Author Topic: How to calculate annual expenditure  (Read 799 times)

AD700

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How to calculate annual expenditure
« on: May 31, 2018, 12:31:27 AM »
Hi all,

All of the FIRE calculations are dependent on the accuracy in which you can calculate your annual expenses. While this may sound easy (and for many it will be), I am finding this difficult and am looking for advice or examples of templates used to calculate expenses.

A little bit of context that may explain more about why I am finding this tricky. My work, relationship and family life is spread across three countries. My housing is currently paid for by my employer, but I have no home of my own. I donít know where I will Ďend upí, but my time is likely to be divided between at least two countries. In short, I donít have a predictable set of circumstances around which to estimate annual expenditure.

Any suggestions or examples of how you have calculated annual expenditure?

Thanks!

imolina

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Re: How to calculate annual expenditure
« Reply #1 on: May 31, 2018, 01:14:56 AM »
I am in the same situation, so I calculated an estimation of future annual expenditure in the country where I am thinking of retiring. 
Maybe calculate how much you would need to retire in each country, and take the worse case scenario, including traveling expenses.

Hirondelle

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Re: How to calculate annual expenditure
« Reply #2 on: May 31, 2018, 02:43:07 AM »
Similar situation here. I'm very young so it's impossible to predict potential future implications of coupling up and/or getting kids. Also I have moved frequently in the last 5 years with a great COL variety.

My current approach is to focus mostly on optimizing expenses and achieving a high savings rate. Even under my current expenses FIRE is still far away (>10 years) so I don't have to reach for a hypothetical number. Instead, I just try to save up as much as possible until I get a better hang of what the future expenses will look like.

Another approach I try to take is to see how much my savings will offer me now. Eg using 4% withdrawal, having a $100k means I have $4k annually forever. By framing it that way, I get excited about reaching intermediate goals and try to think of what I could do with $4k annually (e.g. "Yay, I have covered 25x my rent now, next is the grocery bill!").

patchyfacialhair

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Re: How to calculate annual expenditure
« Reply #3 on: May 31, 2018, 09:17:03 AM »
Honestly, I find the "worst case scenario" approach to planning leads me to the least amount of stress.

Housing? Add up all costs between all the countries you'll be in during retirement. Add a few dollars to your estimates
Travel Expenses? Assume you're paying full price, plus a little extra, plus a few extra trips here and there.
Healthcare? Assume paying for healthcare in both places, higher than estimated.

Do that with absolutely everything to include taxes in retirement.

You'll probably end up with a number higher than what you expected, but as you try to optimize and continue to do so, you'll find that your estimates are overall higher than reality, but that safety margin allows you to weather the budget line items that are more than expected on occasion.

secondcor521

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Re: How to calculate annual expenditure
« Reply #4 on: May 31, 2018, 01:07:34 PM »
The best way, IMHO, and the way I did it:

1.  Figure out what you are actually spending now on everything.  I used Quicken and made sure every penny that went through my life also went through Quicken for several years.  There are other financial tracking tools out there now that can do similarly.

I'd recommend several years worth of data, but at least six months at a bare minimum.

Another way is to make sure every cent spent goes through a small set of accounts, then you can take the balance at the beginning of the period and the balance at the end of the period and all the deposits and do the math that way.  However, this may not account for taxes that may be withheld from your paychecks before the net amount is deposited.  And taxes were the single largest expense category that changed for me between working and FIRE, and I suspect it is one of the largest for most typical people.

2.  Go through all of the transactions or by category and decide how much that expense will increase or decrease in FIRE.  For me, I knew taxes would go down, I knew healthcare insurance would change, and I knew my child support would end.  I thought auto fuel would drop but it did not.  I did not think eating out expenses would drop but they did.

3.  In your case, you might want to construct different scenarios:  Scenario A is FIRE to country A, scenario B is FIRE to countries A and B, scenario C is FIRE to country C.  Go through step 2 for each scenario.

4.  Then take those scenario FIRE budgets and multiply by 25.  You can get a rough guess as to how long it will take you to get there.  So maybe you can retire to country A in 6 years but country B would take 10 years.  This in turn might inform your decision as to which scenario you choose, and thereby narrow your target FIRE budget to one of the scenarios in particular.

In my observation and personal experience, taking actual current living expenses and adjusting them in a reasonable way for FIRE changes has turned out to be an adequate level of planning for myself and other FIREes' situations that I'm aware of.  It won't be perfect, but it'll be close enough to be workable.

Zikoris

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Re: How to calculate annual expenditure
« Reply #5 on: May 31, 2018, 01:31:44 PM »
If it's pretty far off, I would just focus on throwing as much at investments as possible. But if it's pretty close, could you just... make the decisions about what you're go in to do? I mean, you'll have to decide eventually, so what if you just decide now? Or maybe just set an upper limit, and commit to figuring of a way to live within that?

AD700

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Re: How to calculate annual expenditure
« Reply #6 on: June 01, 2018, 09:57:38 AM »
Thanks for the replies. You've given me lots to think about.

My conclusion at this stage is that my life is too unpredictable to be able to realistically begin to calculate expenses. I realise that I need to come up with a more concrete vision of the life I want to lead rather than simply being swept around with the latest currents. So at least initially, I think I will follow Hirondelle's approach and save all I can until things become a little clearer.

When (if) my life becomes a little more 'normal' I will take some of the other advice about looking at various scenarios and calculating based on this.

Thanks again!