The path to retiring early is straightforward. Accumulate enough assets to fund all your expenses for the rest of your life. Figuring out what is “enough” and then saving that amount can be challenging.
Today I want to limit the discussion to expenses and budgets. In order to answer the question “how much do I need to save for early retirement?“, you have to determine what you plan on spending in early retirement. Everyone has unique interests and desires and can expect to spend different amounts while working and during retirement. I can’t tell you whether spending $30,000 per year is right for you or if you will be happier spending $50,000 or $100,000. It all depends on what kind of lifestyle makes you content and how long you want to work in order to gather enough assets to fund your desired lifestyle.
I’ll be the first to admit that budgeting can be boring. I never put together a budget while working. We were naturally frugal and always managed to save half our paychecks or more. Decent incomes helped fuel the high savings rate.
I 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.
I recently 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.
In a recent article on the Root of Good household’s annual expenses, I showed how our core annual expenses add up to around $24,000 per year. This amount is an average of our actual spending over the three year period of 2010, 2011, and 2012. Some of these core expenses will continue unchanged into retirement, while others will increase or decrease depending on our planned retirement activities and lifestyle.
I also added a line item to explicitly account for income taxes, since these are no longer a “cost of working” but are now an expense associated with our spending. The more we spend, the more we have to withdraw from our investment portfolio, the higher our income tax will be each year.
Here is a chart showing our historical average spending, projected changes in spending due to retirement, and our retirement budget:
I’ll start with the home repairs and maintenance addition. I added $1,500 per year to my repairs/maintenance category 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.
Luck being what it is, I will probably have to replace my hot water heater, HVAC and an appliance or two in the same year. But then I might go five years without spending anything on the items on this list. That is why I use an average cost per year of $1,500 that should cover all the items over the long term. I can do some of this work myself (with youtube’s help) or spend time finding a good inexpensive contractor, so that will save me some money as well.
Other house expenses like utilities, taxes, and insurance should remain relatively constant. We might see a slight increase in energy and water consumption due to being home more during retirement. For now, I am not adding anything extra into the retirement budget to account for slightly increased consumption.
Some might wonder where our mortgage payments are on the budget. Although we still have a mortgage right now, it only has a little over three years remaining. Instead of accounting for the monthly payments as an expense, it makes more sense to mentally set aside enough to pay off the mortgage in full (around $50,000) and not include that amount in our investment portfolio total that will be used to fund our retirement expenses.
Our already low auto expenses should drop when Mrs. RootofGood gives herself a pink slip soon. Right now, we spend about half our auto budget on gas for Mrs. RootofGood’s commute. I subtracted $1,500 from the “auto – gas” category to account for no more commuting costs.
The plan is to cut back to one car once Mrs. RootofGood isn’t working, 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.
Since I am using our historical spending from 2010 to 2012 as the basis for our retirement budget, there are no “car replacement” costs recorded in the historical results. We didn’t buy any new cars during that period. To account for the cost of buying a new(er) car occasionally, I added $1,000 to the “auto maintenance” category. However, cutting from two cars to one car should reduce our maintenance, insurance, and taxes by at least $500. The net result (+$1,000 – $500) is a $500 addition to the “auto maintenance” category.
After the $1,500 savings from getting rid of the commuting costs, we should end up with a $1,000 reduction in annual auto costs in retirement.
Medical and Dental
Medical and dental expenses are a little tricky. While working, Mrs. RootofGood had excellent nearly free medical insurance and well subsidized dental insurance. These insurance expenses came out of her paycheck and are not something we expected to carry into retirement, so we never tracked the expenses.
In retirement, we will get a health insurance plan from the new healthcare.gov exchange. Since our taxable income is so low, we will qualify for a very significant subsidy that will help keep premiums down. I expect the health insurance premiums to be around $1,100 per year. Check out why our premiums will be so low in this article on Obamacare and early retirement. Our premiums might be even lower (closer to $500) if our state doesn’t expand Medicaid (the subsidy kicks in at a lower income level). But I’m planning on $1,100 per year for budget purposes.
We plan to self insure for dental expenses during retirement unless a great dental insurance plan comes along. Most dental insurance plans seem to be fairly expensive for the coverage you get. We have a great solo practitioner dentist that is also very affordable and doesn’t recommend unnecessary treatments (to his own financial detriment!).
Historically, we spent $1,425 annually on medical and dental expenses (in addition to med/dental insurance premiums we didn’t track). These costs included some pretty serious stuff including the delivery of our son and tons of precautionary tests during the pregnancy (everything turned out perfectly, by the way).
I am budgeting $2,000 extra for medical and dental expenses, and most of that is for the health insurance premium. Additional dental expenses make up the rest of the increase.
Our tax bill during retirement will be very low due to our low incomes and our three dependent children. Federal taxes will be close to zero, and state taxes won’t be much higher. At some point in the next 10 to 20 years as the kids leave the house (and their dependent status), our taxes will go up as our kid related expenses go down.
For budget purposes, I’m planning on $1,000 per year to cover our federal and state income tax burdens. I have been pretty good at managing my tax liability while working, so I think I can keep it up in retirement (when our taxable income stream will be more malleable).
We are looking forward to more vacations. And longer vacations. We average around $1,300 per year on vacations and have managed to get in quite a bit of traveling in the last three years (given that we have three kids):
- long weekend in Washington, D.C.
- 2 weeks at the beach in an oceanfront house
- 7 night cruise in the Caribbean
- shorter beach trips and day trips
I’m 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. In the list of our recent vacations, I didn’t include our nine day trip to Argentina and Uruguay where we spent about $500 total including hotels, flights, local transportation, and meals. In addition, we recently spent 4 days in Chicago for about $250 total (free flights and hotels for the four of us – we left the one year old with grandma).
Travel hacking makes our vacations incredibly affordable. Or viewed a different way, we can stretch a $1,300 vacation budget pretty far when we can get free or cheap flights and hotels.
Where are we headed next? I honestly don’t have a clue! But we would like to travel all over the world. Various destinations in Central and South America, Europe, and Asia make the list. We also plan on taking cruises occasionally to more “mundane” destinations like the Caribbean.
Having lots of free time in retirement gives us more flexibility to pick travel dates that save us money or stretch our airline miles further. We can travel during an off-peak season or on any day of the week if the cheap flights are only available during certain times or days. We are also able to partake of steep discounts for last minute travel. For example, we scored a nice mountain cabin rental on the lake this past summer for more than 50% off the going rate. The owners were running a last minute special to fill up their cabin for the following weekend.
To fund our additional vacations, I have added $4,000 to the “vacation” category which brings our total vacation budget to just over $5,000. This may not seem like a lot, however throw in a set or two of free flights for the family and a week or two of free hotels, and we can get pretty far on that sum of money.
I subtracted $150 from the “education, training, and professional fees” category. I paid for some professional licenses while working. I won’t have those expenses during retirement, since I went “inactive”. Unless I get bored and reactivate a license or two to have some fun and make a buck.
I bumped up our “miscellaneous” spending category by $956 as a fudge factor to allow a little extra spending here and there. It also makes our total retirement expenses an even number, so that alone is worth $956 per year.
The Bottom Line
To recap, I took my average historical spending from the last three years and then projected how our expenses will change in retirement. Then I added the historical expenses and the projected changes to arrive at my retirement budget. I started with around $24,000 in historical expenses (during my working years) to which I added around $8,000 in increased spending during retirement. The bottom line retirement budget comes to $32,000.
There is a little fluff in our budget, so we could always trim back on spending in some areas if our investment portfolio performed really poorly or we had an unexpected expense in one category. Since our budget is so low, even a tiny bit of supplemental income can keep us living our planned retirement lifestyle.
Our year to year spending will never hit $32,000 exactly. One year we might spend $5,000 more than budgeted if we replace a car or do a major home improvement project. Other years our spending might run a few thousand under the $32,000 budget.
They key to a successful early retirement is knowing what you want to spend, and saving enough to be able to fund your desired lifestyle.
Want to retire early?
Here are your action items:
- Start tracking your expenses now. Personal Capital is the easiest way to start tracking expenses in only 10 minutes. You have to know what you are spending before you can plan your retirement budget. No excuses!
- Think about what you want to do in retirement and what it might cost. Take your time on this. This is probably the hardest part of budgeting for retirement expenses, as it can be difficult to think of what you want to do for fun for the rest of your life. But you are responsible for your own entertainment.
- Figure out areas where your spending in retirement might differ from your spending while working. You will spend less in some categories like commuting and will probably spend more in other categories like entertainment, recreation, and travel.
- Take your current expenses and add or subtract as necessary in areas of spending that will change in retirement. Don’t forget categories like “income tax” that you may not keep track of right now.
Update as of 3/1/2015: For 2015, I’m giving us a 1.3% raise over 2014 and plan on spending $32,400. I hope to publish an updated overview of our early retirement budget soon.
2016 Update: Since our portfolio kept growing year after year, I bumped the budget up to $40,000 for 2016.
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This all makes sense. What I believe is harder is to project your ‘needs’; for instance, one ought to be able to budget for help and care after a certain age. Here is where a lot of ‘I can live on very litlle ’cause I do it myself’ type early retirements get it a bit off the mark.
There is a lot of truth in that. Since I’m 33 and already retired, it makes forecasting what I think I’ll want and need 3, 4, or even 5 decades in the future difficult.
As for not being able to do things myself any longer, that will definitely happen at some point (hopefully a couple decades from now at least). I’m fortunate (for planning purposes) that my kid related expenses should be gone in about 2 decades, just in time for my DIY ability to start tapering off.
There are also a number of recent studies in the financial planning literature (all U.S. based as far as I know) that suggest that retiree spending tends to decrease in real terms somewhere in one’s 60’s. Here’s a good summary at the Boglehead’s site: http://www.bogleheads.org/wiki/Models_of_spending_as_retirement_progresses#Stages_having_variable_real_spending
I’ll probably be in the same position of having real spending decrease once I get “old”. I’d love to hike the Inca trail to Machu Picchu in my 30’s. Not so much in my 60’s or 70’s (unless I start running triathlons!). I’m more likely to be knee deep in grandkids at that age!
To keep myself from “getting off the mark”, I base my spending on a “core budget” and a discretionary FUND. My core budget includes only need-to-have or committed expenses. My discretionary FUND consists of my accrued surplus income and is there to pay for any fun — or unforeseen need — that may come up.
In Justin’s case, his $20,622 core budget would exclude his fun and gifts expense lines. His discretionary fund — with maximum flexibility — could then cover fun, gifts and future/unforeseen needs. (I cap my discretionary fund at one year’s core expenses — $18,000 — but that’s just me.)
I don’t have a separate “discretionary” fund because I intuitively know I will cut back on discretionary expenses (like vacations, entertainment/fun, gifts, etc) if our portfolio performs really poorly. Like you though, I know there is a core set of expenses, probably $20-22k per year, that we could live off of without drastically changing our lifestyle (forgoing cars altogether, moving to a smaller house or condo, or eating only rice and beans).
This is a really great detailed analysis of what you expect your spending to look like. While I would like to retire early, we don’t even own a house yet, so I have no idea what our future costs might be. I just know I want to keep them fairly low to make it easier. Traveling is the most important to me right now, and ideally I would like to fund a lot of that with reward points and whatnot. I have a rough plan of at least retiring in a lower cost of living area, and not getting too much house.
Sounds like you are on the right track. Saving when you are young is an awesome way to build your wealth early and just let it compound and grow into your 30’s. You can figure out a lot of the budget and finance stuff down the road when you know what you want to do and where you want to live.
I’m little ashamed to admit that we haven’t adjusted our budget for early retirement figures, and have taken the lazy way out of assuming our costs will remain static (adjusting for inflation). I’m jotting this link down so I can make this exercise one of my 2014 goals.
Thanks, and I’m glad I found your blog (through Pretired).
The retirement budget I provided in this article is probably version 3 or 4. About once per year as I approached retirement I updated it to add something, subtract something, or change the amounts on certain line items.
This is incredible. Congrats to you and your family for early retirement. It’s pretty crazy that your personal financial discipline combined with the benefits of cheaper housing/utilities/entertainment/etc that has become more affordable in the 20th and 21st centuries, that you are able to retire at 1/3 of your life expectancy. It’s very encouraging to here the story of another FI-er. I’ve been following Mr. Money Mustache and the Madfientest for a while now, so I’ll add you to my list of FI heros. It always comes down to numbers and discipline in the end… and it looks like it’s paying off! I hope you join you and the ranks soon. I’m 31 now and planning for 40, fingers crossed.
Best of luck! It takes some discipline, but once you get into the groove of saving and investing, getting wealthier tends to happen automatically. I’m a big fan of Mr. Money Mustache and MadFIentist as well. Thanks for the kind words!
It’s pretty amazing how close your numbers are to ours even though you’re clear across the country. We don’t “budget” per se, but we look backwards to determine our automated transfers, etc. And I use the data to drive down costs that are sneaking up on me. We’ve got to take a more detailed look once Pretired Mama is ready to pretire because quite a bit will change. Health care costs will go up, commuting costs will go down, etc. I have to say I was shocked how much my spending dropped when I quit working. Just the act of getting dressed, driving in, eating lunch and recovering from the pain of it all added up to quite a bit!
As we started closing in on retirement, I started identifying those costs that would change (health and dental were two big ones). Agreed on the costs of working – I managed to get by on the cheap, but it’s hard to avoid some costs.
I think your health insurance costs in your budget are way off. My first retirement was in 2009 but it doesn’t really count because I started a new job the following Monday. I just retired completely on September 6th. At 59, I am considerably older than you and my insurance is thru my first employer but the increases in cost have been a budget buster. My coverage goes up almost $700 each year. Right now the cost is $7053 per year. As of March is will be $7704 and that is for individual coverage. Family coverage is over $14000 per year. I have been unable to plan because the increases have been coming increasingly early. In 2012 the increase began in June, in 2013 the increase was done in May and in 2014 the increase will be in March. When I checked the government web site last year it promised low cost premiums but when you contact the actual insurance companies the costs skyrocket and were in most cases higher than I am already paying. Your wife might want to ask what the cobra cost of her health insurance would be? The will probably give you an idea of the costs of comparable insurance
Depending on your income, you may very well qualify for large subsidies through Obamacare (the ACA or Affordable Care Act). Here’s a quick overview of the level of subsidies and the premiums you might expect.
I ran an example for a 60 year old couple. A good (“silver”) plan would be $5,700 per year in premiums, or a not as good “bronze” plan would be $2,900 per year. That’s for a 60 year old couple earning $60,000 per year income in retirement. Lower income will lower the premiums you pay.
You are right – employer provided retiree health insurance is often very expensive. Sometimes as much as or more than private insurance (at least through 2013). But the employer provided HI was guaranteed with no pre-existing condition exclusions. You might be much better off financially switching to a health insurance exchange plan and getting a subsidy to assist with the premiums. Check out healthcare.gov .
In the link I posted a few paragraphs earlier, I show how our family’s premiums will be around $1,100 with an exchange health insurance plan and an estimated income of $37,000/yr. We rarely visit the doctor, so that’s the bulk of our healthcare expenses. I’m sure the expenses will rise over time though.
Your budget doesn’t include anything for the kids? Sports fees, etc.?
We have funds for things like kids’ summer camp in the Toys/Entertainment/Fun category. They might drop summer camp and do more sports as they get older.
We also have categories like Vacations, Groceries, and Clothes that include kid expenses (but I don’t split them out separately).
I get that you’re affiliated with Sam/Yakezie and he’s financially incentivized to push their product.
But in reality, Personal Capital is better for investment tracking, not day to to day spending.
Mint is much better for the frugal living/budgeting/early retirement folks because it is a much better tool for tracking and sorting expenses.
In a perfect world, the two would merge.
I enjoy your posts.
I haven’t tried mint in a long time, but when I did it couldn’t get all my accounts entered correctly. For me, my spending is well under control so the simplicity of personal capital’s expense tracking is nice. I don’t budget at all, so I’m not actually too concerned with “did I hit my budget numbers this month” other than the big picture bottom line.
I’m in agreement that the strength of Personal Capital lies in the investment tracking. Which is what I struggled with the most prior to Personal Capital’s seamless integration of all my accounts.
My recommendation would be to try Mint if Personal Capital doesn’t provide what you need. I have heard mint gets you more detail on spending (like you say) and allows budgeting, but I never used it enough to give it a good workout. Maybe I should give it another try? Not that I need another financial data aggregator since Personal Capital provides what I need. 🙂
I have heard other swear by You Need a Budget! (YNAB). I haven’t tried it, but it tends to get great reviews. It isn’t free, so if a free tool like mint or Personal Capital does what you need efficiently, then my choice is the free option.
Great post RoG. I was finally able to put pen to paper and figure out how much we spent in 2013. Let’s just say it was a little higher than $32k. This year will probably not be any better as we battle PMI and take advantage of living abroad but we will surely be spending the money more wisely. I hope we are able to track and spend at your levels in the next 3-5 years.
Thanks for stopping by Mr. Grump. I felt like once I started tracking expenses it was easier to focus on specific areas where we were being profligate in our spending. Not that we slashed spending to the bone, but we were able to watch general trends that aren’t always evident.
Thanks for posting your actual numbers! I’ve been looking for sample early retirement budgets so we can start to build ours. Even though we are very, very far from retiring, it helps me to plan and figure out what we’ll need to do to get there. It also helps inform the spending decisions we’re making now! Sustainable frugality is our new way of thinking about things. I’m glad to see that you, unlike many in the extreme frugality set, still make room in your budget for a lot of travel– we have a $5000/year travel budget, and this year alone, we’re going to Thailand, both coasts of the U.S., and on a bunch of smaller trips. It’s worth it to us.
Thanks, glad you like it. I think it’s makes a lot of sense to take what you spend while you work, and then add/subtract as necessary to craft the retirement lifestyle you want. Some costs go up, some costs go down, some costs go away (like the commute!).
We value travel a lot, too. We’ll probably end up traveling for six weeks this year and will probably spend $5000-6000 (but no big deal if we bust that budget a little!). Since I’m retired and Mrs. RoG was able to work out a ton of extra time off this year and next, we’re looking forward to putting our travel budget to good use!
Your housing budget looks awfully light and you don’t include health care. I’d put another $10,000 for a single and $17,000 for a couple, which would put the income requirement at $42,000 and $49,000 respectively. Really modest but a sad reality for most Americans. Retirement is for living large.
I think it’ll work. Health care is in there, too. Just pretty light. We’ll be getting some steep ACA subsidies, so don’t expect a ton of expenses for the next while. Yeah, we’ll get older and maybe get sicker, so these costs could go up. If we were 50- or 60-something, I’d budget a lot more.
Congratulations on compiling such a detailed budget! If more people would put half as much effort into their own budgets, they would see so many more financial opportunities open up for themselves. You must live in a low cost area as some of your costs (like real estate taxes) are much lower than ours.
A couple of thoughts on the health insurance issue:
1. While you’ve covered the cost of the insurance premiums (with subsidies), most ACA plans have rather high deductibles and out of pocket limits. Hopefully you’ll have no big claims, of course, but how would you handle a $10,000 deductible (for example) should a large claim arise?
2. There has been much talk about repealing the ACA, but I doubt it would happen before the next Presidential election. But retirement for you will last a long time (until you’re eligible for Medi-Care)! What would you plan be if the ACA is repealed, or if they add an asset test in addition to the income test for subsidies? Just curious how others would handle this if it occurred after they retired…..
Thanks for sharing your information!
1. Our high deductible plan from Mrs. RoG’s employer has a $5k deductible. We would simply pay $5k out of pocket. Max out of pocket is around $11-12k and that is the worst case for medical care in a given year. Once we are on ACA subsidized coverage, it’s likely that we’ll have deductibles between $0 and $500 and max out of pocket amounts of $1000-3000 based on the least expensive silver plans we have available to us. In other words, we’ll be on the hook for less out of pocket once we’re on the ACA plans. Our premium will be around $130/month based on an assumed $42,000 per year AGI.
2. What to do if the ACA gets repealed? I think a complete repeal is unlikely and that we’ll be able to get some sort of similar coverage. If not, we might consider paying out of pocket for regular unsubsidized coverage if available, becoming a resident of a state that has some sort of ACA-like coverage (some states actually like health insurance for all), move to another country, get a part time job with coverage, or some other creative way to get HI coverage.
It’s a concern, but a complete scrapping of ACA without some sort of replacement seems unlikely since it will have been in place for over 2 years by the time the new president takes office. All of a sudden you would be taking away all kinds of stuff that people have come to rely on.
I can’t believe you not spend $145 a month on electricity! We have the eco conscious rate and we still are at $190 to $300 a month! Sigh.
I’d be curious about your travel hacking too if you could post how you only spent $500. That’s amazing.
While I respect your frugal lifestyle, I ‘m shocked and disappointed at how little you give back to society. You make well over $100K, pay less than 1% in federal taxes – and give only $58 a month to charity? Personally, I don’t see this as a model for anyone with a conscience.
Hopefully, you give generously of your time in a major way that’s not accounted for here. If so, I commend you. If not, I urge you to consider sharing at least a small portion of your good fortune. There are so many people who could use your help!
Read the other comments and you’ll see we give back in many non-monetary ways. We also give little to charity today but that may not be the case forever. We still have 3 young children so the future is still somewhat unknown for them. I’m a little taken aback by all the people that feel entitled to tell me how I spend my discretionary income and suggest I’m greedy because I don’t give more (all?) of it away.
And we no longer make anywhere near $100k per year. AGI the past couple of years has been closer to $42-46000, or somewhere around 150% of the poverty level for our household of 5. We have assets that we are living off of, but our income isn’t huge.
I’m sorry for the people attacking you like this. It’s more than likely Sanders-type folk that believe everything should be free and the world should run off unicorn farts. Lol. People would be much more charitable if the government didn’t steal so much in taxes to go to entitlement programs. Ignore the haters.
I know it’s been over 2 years since Jim Kraus’ comment, but it does deserve a response. He attacks Justin for apparently having no conscience due to his giving too “little” to society (apparently compared to a threshold requirement that exists in Jim’s mind that none of the rest of us are privy to). Yet Jim apparently doesn’t have enough of a conscience to prevent him from attacking Justin. Doesn’t the same moral code that says “love one another” also say “love one another?” In other words, if love means we give to those less fortunate than ourselves, doesn’t love also mean we treat each other with respect and dignity, and don’t judge them or attack them? Jim even conceded that Justin may be giving of his time instead of money (time is arguably an infinitely more valuable resource than money), but didn’t take the time to verify this before issuing his statement of condemnation. Who made Jim Kraus the boss and judge of Justin? Isn’t Jim going to answer to the same God as Justin? So Jim breaks the golden rule by attacking Justin for apparently breaking the golden rule. That’s pure hypocrisy. How much money does Jim “give” to society (or to God) in order to pay the penalty for his condemnation of another man made in God’s image? How much $ will it cost Jim to get his conscience clear? Jim also overlooks one fact about giving to charity: Nobody ever felt loved by receiving an anonymous handout from a charitable organization. Love is only felt when one human intentionally reaches out to touch another with kindness rather than with condemnation. Though a homeless man may appreciate receiving a blanket or a Thanksgiving dinner through a charitable organization, he will only feel loved if another human being has compassion on him enough to personally interact with him. Throwing money at nameless, faceless people is not love. Stated simply, the act of giving money to a charity requires NO conscience whatsoever.
Being from Argentina, I have to ask what did you see and how did you like it.
We stayed in Buenos Aires and saw pretty much all the noteworthy tourist spots and the different neighborhoods. Also spent a couple days in Montevideo/Colonia across the river. It was great and I’d love to go back again for longer. Beautiful architecture! Good food! Cool quiet spots around the city.
I posted about our time in Uruguay (but never got around to Part 2 about Buenos Aires).
Excellent! Americans move South more and more.
It is a shame it is so expensive (some things). It gets worse every year…
This post got me thinking. Up till now I’ve been setting aside $150/mo to buy a used $15k car every 8 years. Like you we have gone down to 1 car since I entered early retirement a year ago.
But your post got me thinking … Why do I need to set aside ANY money for a replacement car (or ANY savings goals) when I am retired (duh)? When you are retired, your savings are ALREADY THERE, SITTING IN YOUR RETIREMENT ACCOUNTS. So why would I pull an extra $1800/yr from my IRA/401k and let it sit in my checking or savings account, resulting in a yearly higher taxable income, when I can just let that money SIT WHERE IT IS in a tax deferred account and then pull out $15k from my investments every 8 years?
I see several potential benefits:
1. My yearly income decreases by $1800.
2. The decrease in income reduces my taxable income for years 1 through 7. Of course, year 8 might make this a wash unless I can do some advanced tax planning for that 8th year.
3. By leaving that $15k in my retirement accounts until I need to make the car purchase, it will on average grow by about $5k more versus pulling it out incrementally over those 8 years to sit in a savings or checking account.
4. If I choose, I can use the yearly tax savings as additional headroom to convert more each year from IRA to ROTH IRA.
5. A retirement-sized portfolio balance can go up or down $15k daily, so a used car purchase is essentially below the noise level anyway (the variance of the daily ups and downs of the stock market). When I need to buy a car, I won’t really notice much affect on my portfolio balance.
Bottom line, I no longer need to put car replacement in the BUDGET. When I need to replace the car, I just need to withdraw the necessary cash from taxable investments (or Roth conversion ladder). I am going to examine my other ongoing savings goals (what YNAB curiously calls “true expenses”), to see if it makes sense to remove any of them from my budget as well, paying for them by extra withdrawals when the time comes to make the purchase.
I think that’s the way to do it vs. separate segregated accounts for each savings goal. The costs average out year to year and if you’re pulling from a six or seven figure portfolio then it’s rounding error to withdraw a little more this year vs a little less next year.
Or at least that’s my conclusion after 5 years of doing this!