summarizes a couple dozen investment accounts into one screen. It is completely free to use Personal Capital whether you have $1,000 or $1,000,000 or more. If you don’t already track expenses, try Personal Capital, since it only takes 10 minutes to sign up and link all your accounts.
Knowing what you spend is the best way to identify wasteful spending and make positive changes to allow more savings and investing.
What do you think? Have you changed your budget given the recent market downturn? Does your budget look like ours? Are we spendthrifts or misers?