During the course of your career, you tend to pick up a few tricks that you can use in your personal life. In my last job, I helped build, operate, and maintain a billion dollar civil infrastructure project. I won’t leave you hanging on the details. We built a twenty mile toll road. Building the road was very expensive, but the costs didn’t end once the project was open to traffic. After the project was complete, our next task was planning for ongoing maintenance and operations of the facility.
Even though roads are built from very durable materials like concrete and asphalt, they still fall apart over time. Part of my job included developing a long term capital replacement program for every element of the road. All the major systems – pavement, bridges, signs, lighting, landscaping, traffic signals, and tolling technology all deteriorate or become obsolete at different rates. We didn’t know exactly when any of these systems or elements would fail, but we knew enough to plan for eventual replacement. For example, concrete pavement would last around 30 to 40 years whereas asphalt pavement would need to be resurfaced at the ten year mark.
To develop the facility’s long term capital replacement program, we went through every part of the road that would eventually need replacement and estimated the service life and the cost to replace. Those are the two parts of the puzzle I want to highlight: service life and cost to replace.
Since I doubt many of you are interested in the minutia of the full long term capital replacement program for the toll road, let’s switch gears and borrow the concepts of “service life” and “cost to replace” and apply them to developing a long term capital replacement program for houses. It will be much more relevant to most homeowners and I can avoid technical jargon like “crack seal” and “mill and fill”.
Long Term Capital Replacement Program For Houses
First off, let’s identify what systems or elements might need to be replaced in a house. Some are obvious like the roof, the air conditioner and furnace, and the major household appliances like the stove, dishwasher, clothes washer, and dryer. Some systems are less obvious because they are out of sight such as the hot water heater, plumbing, and electrical system. Other parts of a house that wear out over time include windows, doors, flooring, and interior and exterior paint.
For each of these parts of a house, I have estimated a service life and a replacement cost, as outlined in the following table.
|House System||System Cost||Service Life (years)||Annualized Cost|
|Air Conditioner + Furnace||$4,500||10||$450|
|Stove + Oven||$500||20||$25|
|Hot water heater||$700||10||$70|
|Windows + doors||$4,250||30||$142|
|Carpet + flooring||$2,000||15||$133|
|TOTAL ANNUALIZED COST||$1,571|
For the service life, I started out using my own judgment. Some of these are rules of thumb I’ve heard forever like an asphalt shingle roof will last 20 years and HVAC units are good for 10 years. For the major appliances in the kitchen and laundry room, I figured those appliances with moving parts like the dishwasher, clothes washer and dryer wouldn’t last as long as the fairly sedentary stove and oven. Many of the rest of the items in the list often come with a manufacturer’s warranty that serves as a good general idea of how long these elements might last.
So far, the components in our house are doing a great job surpassing the estimated service lives in the chart. But I don’t want to be caught off guard by the sudden failure of a few expensive components of our house.
If you want to develop your own service life estimates for the components of your house, consider regional variations that might cause longer or shorter life spans. For example, if your air conditioner is rarely used, then it might last a lot longer. Conversely, if you are near the ocean in a hot and humid climate, your air conditioner (or the condenser at least) might need replacing more frequently due to excessive use and corrosion from salty sea spray.
For replacement costs, I generally relied on historical expenses for projects at my own house and those of neighbors and friends nearby. Across the US, construction costs can vary dramatically due to regional variations in labor and material costs and local regulations. My cost estimates might appear low because I live in a moderate cost of living area. For some components, I figured I could do the work myself and save a bunch of money – possibly with help from family and friends (or from inexpensive labor procured through Craigslist). I also have the time to competitively shop around for the lowest bid for a given job or the best price for a given appliance (like my 50% off in-wall oven).
Once I estimated the service life and replacement cost for every component in the house, I then determined an annualized cost for each component. I estimate the roof replacement will cost around $4,000 if I buy the materials myself and do most of the work with some help on certain parts of the job. Roofs tend to last an average of 20 years in my area. This leads to an annualized cost of $200 to replace the roof. A refrigerator that costs $500 to replace every 15 years has an annualized cost of $33.
Adding up the cost per year for each component will result in the total annualized cost for all components in the house. For my house, the total annualized cost is $1,571 per year.
Total Annualized Cost of Replacement – Who Cares?
If you want to properly account for all the big replacement expenses you’ll eventually face as a homeowner, you should care! I used my roughly $1,500 total annualized cost of replacement as an input into the housing line item while developing my $32,000 retirement budget. This $1,500 represents the large replacement costs of major components of the house. It’s in addition to the $580 worth of routine home maintenance costs we have each year like repairing things that break and keeping the yard looking (relatively) spiffy.
Ordinary people might dismiss this detailed level of planning as foolish since no one knows whether a given component of your house will last two years or twenty. Your brand new dishwasher might need to be replaced within a few years while your oven could keep chugging into its fourth decade and beyond (like my 41 year old oven that just died – RIP old friend). In the aggregate, I bet you’ll end up pretty close to the averages.
When an appliance breaths its last breath and finally meets the big Repairman in the sky, it’s not an emergency or an act of God. These are totally foreseeable events that you can easily plan for. With six to eight major appliances in every household, all of which have service lives of 10 to 20 years, you are going to have an appliance die roughly every two to three years (on average). It’s just math. Plan for it.
If you hope to reach financial independence and retire one day and fund your living expenses from your investments, you need to have an accurate estimate of living expenses. The big ticket items in your house are one of the more frequently overlooked areas of expenses. These large expenses might show up infrequently, but that doesn’t mean you should ignore them. Get a handle on the costs of replacing the major components in your house and budget for them.
If you are shopping for a new home, you can use the “annualized cost of replacement” concept to evaluate the houses you consider. Once you narrow down your choices to a handful of potential houses, run through the major components and see what the annualized cost of replacement would be for each option. You might find that fancy upgrades on one house will end up costing significantly more to maintain and replace over the long haul compared to a more simple house. Housing costs don’t stop at the purchase price, even though that’s the most visible number when you are house shopping. Considering long term housing costs in addition to the up front price is the most optimal way to shop for your new home.
On my billion dollar toll road project, the annualized cost of replacement ran into the millions of dollars. For most residences in the United States, the annualized cost of replacement will probably run in the thousands of dollars. Even though the replacement costs for a house are less than 1% of the costs on the toll road project, the methods of determining the annualized cost of replacement remains the same. Identify the service life and cost of replacement for all major components, then do the math to figure out your overall annualized cost of replacement.
Have you replaced a major component of your house lately? Did you consider it an unexpected expense?
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