Author Topic: Budgeting for Large Purchases Post-FIRE  (Read 1335 times)

EngineeringFI

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Budgeting for Large Purchases Post-FIRE
« on: January 28, 2018, 08:05:45 AM »
I'm curious to hear the different budgeting strategies the post-FIRE folks here use when making larger one-time purchases. For example: a car, or major work to a house. It seems like that purchase could easily push you above your planned withdrawal rate for that year. Do you reduce your monthly spending by a small amount afterwards to essentially "pay yourself back" over a longer period? Do you set aside a portion of your monthly budget ahead of time until you have the right amount in savings to make the purchase?

SwordGuy

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #1 on: January 28, 2018, 08:22:46 AM »
We have reserves set aside for replacing cars, roof, etc.   We're unlikely to have to do any of them more than once (due to our ages).

If you don't do that, then your budget should include funds that are being set aside for this purpose in the future.

Example:

Let's posit that a new roof will cost you $6000 and will last 20 years.   That's $6000 / 20 = $300 a year.

Let's say that your FIRE income is $30,000.

$300 is 1.0% of $30,000.  You should be setting aside 1% of your annual income for a new roof.

Note that I said 1%, not $300.   Your income should be adjusting for inflation and the cost of a roof will, also. 

Repeat for all the likely expensive things that can go wrong, then add in a dammit factor to account for the things you forgot about.

Hope that helps!

EngineeringFI

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #2 on: January 28, 2018, 08:33:56 AM »
Thanks for your response. This makes perfect sense, but my one question is when you say "set aside", do you mean you still withdraw that 1% of the annual income from investments and put it in something like a savings account. Or instead, do you just subtract it from the amount that you do withdraw from your investments so that it can continue to grow?

Lake161

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #3 on: January 28, 2018, 10:13:28 AM »
I use this spreadsheet to predict and budget for the big ticket items. I set aside this money from my quarterly withdrawals, and put it in my savings account. It provides my cash cushion in case of a market downturn.

spokey doke

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #4 on: January 28, 2018, 10:16:19 AM »
I plug in periodic expenses in cfiresim...a pretty nice tool
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Cassie

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #5 on: January 28, 2018, 11:10:53 AM »
WE just pull $ from our investments for big ticket items. We did not cut back on things we do.But we are older at 59 and 63 and realize that time to travel can be short so are having fun now.

Livingthedream55

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #6 on: January 29, 2018, 09:00:51 AM »
I will have two funds:

(1) My "stache" from which I will withdraw for annual living expenses.
(2) An additional fund (let's call it the Backup Fund) for big ticket items (replace a car, major house repair, unplanned & significant medical expenses).

I also don't see myself needing to spend my entire 4% withdrawal from my "stache" so plan to add to the Backup Fund each year as well.

 



Fishindude

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #7 on: January 29, 2018, 11:36:27 AM »
I budget $15K per year for this sort of thing.  Some years less, some years more, but there is always something.

tooqk4u22

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #8 on: January 29, 2018, 03:28:00 PM »
We have reserves set aside for replacing cars, roof, etc.   We're unlikely to have to do any of them more than once (due to our ages).

If you don't do that, then your budget should include funds that are being set aside for this purpose in the future.

Example:

Let's posit that a new roof will cost you $6000 and will last 20 years.   That's $6000 / 20 = $300 a year.

Let's say that your FIRE income is $30,000.

$300 is 1.0% of $30,000.  You should be setting aside 1% of your annual income for a new roof.

Note that I said 1%, not $300.   Your income should be adjusting for inflation and the cost of a roof will, also. 

Repeat for all the likely expensive things that can go wrong, then add in a dammit factor to account for the things you forgot about.

Hope that helps!

This is what I do but I would add one thing....how much expected life remains on those big items.   If a roof costs $6000 and last 20 years but is currently 10 years old....what I do is put $3000 into an account and then add $300 per month from then on.  I include the $300 in my spending but I don't include the account in my net worth.  So when it is time to replace the roof I just transfer the $6000. It serves to smooth the expenses/spending. 

WSUCoug1994

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #9 on: January 29, 2018, 04:22:58 PM »
Like others have mentioned my "withdraw" rate includes nearly every contingency including home maintenance/improvement, new to us cars, education for the kids, extended travel, etc.

I read somewhere (and it is proving to be pretty accurate) that $1 per sq/ft per year is a good guideline.

SwordGuy

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #10 on: January 29, 2018, 04:28:03 PM »
Thanks for your response. This makes perfect sense, but my one question is when you say "set aside", do you mean you still withdraw that 1% of the annual income from investments and put it in something like a savings account. Or instead, do you just subtract it from the amount that you do withdraw from your investments so that it can continue to grow?

I decided to just go with a simpler method.  I picked a dollar amount that would represent fixing the roof, painting the house (assuming I would be too old to do it by then), replacing the HVAC units, and replacing two cars, etc., and invested it in VTSAX and VTIAX along with my other holdings.   When I do my retirement planning via cFireSim, etc., I just ignore that amount in the starting balance for the simulation.   It should grow to more than keep up with inflation and acts as an extra safety margin as none of it should be needed for quite some years.   

It's less efficient in reaching FIRE date than the method I described for you, but that amount showed up in an inheritance, so I put it to use without having to do a more complicated method.


Daisy

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #11 on: January 29, 2018, 09:39:19 PM »
I budget $15K per year for this sort of thing.  Some years less, some years more, but there is always something.

I also don't have such a specific allocation each year for car repair, roof repair, etc. Every year is variable, and something eventually pops up, so I have enough buffer in my budget to cover big expenses every year.

This is my first year of FIRE and I have some cash reserves, so not too worried about it.

My travel budget is pretty generous and I may not hit it every year. But if I have a large health expense in a particular year, I will just cut back on travel.

I don't think it's worth the effort to overcalculate so many things. Just know things will happen every year and have enough leeway in your budget to handle it.

Frankies Girl

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Re: Budgeting for Large Purchases Post-FIRE
« Reply #12 on: January 29, 2018, 10:10:18 PM »
I don't take out more than I need in any given year. On my 3rd year of FIRE at this point, and have established a basic quarterly drawdown for expected expenses.

Anything that is either a surprise or expected at some point (like replacing the entire roof, or buying a car) will be addressed when we think it's time. I have an inherited IRA that is supplies about half of our yearly expenses and dividends/cap gains generated out of the taxable brokerage supply the rest. If we have a large expense that isn't baked into the existing budget (and we don't usually), then I'll take a look at that time and decide if it should come out of the taxable or the iIRA (and so far, taking from the iIRA has been the best move for our situation).

In any given year, we have enough wiggle room to not lose most of our ACA subsidy if we suddenly needed an extra 10k-20K. This is really the only concern we have as far as drawing off our accounts at this point. We would have to have to double our spending to even reach the next larger taxable bracket and in general have around a year's worth of savings readily available otherwise.

I don't pull anything out until I need it tho, because IMO, better to take a small tax hit if/when absolutely necessary than yank money out of the market to have it sit around in a ~1% savings account on the off chance I might need it in the next year or two. (and if we needed something RIGHT THIS MINUTE, we do still have 1 year of expenses in a saving account anyway as our Emergency Fund)
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