How to deal with lumpy expenses in retirement budget

[poker-wont-help-me-fire]

I am hoping to retire in the next 2-3 years.  I’ve created a budget that includes the following to account for lumpy expenses:

$300 per month for car replacement
$100 per month for car repair
$400 per month for home maintenance

We have relatively new vehicles, and my aim is to retire after replacing our roof and maybe after getting solar panels.  So we theoretically shouldn’t have a need for much of this money in the first few years. We would be putting this money into sinking funds for these various expenses.  Is it better to withdraw money annually (or monthly) to put in the sinking funds or leave it invested until it’s needed? If it’s invested, it could make more money (or lose more money).  And annual income would be lower in the years these funds are not needed.  Lower income would be better for taxes, ACA, Roth conversions etc.  But then you might have a situation where you need a new car and have to spend an extra $25k in the year you purchase it.  So your income might be something like:

2026 - $60k
2027 - $60k
2028 - $60k
2029 - $60k
2030 - $85k

Is the above scenario preferable to a steady income of $65k per year?

How are those that are already retired handling these types of lumpy expenses?

[ixtap]

Have you been budgeting and using sinking funds up until now? Using sinking funds really is ideal from a budgeting standpoint and means that you aren't as much at the whims of the market if you have a higher spend year.

However, DH has never worked to a budget and I lasted maybe six months when I tried. So we plan to use the second method and just kind of more or less stick to our SWR averages over time. But we haven't actually started yet: DH was asked to stay on part time when he announced that he wasn't planning on finishing our the year they were starting to plan for. Between additional years of growth and even a little savings, our portfolio should be well passed if he ever steps away completely.

[poker-wont-help-me-fire]

Have you been budgeting and using sinking funds up until now? Using sinking funds really is ideal from a budgeting standpoint and means that you aren't as much at the whims of the market if you have a higher spend year.

Honestly, no.  We don’t really budget like this at all while we’re both employed. We’re frugal and save about half of our incomes towards retirement and savings.  But we don’t budget and if we need something, we just get it. We just replaced my 2006 Hyundai Elantra with a 2023 Chevy Bolt, and we bought it in cash. Of course this was after more than a year of agonizing regarding what car to purchase and whether to hold onto the old car a little longer.  But the point is that we didn’t have any money specifically earmarked for the car - we just bought it out of savings.  I am struggling with the idea of switching to a system that would have to be a lot more regimented. 

[NotJen]

Are those your income numbers, or your spending?  In retirement, your taxable income can be disconnected from your spending.  If you have a mix of Roth, 401k, taxable accounts, you will not be taxed on every dollar you withdraw.  So spending an extra $25k does not necessarily mean an extra $25k ends up on your tax form.

My first year of retirement, my income was only interest and dividends, because I had saved cash my last year of working instead of investing in my taxable accounts (still maxed retirement, of course).

I was never a sinking funds kind of person.  My plan is to have a 2 year cash buffer, which I analyze each December as part of my year-end tax planning.  If I plan to buy a car at a certain time, the money is included in that buffer.  If I need to emergency-buy a car, the cash is still there already, and I just refill the buffer at the end of the year.

[Omy]

We have a large "cash" buffer (earning 5+% at the moment) - approximately 10% of our stash.

It's been great because we haven't had to draw from any of our funds invested in the market in 4.5 years of FIRE. It handles anything lumpy that comes along and helps minimize our MAGI for ACA purposes. Our annual income is composed of interest, dividends and capital gains that we no longer re-invest, and rental income (which is all pretty predictable.)

[poker-wont-help-me-fire]

Are those your income numbers, or your spending?  In retirement, your taxable income can be disconnected from your spending.  If you have a mix of Roth, 401k, taxable accounts, you will not be taxed on every dollar you withdraw.  So spending an extra $25k does not necessarily mean an extra $25k ends up on your tax form.

My first year of retirement, my income was only interest and dividends, because I had saved cash my last year of working instead of investing in my taxable accounts (still maxed retirement, of course).

I was never a sinking funds kind of person.  My plan is to have a 2 year cash buffer, which I analyze each December as part of my year-end tax planning.  If I plan to buy a car at a certain time, the money is included in that buffer.  If I need to emergency-buy a car, the cash is still there already, and I just refill the buffer at the end of the year.

Those were hypothetical spending numbers just for demonstration purposes.  You are right that income and spending should be disconnected in retirement…which makes this whole thing that much harder.  The reality is that our spending needs would be between $60k and $70k and in early retirement that would come from taxable investments, interest and savings. We would also be doing Roth conversions up to the standard deduction.  Even though I’m generally a smart person with a good understanding of math, and I’ve done a lot of reading on ACA subsidies, Roth conversions, and tax minimization…I find optimal withdrawal strategies to be extremely complex.  There is also the whole question about whether to adjust withdrawal percentages based on how the market is doing. 


Anyway, it seems like most people don’t use the sinking funds strategy.  Perhaps having a strong cash cushion is the right answer to smooth out any lumpy expenses that might come up. 

[Catbert]

Are those your income numbers, or your spending?  In retirement, your taxable income can be disconnected from your spending.  If you have a mix of Roth, 401k, taxable accounts, you will not be taxed on every dollar you withdraw.  So spending an extra $25k does not necessarily mean an extra $25k ends up on your tax form.

My first year of retirement, my income was only interest and dividends, because I had saved cash my last year of working instead of investing in my taxable accounts (still maxed retirement, of course).

I was never a sinking funds kind of person.  My plan is to have a 2 year cash buffer, which I analyze each December as part of my year-end tax planning.  If I plan to buy a car at a certain time, the money is included in that buffer.  If I need to emergency-buy a car, the cash is still there already, and I just refill the buffer at the end of the year.

I agree with Jen.  Keep a robust cash buffer to use for emergencies, regular spending and these lumpy expenses.  If you've been tracking your expenses for a number of years you might be able to "predict" how much these random expenses will be.  For me we seem to have 25K a year in these type of expenses.  I have several rental houses that generate random large repair bills as well as my own 100 year old house.  However, every year something good or bad happens (e.g., new car, new roof, solar, major vacation, etc).  I'm in a VHCOL area so that also runs up prices.

I couldn't be bothered to keep multiple sinking funds and borrowing from one to fund another.

[Sandi_k]

This is why we've been doing Roth conversions since 2019; I want at least 20% of our stash to be in Roth accounts upon retirement.

I also just rebalanced to lock in the 2023 stock market gains; assuming a 3.5% SWR at age 60, if our asset allocation is 75/25, that means we have approximately 7 years in fixed income to be drawn if/when needed.

My plan is to pull the year's spend over each January from our retirement accounts, and then budget from that.

If we need more for a lumpy expense, there is always the Roths, or our cash emergency fund (either from our credit union stash, or from Fidelity, in a brokerage account).

[RedmondStash]

I'd never even heard of a sinking fund before. Although I do always project that we'll spend an extra $10k per year on unexpected expenses, so I guess that's similar.

How I deal with lumpy expenses is -- um, I don't understand the question. When we have larger expenses, we pay them. I guess we keep a good-sized cash position (5-8%), but in a way, that's irrelevant, because if you always want a certain cash allocation, then if you have a large expense, you ultimately have to replace that cash anyway by selling other assets, to maintain your target AA. But I guess a larger cash position does give you a little flexibility as to timing. (But not market timing, of course.)

We've been FIREd for ~5 years, and we've had some larger lumpy expenses the last couple of years, with more coming soon. I just look at the portfolio, see if we're ahead or behind projections based on an average 7% return (based on our AA), and determine whether we feel flush enough to afford them, or whether we want to postpone for a year or two if possible. But that's mostly for my own peace of mind.

One thing -- to me, "income" means money coming in, from whatever source. "Spending" means money going out. The two aren't always the same, even in retirement. So I got a bit confused by your question at first.

[poker-wont-help-me-fire]

I'd never even heard of a sinking fund before. Although I do always project that we'll spend an extra $10k per year on unexpected expenses, so I guess that's similar.

How I deal with lumpy expenses is -- um, I don't understand the question. When we have larger expenses, we pay them. I guess we keep a good-sized cash position (5-8%), but in a way, that's irrelevant, because if you always want a certain cash allocation, then if you have a large expense, you ultimately have to replace that cash anyway by selling other assets, to maintain your target AA. But I guess a larger cash position does give you a little flexibility as to timing. (But not market timing, of course.)

We've been FIREd for ~5 years, and we've had some larger lumpy expenses the last couple of years, with more coming soon. I just look at the portfolio, see if we're ahead or behind projections based on an average 7% return (based on our AA), and determine whether we feel flush enough to afford them, or whether we want to postpone for a year or two if possible. But that's mostly for my own peace of mind.

One thing -- to me, "income" means money coming in, from whatever source. "Spending" means money going out. The two aren't always the same, even in retirement. So I got a bit confused by your question at first.

What I was trying to say is that in early retirement, you get to determine what your annual income is.  The income would be comprised of Roth conversions, interest, dividends and capital gains. It would usually be based on what you  need to spend in a year.  You would do Roth conversions (which wouldn’t give you more to spend unless you are doing a conversion ladder), use your interest and dividends, and then sell some of your taxable investments, which would probably consist of your initial investment (not taxable) and some capital gains (taxable).  Is it better to take a set amount per year that includes some money for things you may not need (like car replacement or home repairs) and put that money in sinking funds? Or is it better to just sell some investments in the calendar year that you need to fund those large expenses? The first method results in income needs that are smoother, and the second results in income needs that are more erratic. I am not sure which method is better for tax and ACA purposes.

[RedmondStash]

I'd never even heard of a sinking fund before. Although I do always project that we'll spend an extra $10k per year on unexpected expenses, so I guess that's similar.

How I deal with lumpy expenses is -- um, I don't understand the question. When we have larger expenses, we pay them. I guess we keep a good-sized cash position (5-8%), but in a way, that's irrelevant, because if you always want a certain cash allocation, then if you have a large expense, you ultimately have to replace that cash anyway by selling other assets, to maintain your target AA. But I guess a larger cash position does give you a little flexibility as to timing. (But not market timing, of course.)

We've been FIREd for ~5 years, and we've had some larger lumpy expenses the last couple of years, with more coming soon. I just look at the portfolio, see if we're ahead or behind projections based on an average 7% return (based on our AA), and determine whether we feel flush enough to afford them, or whether we want to postpone for a year or two if possible. But that's mostly for my own peace of mind.

One thing -- to me, "income" means money coming in, from whatever source. "Spending" means money going out. The two aren't always the same, even in retirement. So I got a bit confused by your question at first.

What I was trying to say is that in early retirement, you get to determine what your annual income is.  The income would be comprised of Roth conversions, interest, dividends and capital gains. It would usually be based on what you  need to spend in a year.  You would do Roth conversions (which wouldn’t give you more to spend unless you are doing a conversion ladder), use your interest and dividends, and then sell some of your taxable investments, which would probably consist of your initial investment (not taxable) and some capital gains (taxable).  Is it better to take a set amount per year that includes some money for things you may not need (like car replacement or home repairs) and put that money in sinking funds? Or is it better to just sell some investments in the calendar year that you need to fund those large expenses? The first method results in income needs that are smoother, and the second results in income needs that are more erratic. I am not sure which method is better for tax and ACA purposes.

Sounds like you're talking specifically about taxable income.

I believe over on the Bogleheads forum, they often talk about how in retirement, it's financially advantageous to have relatively even taxable income throughout retirement; I don't have the citations or sources to hand, but you could search that forum for discussions. The Bogleheads wiki may also have some guidance on that topic.

My personal approach has been to do as many Roth conversions as possible over the years without nudging up into another tax bracket. With a substantial Roth stash, it becomes possible to have some flexibility regarding taxable income, which helps in getting ACA subsidies, while still having enough cash available for your spending needs and any lumpy expenses each year.

I did some spreadsheet analysis of keeping taxable income low via Roth for maximum ACA subsidies vs. varying levels of Roth conversions leading to reducing or eliminating the ACA subsidies. What I found -- and someone else's analysis may differ -- was that financial outcomes were best either when going for the maximum subsidy or when going for the maximum Roth conversion within a given tax bracket, on a year-by-year basis, because of how ACA subsidies scale down with increasing taxable income. Taking a middle-of-the-road approach every year seemed to be the worst option financially, which contradicts the Bogleheads common wisdom. So I'm not sure. There are a lot of variables to consider, and everyone's situation is different.

I guess my perspective is that if you're going to take taxable income that you don't need anyway, why not just do a Roth conversion and have that money available later without tax consequences? Seems like a safer bet than whatever a "sinking fund" would be. But if you're not yet old enough to access retirement accounts, or if you haven't had at least one Roth account for 5 years, you might prefer a different answer.

[wageslave23]

I'd never even heard of a sinking fund before. Although I do always project that we'll spend an extra $10k per year on unexpected expenses, so I guess that's similar.

How I deal with lumpy expenses is -- um, I don't understand the question. When we have larger expenses, we pay them. I guess we keep a good-sized cash position (5-8%), but in a way, that's irrelevant, because if you always want a certain cash allocation, then if you have a large expense, you ultimately have to replace that cash anyway by selling other assets, to maintain your target AA. But I guess a larger cash position does give you a little flexibility as to timing. (But not market timing, of course.)

We've been FIREd for ~5 years, and we've had some larger lumpy expenses the last couple of years, with more coming soon. I just look at the portfolio, see if we're ahead or behind projections based on an average 7% return (based on our AA), and determine whether we feel flush enough to afford them, or whether we want to postpone for a year or two if possible. But that's mostly for my own peace of mind.

One thing -- to me, "income" means money coming in, from whatever source. "Spending" means money going out. The two aren't always the same, even in retirement. So I got a bit confused by your question at first.

What I was trying to say is that in early retirement, you get to determine what your annual income is.  The income would be comprised of Roth conversions, interest, dividends and capital gains. It would usually be based on what you  need to spend in a year.  You would do Roth conversions (which wouldn’t give you more to spend unless you are doing a conversion ladder), use your interest and dividends, and then sell some of your taxable investments, which would probably consist of your initial investment (not taxable) and some capital gains (taxable).  Is it better to take a set amount per year that includes some money for things you may not need (like car replacement or home repairs) and put that money in sinking funds? Or is it better to just sell some investments in the calendar year that you need to fund those large expenses? The first method results in income needs that are smoother, and the second results in income needs that are more erratic. I am not sure which method is better for tax and ACA purposes.

Sounds like you're talking specifically about taxable income.

I believe over on the Bogleheads forum, they often talk about how in retirement, it's financially advantageous to have relatively even taxable income throughout retirement; I don't have the citations or sources to hand, but you could search that forum for discussions. The Bogleheads wiki may also have some guidance on that topic.

My personal approach has been to do as many Roth conversions as possible over the years without nudging up into another tax bracket. With a substantial Roth stash, it becomes possible to have some flexibility regarding taxable income, which helps in getting ACA subsidies, while still having enough cash available for your spending needs and any lumpy expenses each year.

I did some spreadsheet analysis of keeping taxable income low via Roth for maximum ACA subsidies vs. varying levels of Roth conversions leading to reducing or eliminating the ACA subsidies. What I found -- and someone else's analysis may differ -- was that financial outcomes were best either when going for the maximum subsidy or when going for the maximum Roth conversion within a given tax bracket, on a year-by-year basis, because of how ACA subsidies scale down with increasing taxable income. Taking a middle-of-the-road approach every year seemed to be the worst option financially, which contradicts the Bogleheads common wisdom. So I'm not sure. There are a lot of variables to consider, and everyone's situation is different.

I guess my perspective is that if you're going to take taxable income that you don't need anyway, why not just do a Roth conversion and have that money available later without tax consequences? Seems like a safer bet than whatever a "sinking fund" would be. But if you're not yet old enough to access retirement accounts, or if you haven't had at least one Roth account for 5 years, you might prefer a different answer.

+1. This is a good answer.

[Loren Ver]

We've been retired since 2019 and keep our MAGI very low for ACA purposes, so we don't do Roth conversions as that would also decrease our cost sharing reduction and reduce our subsidies.

What we have done is take out the money we need for living.  Then when we need a larger expense, we just take out additional funds from the accounts that have a more favorable cost basis.  If it is an expected high expense, we will structure all the withdrawals around it. 

We are very stock heavy and have stock in different investments so we have options.  We do also have some in the money market and a little in ibonds as our efunds. 

YMMV especially if your expenses are significantly higher than ours, which they very well might be given the numbers you shared. 

[Laura33]

I'd never even heard of a sinking fund before. Although I do always project that we'll spend an extra $10k per year on unexpected expenses, so I guess that's similar.

How I deal with lumpy expenses is -- um, I don't understand the question. When we have larger expenses, we pay them.

The benefit I have found to the "sinking fund" approach is it forces you to notice a bunch of things that otherwise might seem like one-offs.  For a number of years, I told myself my budget was good, we had just had to buy a car this year, or that year we needed a new roof.  After probably 5 years, I realized that, sure, I only replaced the roof once and only bought one car, but there was something like that every year.

OP:  If you have figured out your FIRE budget by just looking at what you've actually spent over the past X years, then you probably don't need to do anything different, because your actual spend over many years should catch all of those kinds of once-every-5-to-15-years things.  This is more an issue for people who are new to the whole concept and trying to develop budgets to see how much they can realistically save -- can't tell you how often I've seen those kinds of budgets that account for the mortgage on a house but have nothing extra set aside to replace the dishwasher or fridge in that same house.   

If you're confident your FIRE budget accounts for all of those things, then you don't have to worry about setting up some sort of separate account with monthly transfers or whatever.  Presumably, every year, you're going to decide what you need to spend and what will come from taxable vs. pretax accounts to manage tax consequences.  You can just true up any unexpected one-time expenses as part of that exercise -- just keep a sufficient % cash amount to cover projected expenses with a buffer, and adjust as life requires more or less in a given year. 

[farmecologist]

We've been retired since 2019 and keep our MAGI very low for ACA purposes, so we don't do Roth conversions as that would also decrease our cost sharing reduction and reduce our subsidies.

What we have done is take out the money we need for living.  Then when we need a larger expense, we just take out additional funds from the accounts that have a more favorable cost basis.  If it is an expected high expense, we will structure all the withdrawals around it. 

We are very stock heavy and have stock in different investments so we have options.  We do also have some in the money market and a little in ibonds as our efunds. 

YMMV especially if your expenses are significantly higher than ours, which they very well might be given the numbers you shared.

Well...you want to do Roth conversions before you retire...and then use the proceeds in the Roth for MAGI-free "income".  Either that or build a large cash position...or both.  With the interest rates these days, the large cash position isn't as crazy as it used to be ( for now )...but Roth conversions before retirement are likely better. 

[Loren Ver]

Roth conversions are hard when you only worked for one company and only had one 401k from job start until retirement.  Nothing to convert. 

Cash added to much drag, so we didn't build up much cash either, just enough for reasonable efund, about 20k (covered both mortgage and OOPM for insurance for two years).

We went another route and did brokerage accounts when we didn't have good 401k access. 

We are odd ducks though.

Loren