21 Replies Latest reply on Feb 19, 2016 10:53 AM by JerryD

    How are you estimating retirement expenses?

    Susanna144

      Here's a problem that's on my mind a lot lately.  How confident can I be in my estimates of retirement spending?  I am sure everyone approaches this problem in a slightly different way.  There are so many aspects to it!  My approach has been to take a 5 year average of my spending, and adjust it, primarily by removing categories that will no longer apply.  About 30% of my spending goes to rent and utilities for my place in town, which I plan to get rid of when I retire, and that means my spending may well be 30% less.  I also have considered subtracting most of my car expenses, because more than 3/4 of my miles are from driving to town, for work.  But I will still be driving, still have insurance and some repairs, and repairs are most of the expense, when you are driving a car with more than 200,000 miles on it.  That brings up another important question - what about big expenses?   I could easily spend more on a new car than I spend for all my other annual expenses.  What is the right way to budget for occasional large expenses?  I could extend the time period over which I am averaging, I have more than 24 years of expense data to work with, but when I do that, inflation starts to become significant.  What do you assume for inflation during your retirement years?  Anything could happen, but most of the evidence seems to suggest retirees spend less and less as they age.  I am not assuming that my expenses will rise with the Consumer Price Index, but they may well rise, especially if I drive my RV all over the country, as I'd like to do.  I realize that typical calculators you find online assume you'll spend some percentage of your income, instead of adjusting expenses.  That's the lazy way to go, because people know what they earn, and don't track expenses.  I think that doesn't make much sense, because of payroll taxes, among other things.  Basically, I'd be delighted to learn what other members of the forum think on this complicated subject, both people planning for retirement, and people experiencing it.

        • Re: How are you estimating retirement expenses?
          JerryD

          Over a decade ago we created a new (retirement) budget which is still pretty much in place today. We track data in the budget categories and average the last year so that at any time we have the actual expenses for the last year. We created a budget line called off-budget for expenses that "pop up". We have lines to analyze budgeted versus actual on-budget items and also budgeted versus actual items plus off-budget items to get real picture of expenses versus plan.

           

          We adjust a budget level for any item ONLY when we have to. There is NO automatic inflation adjustment. This strategy is an incentive to find ways to stay within the budget level set previously. You would be surprised how the Internet and good planning can allow one to do better, smarter and lower cost actions that allow this.

           

          Major off-budget expenditures can throw chaos into a tight budget. You have to watch these very carefully. You either eliminate the expense or minimize it. For instance, we replaced several cars in the last few years. Backed up by extensive Internet searching, networking and cost analysis on the last car we didn't even have to sell anything (our standard big ticket, off-budget financing) by getting a $3,000 discount, working to get some extra on our old but nice gas-guzzler SUV AND doing something different besides paying cash. The dealer offered 0% financing which I doubted but numbers don't lie. When I mentioned that we would also have to come up with sales tax and licensing, they threw that into the 0% financing too! Yes, we do now have 4 years of rather large off-budget spending, but it didn't involve selling anything at a bad time to pay cash and it is averaged into the budget for retirement spending planning.

           

          I have never done it, but it seems that you could plan in a reliable new car by leasing a less costly one for your reduced usage. Since you won't require high mileage on a replacement car, maybe you could look at Consumers Report for a reliable used car in a price range that appeals. A good car can go 200,000 miles these days without big costs.

           

          There are lots of ways that somebody with lots of time (definition: "retired person") to search, research and calculate ways to make the available dollars stretch.  GOOD LUCK!!!!   :-))))

          • Re: How are you estimating retirement expenses?
            BoBraxton

            Personally after just four years retirement (social security) I have found "budgeting" to be "bonkers" and quite a bit more difficult than during almost 50 working (for pay) years. This fourth year, especially, we have done major / major spending on house stuff postponed over the three decades we have owned this (our first) house. The result is not catastrophe, just a lot "looser" than I mostly feel comfortable in. It has helped that the indexed investments have stayed (down and up) within a favorable range (I did not say gaining). Instead of thinking that I can actually control, I keep careful tabs on reality - what is happening. Part of that is to watch the checking account bank balance daily and compare it to total investments and fluctuating. I feel uncomfortable when the checking balance falls under 1% of our combined retirement investment(s) total.

              • Re: How are you estimating retirement expenses?
                JerryD

                Bo, an expense like a house remodel is not what I would call a budget item in my budget. It would be way, way off-budget for us. If I hadn't totally paid it off, I would have to work it into the budget until paid off and then eliminate it. We did something like that with a multi-year 0% loan that we still call off-budget but watch carefully in total expenditures.

                 

                Do you really have to watch the checking account daily, Bo? Here is what we do. I move a sum to our checking account that I calculate to cover our costs for a number of months several times a year. Yeah, it isn't making anything but short-term money rarely does these days. A major calculation comes when IRA RMD's is taken very late in any calendar year. I send in the taxes to the Feds and the State. I look at what we need to live on and what we have in short term interest paying investments and then I send any excess back to a T-C after-tax retirement annuity and the living expenses to short-term, interest paying securities that we farm throughout the following year.

                 

                Although I look at investment values pretty frequently so as to track progress, I do not do it with buy/sell intentions. I would suggest the same and even less frequent monitoring of the checking account, if for nothing more than peace of mind, Bo.   GOOD LUCK  :-)))))

                  • Re: How are you estimating retirement expenses?
                    Susanna144

                    I can relate to Bo's concern about investments this year.  I've been checking my own daily, and since there is a service that links my accounts, including the checking account, mutual funds and 403b, you could even say that I am looking at my checking account daily.  I think Jerry's way of handling cash flow is expressive of greater confidence.  I was thinking that I would be making major transfers and tax payments each December,much like the RMDs, but before RMDs start.  It's going to be a brand new situation, and take some getting used to.  Home improvement is a huge issue, such a judgement call, and even a topic of debate between my husband and myself right now.  He wants to spend $2K on additional PV panels, before we retire.  I want to wait, be sure we need the capacity, and explore the costs and benefits in more detail.  Prices are going down, so why buy early? Budgeting is a real art, and I am not sure I will ever master it.  So many categories fluctuate hugely.  The trick is to keep the total under control, that's what matters most to me.  Thank you both for reviving a dead thread.  It's been rather boring around here lately.

                • Re: How are you estimating retirement expenses?
                  TroutBum

                  I try to keep things as simple as possible. I know how much money we make and how much we save. The difference is what we spend. I know how much we can expect from SS, how much my wife's income will net and how long she plans to continue working. Using that information I've used a number of planning worksheets and they all say basically the same thing...that I can retire. Tick-tock.

                  • Re: How are you estimating retirement expenses?
                    TripleStep

                    My estimate of retirement expenses is very personal.

                    Like you, @Susanna144, I have been tracking my spending for years and years. It's been increasing. Not every year, some years I spent less than the year before, but the trend shows increased spending. 

                    I only note big jumps from year to year in passing, such as, "oh yeah - that year I got new doors and windows and gutters."   But I don't make any modifications, I just let the trend line calculation smooth those peaks.  I use 14 years of my spending history in a spreadsheet, and let it do straight-line smoothing; I also let it show me standard deviation(s). I let it show me estimated expenses up to 10 years from now. The standard deviation(s) give me some kind of estimate of confidence. Then, I just make a guess that I am more confident of my estimate for expenses for next year than I am for the estimate 10 years out.

                    That's all I am willing to do; I don't want to add in complications like confidence calculations, nonlinear projections, or uneven weighting.

                    I like this because it's my spending; it's my history. I don't have to wonder about how the national average inflation numbers reflect how much I spend; historical inflation is built into my historical spending. The decrease in commuting expenses when I retired is also built in, as are the increases in leisure spending. 

                    This begs the question of how much the future will be like the past. For me, I have looked at history, and I have decided that the way things were in my past is just as reliable a predictor as an educated guess about how the world might be different in the future.

                      • Re: How are you estimating retirement expenses?
                        JerryD

                        We do it in a simpler way. We NEVER change the budget except when the history proves that costs in any category are increasing and we cannot figure out how to or whether we want to reign them in. Our budget line item values, off-budget items excluded, have changed very little in the last 10 years.  :-))))

                        • Re: How are you estimating retirement expenses?
                          Susanna144

                          TripleStep, I really like your approach to inflation.  There have been so many rather pointless arguments about what inflation really is, and looking your personal spending gets rid of them all.  I have not attempted to fit a curve to my average spending, but it wouldn't be difficult to do, and I agree that it's about the right level of detail, just a couple parameters.  I think I am worrying about this because I don't know yet how much I will actually save not driving to the city for work.  I will have more time for travel, and just might travel a lot more often.  I will have time to shop, and could easily spend too much that way.  I should see if I can come out with a 2 parameter model for my regular spending categories, omitting vehicles for example, and subtract off the rent and utilities that I will no longer be paying.

                            • Re: How are you estimating retirement expenses?
                              TripleStep

                              Susanna144, I agree that the way I estimate my future spending will not give you an estimate for your next year that you will feel confident about. You have looked at your history, and you believe that history will not reliably predict your spending in the first year of retirement. You would like to answer the question that I do not address: you would like to know how much your future (spending) will be like your past (spending).

                              The trendline won't answer that question. However, doesn't that question have to be answered repeatedly by anyone who creates a budget? Apparently you have looked for, but have not found, any budget planning tools that will calculate a change in your expenses if you decrease usage in one area and increase usage elsewhere.

                              If I finally understand your question, you want to be confident in your budget projection when you know that past spending cannot provide reliable guidance. What has worked for me is to build enough surplus into the projection to reduce the worry to an acceptable level.

                              Sorry that I did not ease your worries. I remember some anxiety and uncertainties before my first year of retirement, and many other retirees also had them. I just know that you are solidly grounded and can transition to living in retirement successfully too. Then you can look back on that first year from a different perspective.

                                • Re: How are you estimating retirement expenses?
                                  Susanna144

                                  I agree that I need a surplus when dealing with uncertain spending, but there isn't any reason I cannot construct the necessary model, following your example for the treatment of inflation, and Jerry's example for handling the large off-budget expenses, like new vehicles.  I ought to construct a model myself, I have the historical data and the appropriate background modeling different kinds of data.   My model will adjust for retirement by assuming the expenses associated with my place in town disappear when I sell that.  Surely that's a reasonable assumption.  I am quite uncertain about other changes I may make, but I don't have to assume any, to get started on this problem. I have to decide which categories are off-budget and how much of a reserve I need to cover those, and I can model the ones that are more stable, like insurance, transportation, communications, food, etc.   I can even use the observed fluctuations to estimate the necessary surplus.  You have all been very helpful making me see how to tackle this problem.  Now I just need to work on it.

                                    • Re: How are you estimating retirement expenses?
                                      Susanna144

                                      I've made a start on this, divided up the last 12 years into stable and unstable categories and estimated spending growth (not exactly inflation) from the stable category.  I came out with 4.5% annually.  The unstable category includes travel, medical care, automobiles and home improvement.  It's about 35% of total expenses, and I have not yet decided if the increase that I estimated for the stable category applies to these expenses.  I dropped expenses I won't have any more: rent, utilities, phone/DSL and renter's insurance.  Projecting forward in time, I get a substantial increase in spending, but I should also have substantial growth in my investments, and I think it should be enough.  I still need to work on the uncertainties and estimate the necessary surplus.  I'd like to make a more formal job of spending including taxes with error bars and graph it up.  More to do!

                                        • Re: How are you estimating retirement expenses?
                                          JerryD

                                          "The unstable category includes travel, medical care, automobiles and home improvement."


                                          To take out uncertainty over "travel", I just added a budget line for so many $1,000/year. We have never exceeded it, so that was a surplus for years. If we ever do exceed it, then we'll work against the surplus. Our expense tracking should tell us if we are letting it get out of hand.


                                          "Medical care" is fairly controllable if you get Medicare and a good supplement and Part D coverage.Just remember to get the very best supplment that you can afford since after the first year and any serious conditions, you will NOT be able to change it.


                                          "Automobiles" and "home improvements" are highly discretionary and can be done to a great extent when you are able. I would call these off-budget. I do track car replacement expense estimates in a larger cashflow/retirement value spreadsheet. How fancy the car and improvementsis very controllable. Car breakdowns and leaky roofs are another matter.


                                          Please don't make it too complicated, Susanna. Take a wack at it, live on this first attempt and then tweak it. Like I said, we have changed our basic budget little in the last decade by using cost tracking to control expenses and reluctantly increasing ltems when we either had to or just wanted to.   GOOD LUCK!!!!!    :-))))

                                            • Re: How are you estimating retirement expenses?
                                              Susanna144

                                              You're bringing in another key insight for this problem - how flexible are those expenses?  I think you are right about automobiles, especially new ones, being optional.  Home improvement is a funny mixture of must have repairs and desired improvements.  We do seem to spend a lot in this category - but we have a lot of systems to maintain, our electricity, water and heat are all in this category.  The last time we bought propane was in 2008.  I am pretty sure we'll have the same insurance we have now, when retired.  We won't yet qualify for Medicare.  With a high deductible plan, expenses are rather irregular.   We can change plans any time we want, because we will still have insurance through a former employer.

                                  • Re: How are you estimating retirement expenses?
                                    eloh

                                    Great question.  I too have spent a lot of time thinking about this especially now that I have actually retired.  Here is what I do.

                                     

                                    The context of keeping track of expenditures is the question of keeping track of what you have or will have, and making sure you are comfortable with how that changes.  I use several spreadsheets to do this.  One is for how much we spend in different budgeting categories, similar to what most people seem to do, basically telling me the annual cash flow. Second I keep a spreadsheet of all our savings (net worth excluding house).  Third, and most importantly, I have made a model where I have lines projected until  I am age 95 listing all assets in columns with estimated returns and distributions, all sources of income over this time period, summation of taxes each year, how much total cash outflow is each year (expenses) and thus how much is needed from savings each year.  The key bottom line column is yearly net worth (excluding house). I want to keep that number well positive until I am age 95 (wife 97).  My basic model estimates inflation (my own as well as economy) of 5%, annual return on investments of 4%.  Given some published idea of dividing retirement into 3 periods- Go Go (65-75), Go Slow (75-85), Go Slower (85-95), I inflate expenses during Go Go, reduce spend 10% and no inflation during Go Slow, another 10 % reduction Go Slower.  Then using that model, I can tweek everything to my hearts content.  I put in one time expenditures of 20-30K every 5 years. Change annual expenditures up or down, change rates of return, inflation. Put in cost of second house, etc.  Essentially I can play with any what if questions that I may want to consider (any optional spend I am considering)and see what happens to net worth when we are age 95. Hard to think of what happens after that given our family history and circle of acquaintances.

                                    Gives me a lots of reassurance.

                                    I have also used services of TIAA, Vanguard, and Merrill Lynch who have used their models (Monte Carlo) to tell me that we are OK in >95% of possible outcomes.

                                    Let me know if anyone has comments or questions.

                                      • Re: How are you estimating retirement expenses?
                                        JerryD

                                        Eloh, your 3rd spreadsheet sounds very much like what I have done all  the way out to 95 (I guess that I don't care after that). I use 3.5% inflation though and with out checking, I believe that I use 8.5% returns. I also put in an inflated moderately priced car every 10 years.

                                         

                                        I go a bit further and estimate income from various retirement sources and then reinvest excess RMD's beyond our inflated budget requirements. I then go back and adjust each year for actuals so that going forward the basis for investing is realistic.

                                         

                                        My original T-C Wealth Management Advisor was key to providing some info on Social Security and RMD withdrawal rates.

                                         

                                        Nice job.   :-)))))

                                          • Re: How are you estimating retirement expenses?
                                            eloh

                                            How do you get an 8.5% return on your money especially if you have a significant % in bonds?ThanksEl

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                                            How are you estimating retirement expenses?

                                            reply from JerryD in Money - View the full discussionEloh, your 3rd spreadsheet sounds very much like what I have done all  the way out to 95 (I guess that I don't care after that). I use 3.5% inflation though and with out checking, I believe that I use 8.5% returns. I also put in an inflated moderately priced car every 10 years. I go a bit further and estimate income from various retirement sources and then reinvest excess RMD's beyond our inflated budget requirements. I then go back and adjust each year for actuals so that going forward the basis for investing is realistic. My original T-C Wealth Management Advisor was key to providing some info on Social Security and RMD withdrawal rates. Nice job.   ))))

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                                              • Re: How are you estimating retirement expenses?
                                                JerryD

                                                eloh, a suggestion for you. You don't have to include the post from the email notification that you received and wish to respond to. Just go to the thread and do a "Reply" at the bottom of the post of interest that you want to which you want to address. That will alert the original poster on the top to that post with an email notification and also insert a flag on the poster's log-in avatar indicating a post to look at.

                                                 

                                                First, please note that the 8.5% return I stated is a goal although I have been doing pretty good at reaching or exceeding it. How one obtains or even approaches an investment return goal depends on one's tolerance for risk and investment preferences. It sounds like bonds might be one of your preferences. Currently, with the depressed bond returns IMHO that preference might make it difficult to reach an 8.5% goal. I do not currently invest in bonds per se in any of our retirement and taxable investment accounts. If you choose to call a preferred stock a bond-like investment, I do utilize them due to a significant higher return than a lot of bonds, but I have learned to avoid individual preferred stocks and use only ETF's.

                                                 

                                                All of that said, I use the TIAA Real Estate Account heavily due to its fairly predictable returns, low volatility and historical returns. I also use an investment strategy that looks for rare but very promising "random" investment opportunities. One such opportunity was the price of equities back in 2008-09 until very recently. I listened to Warren Buffett's advice about awareness for contraption opportunities and retreats. Note that my approach is not compatible with the very popular "asset allocation" investment model.

                                                 

                                                Please note that I am neither associated with TIAA-CREF nor am I an investment advisor. I am merely stating my approach and this may or may not be right for others. GOOD LUCK!!!!!   :-))))

                                            • Re: How are you estimating retirement expenses?
                                              JerryD

                                              You state a few things:

                                              "I start with a retirement calculator to get guidance on  a safe draw rate on assets per year - so as  not to outlive assets .... We are not retired

                                               

                                              A retirement calculator might predict that someone could take 72,000 a year from assets while another person might be told they could take more-or less.

                                               

                                              The retirement calculators provide very specific numbers and in this economy we aim for a 3% draw on assets ( historically,  though, 4% has been sufficient to not outlive assets.)"

                                               

                                              Using such a calculator to do some rough planning while still working seems like a good idea. You also seem to be trying to live on a more controlled budget. That is an excellent idea. We got real experience at this when I was in and out of jobs with kids still in college. Nothing like real life!

                                               

                                              Such calculator-based planning is good as far as it goes. I have stated in a number of posts on this forum that we have side-stepped that percentage of assets withdrawal struggle and gone to a more life style based budget analysis. Creating a budget that is realistic, detailed and flexible enough has allowed us to work this well into retirement as our guide to spending. Holding the budget firm and increasing only when necessary or desired is how we increase spending, if at all.

                                               

                                              A key item is that the budget is "realistic". Just taking your example on cutting back on eating out, we have planned that into the budget. We have for many years always eaten out on almost every Saturday. Now that doesn't mean $100 meals but, it is fun, saves work for the wife and adds enjoyment by requiring a constant search for good food and good value. So my advice is to include the little pleasures in the budget but control them with a splurge now and then. For us the splurges occur mostly for anniversaries, birthdays, holidays and other special occasions. One thing that I have worked hard at is convincing the wife that eating out on vacations no matter how short is a vacation expense and NOT controlled by the weekly eating out budget. My motive: The vacation budget is much larger than the eating out budget and is running a surplus right now.  :-))))

                                               

                                              The question of how one plans for major medical expenses is very complex. We have chosen to shun long-term care with all  of its complexities and uncertainties along with non-standard options. I have fretted about this for years and I have finally found my solution that fits our mentalities. I have been continuously converting IRA finds to Roth's within a strict upper marginal tax bracket limit. The light bulb went on recently and I have change my thought process to allow for the use of these tax-free funds as a contingency against the need for long-term care. If we need it, we will use it. If we don't, we won't. Works for us!!!!  GOOD LUCK!!!!    :-)))))

                                            • Re: How are you estimating retirement expenses?
                                              RYWA

                                              Hi All, While I am coming to the discussion a few months after the original postings, I am learning much about estimating for retirement.  I tend to estimate very high to ensure I am covered. I am finally diversifying my portfolio and I hope it is not too late to benefit. Thanks for sharing.

                                              • Re: How are you estimating retirement expenses?
                                                DrJoe

                                                It is different for everyone.

                                                I will retire in May 2018 at 62.  I am maxing out in TIAA-CREF with a 70/30 split of my holdings.  I also have abut $250k in other accounts.  By May 2018, I should have $1MM between retirement accounts and other liquid funds.  The $250k will way more than cover expenses until we are both 66 for SS purposes.

                                                I am married.  My wife is a saver and spends very little on anything but the house, which is paid in full.

                                                Before I retire, I will replace the roof and AC system and any other old big ticket item while I get a paycheck.

                                                Then when SS kicks in (for my wife and I that will total $3600/mo), between that and TIAA-CREF, I will be in a position with little to worry about.

                                                I know this is not a plan, as you would want.  But it is what I can control - max investments and savings, minimized costs, and then live off the work I did.

                                                • Re: How are you estimating retirement expenses?
                                                  Frugal12

                                                  I start with a retirement calculator to get guidance on  a safe draw rate on assets per year - so as  not to outlive assets...especially as longevity doesn't just run in my family-it gallops. We are not retired but I figure if we can get as close to the suggested draw rate as possible Then we will be in a good position when we eventually add Social Security and other retirement savings to the mix.,

                                                   

                                                  A retirement calculator might predict that someone could take 72,000 a year from assets while another person might be told they could take more-or less.

                                                   

                                                  The retirement calculators provide very specific numbers and in this economy we aim for a 3% draw on assets ( historically,  though, 4% has been sufficient to not outlive assets.) But a fair number of financial analysts feel that the economy may not support 4% for awhile.

                                                   

                                                  So the  draw is our starting point. We plan the rest of our budget around that. This has meant some lifestyle changes but nothing that is too severe ( yet). We no longer eat out as often and our food budget is a bit tighter. We get books from the library( online) and only purchase a few every year. We got rid of our cable "package" and now use a la carte services where we can subscribe to only the channels we want, avoiding high cable bills. For instance , Netflix is $11.99 monthly while our cable package and basic wireless was heading towards $225! Now it is $95 and we'd like to lower it even more.

                                                   

                                                  The  most difficult, costly, and unpredictable  budget factors we've faced are two : downsize or not? And how to plan for healthcare expenses and long-term care such as nursing homes or in-home care. Medicare pays very little for nursing home care and  only for a very limited period of time.

                                                   

                                                  So we try to save like crazy while not cutting so much that we feel we have to watch every cent. But the bottom line is that we either meet our budget goals or not. If not, we look at other ways to save because I don't want to end up in Medicaid -as one relative did - living  in a tiny room in a nursing home and with very little privacy. If push comes to shove I'll make the best of it but I'll do everything I can to avoid it.