Setting aside pool of funds for specific early retirement expenses vs. 4% rule

[dpsaver5]

I'm a new reader and just beginning my path of learning and planning.  In trying to figure out how much we need to save to retire, I can isolate three major costs that will be eliminated or significantly reduced within 4-15 years of early retirement:

1.  I am planning to budget $30,000/year for health care coverage under the ACA during the early retirement period (which I'd estimate to be 15 years, from age 50 to age 65, so $450,000).  I expect number this will be be reduced at least in half once we become eligible for Medicare at age 65. 

2.  We currently have 20 years left on our mortgage.  If we FIRE in 10 years, we'd have 10 years remaining, or a mortgage balance of approximately $245,000 (HCOL area).

3.  We expect to pay for our children's college education in full (at least the undergrad degree.  Grad school can be their responsibility).  We've saved up quite a bit already for kids college, but since I expect we can FIRE right about the time our kids are finishing high school, I'd want to budget at least $15,000 for each of our 2 children for 4 years to pay for any remaining college expenses  ( $60,000 each or a total of $120,000)

Setting aside those expenses, I estimate we could have a luxurious retirement on $70,000 per year (I know this is not a very mustachian number but we are still new to this, have big travel plans, and live in a very HCOL).  Our base non-mortgage, non-child care expenses are around $35,000, plus another $10,000/year to account for home maintenance/car replacement/other predictable or unpredictable "emergencies", with the remaining including funds for travel, entertainment, clothing, restaurants, gift-giving and miscellaneous expenditures)

So, going by the 4% rule, we would need to save $4 million to account for our initial years expenses ($160,000/year ($70,000 plus $90,000 for health care, mortgage, and college)).  But is it at all reasonable to just separately budget for those three big items, which would total $815,000?  I assume we'd need to account for inflation for the health care expenses, but not for the mortgage expenses or necessarily for the college expenses (since we have 529 savings and I'm just trying to predict the shortfall).  I think we would plan to just pay off the mortgage balance once we retire.  If I add $15,000 for annual Medicare expenses, beginning at age 65, to our $70,000 budget, we'd need to have $2,125,000 saved in order to draw $85,000 at 4%.  If I add back in the $815,000 health care/mortgage/college fund, we'd need to have saved a total of $2,940,000 (plus some amount to account for health care inflation). 

So there's a big difference between needing $4 million and needing $3 million to retire!  What am I missing?  Also, these numbers do not include taxes.  So I'd also need to figure out how much we would need to pay in taxes and add that to the total.

 I would appreciate any advice/guidance!

[MDM]

I'm a new reader and just beginning my path of learning and planning.
...
So there's a big difference between needing $4 million and needing $3 million to retire!

dpsaver5, welcome to the forum.

Yes, if you were planning to retire today, you would want a good understanding of whether $3MM or $4MM is needed.

Because you are looking ~10 years into the future, that much uncertainty is not unreasonable.  The closer you get to retirement in time , the closer you will be able (because you will be far down the path of learning and planning) to estimate what you need.  Meanwhile, do the right things regarding saving and spending, and good luck!

[Laura33]

You are on point.  Best way to think about it is that the 4% rule tells you how much you can withdraw from your portfolio; it doesn't tell you whether that will be insufficient/just right/too much to cover your expenses at any point in time.  The "separate pot of money" is a somewhat more accurate approach, because then you can match your "normal" expenses to the income projected under the 4% rule, and then just save enough on the side to cover the extra stuff.  But even this is going to be overly-conservative, because if you start retirement with an extra $850K, that kitty is going to throw off additional earnings that you are not accounting for while you are drawing it down.

The approach that I have picked up on here that I am a huge fan of is the "buckets" approach (which works best if you have mad spreadsheet skills like my DH).  We are all going to have changes in expenses and income over time, so we have divided our projections into several periods, which you then add together to get the final total. 

E.g.:  50-58:  Expenses $45K (normal) + $30K (health) + $15K (1 kid college*) = $115K/yr x 8 yrs = $920K

58-65:  Expenses $45K (normal) + $30K (health) = $75K x 7 years = $525K

65-70:  Expenses $45K (normal) + $15K (health) = $60K x 5 years = $300K

70-85:  Expenses same $60K**; SS income = $40K = net $20K/yr x 15 years = $300K

Etc.

Once you have each bucket, you present-value each bucket back to today, to figure out how much you need now to have by that time to have each bucket filled when it is needed -- so IOW, even if your 85+ bucket is $200K, you may need to have only $50K set aside for that now, because that bucket it has so many years to grow.  I assume you already have at least $50K saved for retirement already, so, poof!  You have the last XX years of retirement covered!  And then you do that with the 70-85 bucket, and back on down the line to the present.  And once the amount you need for your early FIRE period converges with the amount you have in your bucket, poof! FIRE.***

* Personally, I exclude college costs and college savings from all of my RE planning -- that one is in a separate pot of money similar to your approach, because we don't really consider that "our" money.

**I assume that living/fun expenses will be higher until 70-75 and then travel will go down, but then we add in more for medical, LTC, etc. 

***Note that this is still conservative, because your buckets cover 10-15 years, and the math assumes no portfolio growth over that timeframe.  So you don't really actually need $300K the moment you turn 70 -- if you have like $250K, that will probably grow enough to cover the difference.  You can get more precise with the math if you want to.