Author Topic: Accounting for the future price of life outside of inflation  (Read 3108 times)

catccc

  • Handlebar Stache
  • *****
  • Posts: 1681
  • Location: SE PA
I was discussing FIRE with DH, saying that in 3 years, our stash should cover our current living expenses (approx. $45K-50K, and we would be able to quit working.  Simple, right? 

He goes on to say that our current living expenses aren't enough, because our two kids will cost us more in the future than they do now.  (He's not talking about inflation, I understand the 4% rule accounts for that.)  Currently, our kids are 6 & 8.  Specifically, he pointed out that they will eat more, their clothes will cost more (because they will be bigger and not fit in kids clothes), they may have more activities, they will eventually need phones and cars, may have education expenses not covered by our 529s, etc. Obviously we would keep expenses to a minimum when possible, he's not talking about buying designer clothes, unlimited phone plans or new cars...  But these items are all non-inflation related increased spend.  I did point out to DH that some costs will go down- commuting expenses, work clothes, eating out because we are pressed for time, etc.  But if I had to guess these decreasing expenses probably wouldn't offset the additional costs DH mentioned.  We will want to travel more, and the cost of healthcare is up in the air, so there's that, too. 

I've always oversimplified it in my head though... $1,250,000 @ 4% = $50K a year for life.  That's near what we spend now, so we can pull the plug and make it work.  I can be quite optimistic, so when he says this situation would be "scraping by," I describe it as "maintaining currently lifestyle."

IDK, maybe I'm not paying enough attention to those that have actually retired, but it seems like people here just go with this oversimplified approach?!  (It could be that I'm not paying enough attention.  I tend to focus on those in stash-building mode, since that is where we currently stand.)

Any tips on how to quantify and plan for these types of expenses?  Any other similar expenses that I haven't mentioned that we should consider in our planning?

redbird

  • Pencil Stache
  • ****
  • Posts: 534
Re: Accounting for the future price of life outside of inflation
« Reply #1 on: May 27, 2017, 09:10:11 PM »
I don't have kids, so you can take what I say with a grain of salt, but I did grow up in a large family. I agree with your DH - kids do seem to have more expenses the older they get. The amount my brothers ate as they got into their teen years was noticeably higher, my parents had to buy them deodorant so they would actually use it, etc.

If you're that close to your current living expenses, you have less headroom. I'm FIRE and my stash can support a higher lifestyle than DH and I live on (~$24k/year), but it's nice knowing we have wiggle room in case lifestyle inflation/economic inflation happens or something happens along the line that's not voluntary (ie health-related expenses).

itchyfeet

  • Pencil Stache
  • ****
  • Posts: 760
Re: Accounting for the future price of life outside of inflation
« Reply #2 on: May 27, 2017, 09:47:01 PM »
Well the good news is you will probably be retired for 40+ years and only have teenage kids for less than 10 years.

Maybe you need an additional "fund the teenagers" stash of say $10K per year x 10 years = $100K.

Once you have $1.25M, the extra $100k is only 8% more, which could quite possibly be the return you will get from the market in 1 year, without saving a cent. As you would still be working, you would still be saving, so the "fund the teenagers" stash will probably add less than 1 year of additional work.

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2196
Re: Accounting for the future price of life outside of inflation
« Reply #3 on: May 30, 2017, 02:57:25 PM »
He goes on to say that our current living expenses aren't enough, because our two kids will cost us more in the future than they do now.  (He's not talking about inflation, I understand the 4% rule accounts for that.)  Currently, our kids are 6 & 8. 

It is important to be thinking about future expense changes - certainly for kids, but also for other things like health care or lifestyle things like plans to travel more. 


Well the good news is you will probably be retired for 40+ years and only have teenage kids for less than 10 years.

Maybe you need an additional "fund the teenagers" stash of say $10K per year x 10 years = $100K.

Once you have $1.25M, the extra $100k is only 8% more, which could quite possibly be the return you will get from the market in 1 year, without saving a cent. As you would still be working, you would still be saving, so the "fund the teenagers" stash will probably add less than 1 year of additional work.

I once started to think about it this way but then I figured all the money that is kid-centric will probably become travel-centric.  Health care is really the one I can't figure out...and probably no point really trying to perfect that.

Kapiira

  • Stubble
  • **
  • Posts: 148
  • Location: Albuquerque, NM
Re: Accounting for the future price of life outside of inflation
« Reply #4 on: May 30, 2017, 03:35:46 PM »
Do you currently pay for before/after school care and summers?  If so, I have trouble believing that other child-related costs will go up enough to exceed the cost of childcare.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6742
Re: Accounting for the future price of life outside of inflation
« Reply #5 on: May 30, 2017, 03:56:16 PM »
But if I had to guess these decreasing expenses probably wouldn't offset the additional costs DH mentioned.  We will want to travel more, and the cost of healthcare is up in the air, so there's that, too.

You can spend any amount. Your spending doesn't have to go up for the reasons mentioned by your DH. All of those are choices. So it comes down to deciding what is important to you. Working longer so you can spend more money or retiring earlier so you have more time for people/activities you care about. You can make either choice, but it is a choice.

I would also point out that in most cases when you run historical data simulations a 4% WR plan will see the principal continue to grow despite withdrawals.

The one issue you mentioned that could impact your spending budget is health care in the US, but if your FIRE horizon is 3yrs+ out hopefully you'll have some clarity on that before then and you can adjust your budget accordingly if you need to.

Zikoris

  • Magnum Stache
  • ******
  • Posts: 3414
  • Age: 32
  • Location: Vancouver, BC
  • Vancouverstachian
Re: Accounting for the future price of life outside of inflation
« Reply #6 on: May 30, 2017, 08:49:17 PM »
If I had wanted a cell phone or car as a teenager, my parents would have told me to get a job and buy it myself. It was very common in my area for teenagers to at least pay for their own clothes and eating out with money from their part time jobs. And like other people have said, I don't think most teenagers would even be capable of eating enough food $ to match what daycare in their early years cost.

So sure, you could spend a lot more. You could also spend the same, or much less. It's up to you.

mamagoose

  • Bristles
  • ***
  • Posts: 357
  • Location: FL
Re: Accounting for the future price of life outside of inflation
« Reply #7 on: May 30, 2017, 09:21:59 PM »
I would budget for it the same way you budget for braces - you have a good idea of how much they will cost, so add that one-time expense to your FIRE fund (instead of your annual expenses). You can probably estimate how much it costs for each kid to do 1/2/3 clubs/sports plus summer camps plus vacations, take you and your spouse's clothing expenses & extrapolate that like your children were adults (so double what you're spending now for X years til they move out). I've always planned in my mind to aim for an extra $10k/year above our "basic living expenses" for the unexpected fun in life, like maybe one year my kid wants to go to space camp, or maybe one year we buy an RV. My husband and I have already made a conscious agreement to NOT sign our kid up for the more expensive sports/clubs (i.e. "competitive dance" is a HUGE thing where we're from and it is SO expensive, so we agreed we're just not registering our kiddo for that, instead she can do gymnastics at the YMCA). But yes, we will be budgeting for braces, prom * 2, spring break, senior trips, all those fun things about being a kid.

Laura33

  • Handlebar Stache
  • *****
  • Posts: 2275
  • Location: Mid-Atlantic
Re: Accounting for the future price of life outside of inflation
« Reply #8 on: May 31, 2017, 06:28:52 AM »
I think there are two ways of looking at it.

Option 1:  All these extra expenses are optional.  Adult clothes can actually be cheaper than kids' clothes.  Sure, they eat more for a few years, but you can offset that by making more of the cheaper, filling things.  If they want phones and spending cash, they can get part-time jobs. Etc. etc. etc.

Option 2:  I *want* to give my kids certain things.  I want my kids to have a phone so they can roam and still be in contact; I want to be able to send my kid to a basketball camp because he adores basketball; I want my oldest to have access to a car so she can do the grocery shopping and ferry her little brother around; etc. etc. etc.

I think you are thinking Option 1 and your DH is thinking Option 2.  Note that neither is right or wrong; the point of FIRE is to live the life that you want to live, and that includes what/how much of these extras you want to provide for your kids vs. having them work towards.  Some "more expensive" things to think about include:

-  Frequency of clothes-buying -- during the teen growth spurts you may be buying a lot more clothes as they plow through them
-  Braces.  Glasses/contact lenses.
-  Phones/devices/data (data can be the killer if you are not on top of "only use wifi") and the associated music/games/apps -- iTunes, Spotify, etc.
-  Extracurricular interests, including equipment, fees, camps, trips, etc.  This applies to sports, instruments, arts/dance, robotics, hobbies, etc. -- as kids get older, there are many options for diving more seriously into an interest, and most of those come with price tags attached + options for travel.
-  Car access, insurance, etc.
-  Entertainment/socializing (now that my DD is in HS, she is always off with friends to the pizza parlor/bakery/ice cream shop/movies).
-  College-associated extras (tutoring, testing and application fees, college visits)
-  School extras (tickets to dances and plays, any extracurricular fees, yearbooks, the never-ending Lifetouch, club fees, uniforms, lunches/vending machines)
-  Appearance-related stuff (e.g., makeup/hair products, "professional" haircuts)
-  Pizza.  With teens, it deserves a category of its own.  :-)

Again, none of this is necessary.  But it is good for the two of you to be on the same page about how much you want to cover and how much you want your kids to work for.

des999

  • Stubble
  • **
  • Posts: 182
Re: Accounting for the future price of life outside of inflation
« Reply #9 on: May 31, 2017, 07:22:22 AM »
I think you might see a slight increase, but you don't have to.  It all depends on how you manage it.  If you are thrifty now, you most likely will be thrifty even when they are older.  Like, pass down an old beat when they turn 16, rather than going out and buying them a 10k car. 

Remember they can start working part time to help with some of the costs, I started working when I was 15, I know girls who start babysitting even before that. 

My opinion is that you will be fine, I'm sure you'll find something that keeps you busy and makes you a few thousand dollars a year.  Good luck

rachael talcott

  • Bristles
  • ***
  • Posts: 286
  • Age: 45
  • Location: TN
Re: Accounting for the future price of life outside of inflation
« Reply #10 on: May 31, 2017, 03:13:03 PM »

I've always oversimplified it in my head though... $1,250,000 @ 4% = $50K a year for life. 

The 4% rule was based on a 30-year retirement IIRC.  You really ought to be running scenarios on FIRECalc or CFIRE sim or the flexible retirement calculator.  I find FIRECalc easiest to use.  Put in your expected nest egg, expected years of retirement, expected social security, and then subtract lump sums from your portfolio for the approximate years you plan to spend more on your kids. 

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6257
  • Location: BC
Re: Accounting for the future price of life outside of inflation
« Reply #11 on: May 31, 2017, 03:59:58 PM »
My kids are 15 and 17 now.   I aggressively budgeted from the similar age as yours.  What I found out.

Kids cost the most from age 7-13, then drop off a bit in costs, with a spike for graduation year (or especially when they start to drive).

1)  I give kids $40 per month for allowance,since age 8,  and with that, they have to contribute to some school field trip fees, supplies, and personal entertainment out of that.   They also hoard it for future technology wants.  Total cash budget for them was $120/month each (excluding food, accommodation, education savings, vacation and gifts,  but including extra circulars, clothing, entertainment, birthday parties, camps, etc).   Razors, deodorants, etc turned out to be minimal extra cost... as other costs fell off.

2)  As they became over 12 years the cost for sports fell.  Why?  I refused to pay for rep teams, and they scaled back to just choosing 1 activity at a time, house league.  One daughter chose no extra ciricular after age 14, and just did after school things.

3) After age 12, there are ways to make money -- paper route, babysitting, mowing lawns, until age 14/15 when more money opportunities (reffing, teaching an art class, painters helper) open up.   Therefore, the allowance did not have to grow as they had more things to spend money on.

4)  Christmas and birthday gifts -- half the time these are for a phone, or other wanted item, and they top up with their money to get the version they want.  They also pay for their own contact lenses, phone plans, etc with it.  No net increase, really, for tech.

5)  Graduation year was expensive for my daughter -- just under $1000 including dress, yearbook, banquet, university application fees, AP test fees, graduation photos, small cake and family party, etc.  That is with her paying $200+ for miscellaneous costs from her own wallet.

6)  My son started to eat a lot at age 13, and eats more every day.  He will not eat the low cost foods or leftovers unless I cook it up and hand him a plate.  Hard to get him to make PB&J sandwiches for himself when there is a frozen pizza in the fridge for a "snack".  Food costs jumped in a major way because of this.  Yet he is skinny, so I am happy to have him eating, so I buy foods that work for him even if more money.  My guess is $200 per month more just for 1 teenage boy.

7)  Driving lessons and driver testing fees, and adding insurance onto the car at age 16...  $1000 ? (YMMV).

8)  Vacations start to cost more, as you want more room than a small double bed hotel room, or in my case, we are going overseas for the first time, as they are old enough to "get" it now.  We also bought a larger car for the leg room for long camping car trips.

9)  Ages 7-13 came with the large lumpy expenses for braces, speech therapy, or vision and other therapy issues, etc.  All the stuff most parents would look to pay for kids, plan $8000 per kid for this, just in case.   Sport and camp fees are the highest in this age group, before they settle down to one sport, or choose sports just through high school.  They also outgrow sport gear and bicycles every other year during these ages.   We also spent more for family time skiing in this age.

10)  Long-term Education costs -- we saved the same amount each year from when they were babies, so no change, other than the misc. fees that hit in grade 12 for applications and college tours. (see above).


Note -- after the youngest was 2 years, we did not pay for daycare.... only preschool, extra ciriculars and summer camps for enrichment... so the comments about them being cheaper, older, is not quite true for all.