Beyond the 4% rule......

[WSUCoug1994]

Disclaimer - I am in the education phase of really understanding the dynamics of the 4% rule.

I feel like I have a baseline understanding of what the Trinity Study and Bengen concluded.  I am not a MMM hardcore but I subscribe to 85% of the logic of the Cult and have had many of these financial traits most of my life thanks to my father (although he taught me to plan for financial security not FIRE).  I am 45 years old - likely to hit the exit button around age 52.  My questions are related to non-expenses planning and healthcare.

I do not intend to live like a hermit and part of my dream is to travel (on a tight budget) the world with my family.  I will also continue to purchase things like cars (used, nothing fancy but not $2000 either and I never sell them before they have accumulated 200,000 miles) and other "things" that don't fit neatly into a regular budget.  I also recognize that healthcare is going to be a major (unknown) expense that I am not accountable for at the moment as mine is paid by my employer.  My wife also has MS - which only complicates the matter financially as it relates to healthcare.  I also have some hobbies - some that cost a little and some that can get expensive if I let it.

I was just seeking advice/knowledge/insight into how to plan for these Non-Budgeted Expenses beyond the 4% rule.  The healthcare expenses really scare the crap out of me and I am not sure how to plan properly for them over the long-term.  I know there is likely no answer to the healthcare questions but at some point I have to have a strategy that I can execute.  How do you plan for Non-Budgeted Expenses?  What is your budget/plan for healthcare?

[GillyMack]

About the non-budgeted items, I've tracked them for a long time and have come up with an long-term monthly average.  And that monthly average figure needs to fit into the expected monthly income (4%).  If it doesn't get spent, it accumulates until it's needed.  Takes a little bookkeeping, but a spreadsheet would do.  We take the price of what we would spend on a car and divide it by 10 years.  Have past average for appliance and car repair disasters.  We budget 1 fancy trip per year and a smaller chunk of money for smaller cheaper trips.  So look at your situation and try to estimate what you want to be able to spend going forward. 

About healthcare, that's one of my big unknowns.  We've set aside enough separately an "annual maximum" as a buffer, but just budgeting for the monthly insurance premium is difficult enough as it is since it's not predictable.  We currently use the ACA and there's no telling about cost from year to year.  Or worse, if it will exist.  So can't help you there.  We luckily have a little excess than what we need in the kitty (we're scared to FIRE) and I'm thinking that maybe that could be a contingency fund, but I'm in a quandary, too.  And with your chronic health problem in the family, you've got a much harder case than most.

[SwordGuy]

If a car costs $10,000 and lasts 10 years, the easy answer would be to save $1,000 a year for 10 years.    (It would also be wrong.)

You need to save $1000 + (inflation % * $1000).   The next year, substitute the amount you just calculated  for the $1000 in the formula.

If a roof lasts 30 years, you'll need to do the same thing.
Ditto for your HVAC system, etc., etc.

And, because a couple of big things can go wrong early before you've had time to save enough, you want your stash to be able to cover that.

[MDM]

Disclaimer - I am in the education phase of really understanding the dynamics of the 4% rule.
...
I was just seeking advice/knowledge/insight into how to plan for these Non-Budgeted Expenses beyond the 4% rule.

One has to include all spending, including taxes, investment fees and expense ratios, and everything else - budgeted or not - to evaluate where one stands with respect to the "4% rule."

That means there will be some guesswork involved.

[tooqk4u22]

I transfer $400/month into a separate account for capex/repairs/replacement for home (incl appliances/furnishings) and auto.  I count the $4800/year in my annual spending and for WR % but I do not count the balances in my worth.  When something comes up I transfer the funds to pay for it - last year I had about $10k of spending for these things (biggest was HVAC with some other house & auto stuff) - but the account had grown to about $20k so no problem. 

For me it helps to "match" the spending with expected life of things and benefits me in that I don't stress at all (about the $ or the impact on WR%)when something comes up.

[WSUCoug1994]

I transfer $400/month into a separate account for capex/repairs/replacement for home (incl appliances/furnishings) and auto.  I count the $4800/year in my annual spending and for WR % but I do not count the balances in my worth.  When something comes up I transfer the funds to pay for it - last year I had about $10k of spending for these things (biggest was HVAC with some other house & auto stuff) - but the account had grown to about $20k so no problem. 

For me it helps to "match" the spending with expected life of things and benefits me in that I don't stress at all (about the $ or the impact on WR%)when something comes up.

Did you pick that $400 number out of the air or was there a history that got you to that number?  I think I need to move to something like this for non-expense items but that is going to include a lot of guesswork as mentioned earlier.  That means I need to annualized cost replacement for cars, roof, furniture, well, septic, etc.  That is going to be a very large number.

[Altons Bobs]

I figure in a cushion for that. Instead of a 4%, I go by 1.8% if I were to retire today. I will have 2 years of expenses in cash also on top of that for just in case.

[Laura33]

That is going to be a very large number.

I think that's one of the risks with RE, isn't it?  I mean, if you retire at 70, you can say, ok, I may need one more car in my lifetime, and I just did the roof so don't have to worry about that again, etc. etc. etc -- you have a limited timeframe you are planning for, and so you can keep a certain pot set aside for those unusual things, because it's more defined. 

OTOH, if you are trying to retire at 35, you can't define/quantify it as much -- you might go through 4-5 cars, 2-3 roofs, 5-6 hot water heaters, 2-4 HVAC systems, etc.  Or you could decide to downsize to a condo downtown after the kids leave and never have any of that!  Obviously, you can't set aside the cash for multiple cars/roofs/repairs/etc., so instead you need to annualize the cost of all of those future expenses and increase your 'stache by enough to cover them. 

But that is also why Mustachians focus on optimism and flexibility.  RE by definition entails uncertainty -- because the only way to get certainty is to work so long and save so much that you know everything is covered, but that comes with a huge time tradeoff.  So most folks plan some overage into their annual budget for recurring expenses and then figure that, well, if something huge hits, I'll be flexible and either reduce some other voluntary spending or find some way to make some money to cover the delta.

Tl;dr:  It's not just about the money.  It's balancing money, time, and certainty.

[boarder42]

also the 4% rule builds wealth infinitely much of the time.

i plan to use a variable withdrawal rate and only allow my spending to go down based on the outcome the first 5 years or so... then re evaluate if it can go back up at a later date.

also in 7 years healthcare wont seem like a black box of instability.  i plan on 6-10k per year for a family of 4 right now.

[WSUCoug1994]

also the 4% rule builds wealth infinitely much of the time.

i plan to use a variable withdrawal rate and only allow my spending to go down based on the outcome the first 5 years or so... then re evaluate if it can go back up at a later date.

also in 7 years healthcare wont seem like a black box of instability.  i plan on 6-10k per year for a family of 4 right now.

This is helpful - I do not deal well with uncertainty as I like to model everything out.  I have built a model for these non-budgeted items and I am starting to feel better.  Might target the $10,000 healthcare as a starting point.  Thanks for the help.

[WSUCoug1994]

That is going to be a very large number.

I think that's one of the risks with RE, isn't it?  I mean, if you retire at 70, you can say, ok, I may need one more car in my lifetime, and I just did the roof so don't have to worry about that again, etc. etc. etc -- you have a limited timeframe you are planning for, and so you can keep a certain pot set aside for those unusual things, because it's more defined. 

OTOH, if you are trying to retire at 35, you can't define/quantify it as much -- you might go through 4-5 cars, 2-3 roofs, 5-6 hot water heaters, 2-4 HVAC systems, etc.  Or you could decide to downsize to a condo downtown after the kids leave and never have any of that!  Obviously, you can't set aside the cash for multiple cars/roofs/repairs/etc., so instead you need to annualize the cost of all of those future expenses and increase your 'stache by enough to cover them. 

But that is also why Mustachians focus on optimism and flexibility.  RE by definition entails uncertainty -- because the only way to get certainty is to work so long and save so much that you know everything is covered, but that comes with a huge time tradeoff.  So most folks plan some overage into their annual budget for recurring expenses and then figure that, well, if something huge hits, I'll be flexible and either reduce some other voluntary spending or find some way to make some money to cover the delta.

Tl;dr:  It's not just about the money.  It's balancing money, time, and certainty.

This is so true and helpful for me to remember.  I have a great job now and I will likely not have this earning power again and so I need to stay in as long as it makes sense to get me to my final destination in the shortest amount of time.  I do not want to ever go back to work if possible.

[boarder42]

also the 4% rule builds wealth infinitely much of the time.

i plan to use a variable withdrawal rate and only allow my spending to go down based on the outcome the first 5 years or so... then re evaluate if it can go back up at a later date.

also in 7 years healthcare wont seem like a black box of instability.  i plan on 6-10k per year for a family of 4 right now.

This is helpful - I do not deal well with uncertainty as I like to model everything out.  I have built a model for these non-budgeted items and I am starting to feel better.  Might target the $10,000 healthcare as a starting point.  Thanks for the help.

you can what if yourself into never retiring - a far bigger risk to FIRE is working longer than needed when you dont have to.  its a risk many people dont talk about. 

[tooqk4u22]

I transfer $400/month into a separate account for capex/repairs/replacement for home (incl appliances/furnishings) and auto.  I count the $4800/year in my annual spending and for WR % but I do not count the balances in my worth.  When something comes up I transfer the funds to pay for it - last year I had about $10k of spending for these things (biggest was HVAC with some other house & auto stuff) - but the account had grown to about $20k so no problem. 

For me it helps to "match" the spending with expected life of things and benefits me in that I don't stress at all (about the $ or the impact on WR%)when something comes up.

Did you pick that $400 number out of the air or was there a history that got you to that number?  I think I need to move to something like this for non-expense items but that is going to include a lot of guesswork as mentioned earlier.  That means I need to annualized cost replacement for cars, roof, furniture, well, septic, etc.  That is going to be a very large number.

Kind of a multi-prong analysis that ultimately was supported by history.  I thought of the following over time to get there:

- General rule that you should expect to spend 1% of your house value each year.
- When I bought my house (and prior houses) estimated the remaining life of major things (roof, HVAC, appliances) and their costs (ie HVAC in current house was 17 years old and thought it should last 25, estimated cost of $8k, so 17/25*$8k = $5.4k that I needed in the account for that item - turned out to be $7k and only 1.5 years later so its not perfect). 
- The above approach kind of applies to everything - cars, mattresses, couches, appliances, etc.  There is an expected life to everything - sometimes it shit will happen sooner and some things can be stretched but it should all average out. 
-Over many years I have found that for me - $400/month seems about right, the balances can get up there I guess but I attribute that more to the car replacement aspect of it, which I haven't bought a car in over ten years.

The above doesn't factor in "Capital Improvements" such as a new deck or kitchen, that would fall under discretionary spending in my mind and would be funded under my WR % somehow such as cutting back travel in that year or by other means such as side income or whatever. 

Obviously my spend is higher than MMM and a lot of others as $4800/year represents a significant amount, but it works for me and I like to be prepared.  If I rented this would be less, if my house and everything in it was new then it would be less....until 7,10,15 years from now when everything starts failing.  It really is situation/individual dependent but it should be thought about.

That is going to be a very large number.

OTOH, if you are trying to retire at 35, you can't define/quantify it as much -- you might go through 4-5 cars, 2-3 roofs, 5-6 hot water heaters, 2-4 HVAC systems, etc.  Or you could decide to downsize to a condo downtown after the kids leave and never have any of that!  Obviously, you can't set aside the cash for multiple cars/roofs/repairs/etc., so instead you need to annualize the cost of all of those future expenses and increase your 'stache by enough to cover them. 
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Tl;dr:  It's not just about the money.  It's balancing money, time, and certainty.

Basically this....its not a large number if you do it this way and it provides more certainty.

[WSUCoug1994]

Thanks for the advice - I am starting to feel better......

[Acastus]

For health care, go to your state's Obamacare site or the federal site, and plug in your family to get an estimated cost for a policy. Unless you are sickly, I would just go with a silver plan. Worst case scenario 1:  no subsidy, just pay the full ride.  Worst scenario 2:  add 10 years to your ages and check that price. Obamacare allows insurance companies to charge older people more, up to 3 times that of a 26 year old. If you are getting close to FIRE, try plugging in a couple annual incomes to get a subsidy. The income limit is roughly $45k + $ 15K per extra person in the family. Above that income, there is no subsidy available.

Trumpcare will flush all this down the drain, so what what happens in DC this year.

[WSUCoug1994]

For health care, go to your state's Obamacare site or the federal site, and plug in your family to get an estimated cost for a policy. Unless you are sickly, I would just go with a silver plan. Worst case scenario 1:  no subsidy, just pay the full ride.  Worst scenario 2:  add 10 years to your ages and check that price. Obamacare allows insurance companies to charge older people more, up to 3 times that of a 26 year old. If you are getting close to FIRE, try plugging in a couple annual incomes to get a subsidy. The income limit is roughly $45k + $ 15K per extra person in the family. Above that income, there is no subsidy available.

Trumpcare will flush all this down the drain, so what what happens in DC this year.

Great idea.  Thank you.