How do you establish a FIRE number when spending is all over the place?

[ChpBstrd]

Liquid Net Worth: $1.14M
Mortgage: $111k @ 3.25%

It's time to start thinking about early retirement. My portfolio is growing at an accelerating pace. I've decided to take my chances with the 4% rule. When my stache hits 25X expenses, I'm out!

Only problem is I need to define 25X of what? I pulled my family's monthly spending totals from Mint, which I've been using to track everything since 2016. Then I calculated a rolling number that represents how much we spent in the previous 12 months. As the chart below shows, our "annual spending" is all over the place. As measured in February 2021, I could retire on about $1.13M. As measured in August 2019, I would need $1.87M. These differences amount to years of working!

I slapped a linear regression line on it, and it says we should expect to spend about $60k a year if I retire now. However, the data are so noisy it's hard to take the regression seriously.

So how do you decide what your annual spending in retirement will be? Conservatively go from near the high? Use the trend line? Cut out the one-time expenses and hope for the best?

Notes:

-For healthcare, I'm thinking budget $10k/year. That's how much my employer subsidizes.
-We own our cars outright and no cars were replaced during this period. No HVACs or roofs either. So some cushion will be needed. Maybe $5k/year depreciation budget for big ticket items?
-We had a lot of moving-related expenses in 2018/19 that are non-reoccurring (maybe $15k). 
-We had a lot of private preschool expenses until late 2019 that are non-reoccurring (about $9400). Also a poorly-timed refinance in August 2019 ($3k) is non-reoccurring.
-We might have gotten a bit spendy in 2018/19 because our earnings and stress increased dramatically, before falling in 2020 when the higher-paid spouse quit their job. Perhaps on a retirement budget we'd be disciplined more like we were in 2020. We've proven we *can* live on $50k, so why not retire and just do it (adding budgets for depreciation and healthcare make that $65k)?
-I could reduce spending by $10k a year if I paid off my $110k mortgage with 13 years remaining. This illustrates the mathematical conundrum between the 4% rule and doing something that feels silly like paying off a small 3.25% mortgage.
-Kid has a 529 with about $25k in it that is not counted here.

[nereo]

I’ve learned from this forum that to a large degree, retirement spending is what you decide it will be. Fundamentally it’s not any different from living on a budget while in the accumulation phase (full disclosure: we never budget). Your WR becomes your “income”, only without the fear that you might get fired or laid off. There’s enough safety built into 4% that you typically need not worry about down markets (though see SORR).

There are your predictable, reoccurring expenses, and then everything else (i.e. discretionary), If your WR is $50k you simply live on $50k.  Just like with your take-home pay. If you find there’s something you really want that costs money, you save for a while, or pick up a side hustle, though most of the time your spending expectations falll into line with whatever you’ve decided you can afford.

IME people’s spending in ER tends to centralize around whatever number they pick, though the saving nature of us mustachians seems to push us towards ‘saving’ (spending less) a bit regardless, as its uncomfortable to spend everything we ‘make’ (withdraw). 

[secondcor521]

Life and finances can be more unpredictable with young kids.  It's easier to figure out when they get older and life settles down a bit more (although college, depending on how you decide to handle it, can be a significant question mark also).

I think going with a recent TTM number is fine.  I used trailing six months, and when it came time for me to pull the trigger, the question I asked myself was "Would I be willing to live like I have the last six months?"  That is, was my lifestyle the last six months acceptable and had I been spending in a way that I felt was sustainable long term?

I would absolutely recommend some sort of math effort for including the rare large expenses (cars, roofs, HVAC, braces for kids, college for kids).  It probably doesn't have to be perfect, but as I'm sure you can see it changes the 25X number a lot.

One final thought - it sounds like you're including the mortgage payment in your 25X expenses number.  Your mortgage goes away in 13 years, so it's not perpetual, so it doesn't need to be covered by 25X.  To model this a bit more accurately, you can put it in as a spending amount that ends after 13 years in cFIREsim or FIREcalc.  Another quick-and-dirty way to do the math is to subtract out your P&I on your mortgage payment from your expenses number, multiply the remaining expenses by 25X, then add in your mortgage balance.

[FLBiker]

I'm in almost exactly the same boat, and doing (and finding) the same thing.  Our net worth is ~$1.2M USD, mortgage is $~200K CAD @ 2.44%.  Spending seems to average about $5000 CAD monthly (so around $4000 USD) but there is tremendous variation.  Part of the issue is that we moved from the US to Canada last year, so we had some one-off expenses (ie buying a car) that won't hit every year.  Basically, though, I'm planning to do the same -- I'm going to take an average of 18 or so "normal" months (not immediately post-move) and then add on a cushion for one-offs like roof, HVAC, car.  Maybe $8000 par year?

Fundamentally, though, the importance of getting this number "right" has faded to me as we've realized that both of us want to keep working part-time for the time being.  So as long as we're able to make that happen (which DW already has), our spending is kind of a non-issue.  We'll effectively be coastFIRE, and I'm sure we have enough for that.

[JGS1980]

A couple points you've already already thought about:

1. Healthcare Insurance
-are you in an ACA expansion state? If so, your costs will be WELL BELOW 10K per year if you don't have to pay to the top of the deductible.
-here is a calculator I've used in the past:

https://www.kff.org/interactive/subsidy-calculator/

I plugged in my state and zip code with 50K spending for my family, and have determined that 87% of Silver plan costs will be subsidized. so 1K per year instead of 10K. With max of $5700 out of pocket.

2. Mortgage
-agree with secondcor
-I'd also be tempted to pay off the mortgage, and decrease your baseline monthly expenditure accordingly. This would be for the sake of simplicity, although not strictly a winner math-wise.

3. Any plans for PT work?

[Metalcat]

I’ve learned from this forum that to a large degree, retirement spending is what you decide it will be. Fundamentally it’s not any different from living on a budget while in the accumulation phase (full disclosure: we never budget). Your WR becomes your “income”, only without the fear that you might get fired or laid off. There’s enough safety built into 4% that you typically need not worry about down markets (though see SORR).

There are your predictable, reoccurring expenses, and then everything else (i.e. discretionary), If your WR is $50k you simply live on $50k.  Just like with your take-home pay. If you find there’s something you really want that costs money, you save for a while, or pick up a side hustle, though most of the time your spending expectations falll into line with whatever you’ve decided you can afford.

IME people’s spending in ER tends to centralize around whatever number they pick, though the saving nature of us mustachians seems to push us towards ‘saving’ (spending less) a bit regardless, as its uncomfortable to spend everything we ‘make’ (withdraw).

This is basically it. People live on what they have to live on. Budget conscious people live on what they allow themselves to live on, while those with terrible money skills live on what's available to them, including credit. At the end of the day though, everyone pretty much lives on what's available and adapts accordingly.

Pick a rough figure of the level of lifestyle you think you will enjoy, and aim for that. Pad according to how risk averse you are. That's basically it.