Early Retirement Projections – Part 1: Estimating Our Retirement Expenses
Coming up with a FI target number at the beginning was crucial to our FIRE path. It helped us figure out how long it would take us to reach our goals. That number gave us something to shoot for and it has evolved over time because life can be very unpredictable. Although, the unpredictability shouldn’t stop us from planning ahead, especially when we need to start projecting our retirement expenses.
We plan for a successful early retirement based on what we know, prepare for a middle-of-the-road scenario and shift gears accordingly. That’s how we approach our early retirement projections: with planning, preparation and flexibility. We were waiting to get closer to our early retirement date before posting about our projected expenses in retirement. However, Kyle, a reader, reached out to us with the following message:
“I would like more information about your proposed budget in retirement. After going through many posts on your site, I could not find a detailed breakdown of the $35,000 you plan to spend every year.”
“In particular, I’m very interested in how you will manage health care costs (insurance and deductibles) in retirement as that can be a large cost for anyone trying to retire before age 65 when medicare starts.” – Kile
And of course, we felt obliged to write about it now.
Dear Kile –
First, thanks for reaching out. We appreciate you taking the time to write to us. You couldn’t find a detailed breakdown of the $35,000 budget because we never made it public. We were still “many” years away from early retirement and used a ballpark number based on our retirement plans at the time. Life changes and things will look different by the time we retire as compared to when we started estimating our retirement expenses. It’s good to start somewhere and that target got us to a good place.
Our expenses can vary drastically from year to year but level out over time. For example, we could have a spike in auto expenses in one year if we pay cash for a car. So the more years of tracking we have under our belt, the easier it will be to project ours expenses with accuracy. This is a great reason to track expenses. By doing so, you can fine-tune your projections as you go.
To estimate our early retirement expenses, we’ll use our three years of married expenses as a starting point. Our spending has decreased over the years because we’ve been decreasing our dependency on consumerism to be happy. We don’t anticipate them to decrease by much in early retirement because we plan to continue living comfortably without depriving ourselves of anything.
When we began to calculate our FI number, $35,000 made sense to us. With $35,000 a year we could live like kings in the Dominican Republic, of which $10,000 was allocated to rent. If we wanted to buy a condo or build there, we could even spend $250,000 of the portfolio and live well on $25,000 in annual income that would cover all living and medical expenses. Health care wasn’t even a big worry if we were to move abroad, because it’s cheaper there. Now it’s loaded with a big question mark.
After exploring retiring in the Dominican Republic, we realized that we don’t want to live there permanently. We’ll go visit for months at a time, but we want to have our home in the U.S. mainland. Staying here means that health care costs become a major consideration for us, but they shouldn’t stop us from retiring early.
It’s hard to predict what health care would look like in the U.S. a year from now, never mind trying to guess how it would be in 2020. The best thing we can do is try to stay healthy and be flexible with our spending, so that we can accommodate healthcare expenses in the future. We’ll explore our options as we get much closer to retirement. So the short answer on health care is that we still don’t know how we will deal with it. Once we choose a healthcare option, we’ll write about it.
We declared ourselves financially independent by reaching the amount in income-producing assets to support $35,000 in annual spending, in January 2017, based on a 4% withdrawal rate. We were not expecting to reach our FI number this early. The number (FI) got way ahead of our (RE) plans, which is a good problem to have.
Even though we reached our initial target, we continue to work to accomplish other goals before retiring. We’re also okay with our jobs. We would, however, retire sooner if our work situation became stressful. That’s the power of being financially independent. We can quit our jobs at any time and not have to worry about how the bills will get paid.
As we conclude our pre-retirement phase, we’ve continued to cushion our Freedom Fund while saving for a house as a separate goal. We understand that living in the U.S. will require a higher cost of living than retiring abroad. Having a paid-off house will help alleviate the cost. For example, just not having to produce income to pay a mortgage will keep us in a lower tax bracket.
Average annual spending for last 3 years
Our plan is to retire by 2020. We’re entertaining the idea of traveling during the first year of retirement and buying a house the following year. We want to continue exploring the U.S. before we make such a commitment. In 2021 is when we’d spend according to the budget that we’re aiming for.
In order to project our future expenses, we took the annual average spending from November 2014 though October 2017. To keep it at a high level, we used the Mint expense categories. We left the home expenses out of these calculations since we’ll have a paid off house. We’ll add them later.
|3-Year Average Annual Spending|
|Category||Average Annual Spending||Comments|
|Food & Dining||$10,911||12 month trend: decreasing due to alcohol spending decrease.|
|Bills & Utilities||$2,075||This will increase with additional utility expenses such as water and central air when we buy our home.|
|Auto & Transport||$2,659|
|Health & Fitness||$821||Pharmacy, insurance co-pays|
|*This doesn’t include home expenses since these will change as we go from renting to owning. Average annual spending from November 1, 2014 – October 31, 2017.|
Back to the future – 2021 projected retirement expenses
We expect to have an unusual spending pattern in 2020 because we’ll be traveling more. We might even spend more during that year and will need to set money aside for it.
In 2021 is when we expect to put in effect the budget shown below. Now, let’s project the expenses for 2021 by adding homeownership expenses and a 3% annual inflation for each year. We’ll also add a cushion to the Bills & Utilities category for water, gas and and a higher electric bill.
|2021 Projected Retirement Expenses|
|Home: Property Taxes, Insurance and Maintenance||$6,556||No mortgage! 🙂|
|Home: Other expenses, supplies, furnishings||$1,800|
|Food & Dining||$11,474||This is trending down due to decreasing alcohol spending.|
|Bills & Utilities||$4,562||Added $125 for water and increased electric by $50 a month.|
|Auto & Transport||$2,993|
|Travel||$6,523||This is some fancy traveling.|
|Health & Fitness||$924|
|Shopping||$1,311||We won’t need to buy work clothes, so will save a lot there.|
|Miscellaneous||$100||We rounded it up to $100 per year.|
|This puts our estimated expenses roughly at $38k a year without accounting for health care and gifts & donations.|
That’s a fancy budget. With travel hacking and traveling locally, we can really drop the travel budget down to 20%, if needed. Food & dining can be cut in half by not eating out as much and doing some gardening. Even entertainment can be cut down by 2/3 or more. That already would decrease our expenses by around $12,000. So our fancy budget of $38k could be turned into a $26k budget, with some creativity. That would prepare us for tough times. I’m not even accounting for the advantages of doing activities off-peak as early retirees.
So, that’s our super fancy budget for early retirement. In part two of this series we’ll address the following questions:
- How much do we expect to withdraw from our portfolio?
- How would we deal with lower market returns?
- What’s our criteria for withdrawals?
- And most importantly, what’s our withdrawal strategy?
This is it for part one of our series. Wifey is getting some caviar sandwiches ready while we’re on vacation, enjoying the nice Florida weather. It’s how we do it in this Russian-Latino household. Caviar is a must during the good times. 🙂