Budget Allocation in Early Retirement

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Thursday, March 22, 2012

Budget Allocation in Early Retirement

I wanted to do a follow up to my earlier post about establishing priorities to achieve early retirement, in order to give an overview of how we've specifically allocated our annual retirement spending accounts now that we've gotten there. I've used percentages, rather than actual dollar amounts, because percentages are fairly applicable regardless of how small or large someone's particular budget might be.

Our annual retirement budget is divided between discretionary and non-discretionary allocations. These are currently at 38% and 62% respectively, a result of having worked very hard over the years, particularly the last ten months since I retired, to minimize our non-discretionary obligations. Let's face it - generally these are the least satisfying items to deal with in anyone's budget. 

Here's our non-discretionary list, including the percentage of total annual budget revenue each is projected to consume:

Non-discretionary annual spend
 1%  Auto & Trailer Insurance
 2%  Auto & Trailer Maintenance
 1%  Cell phones
 1%  Gardener (yes, non-discretionary in our case!)
 5%  Groceries
 2%  Home & Earthquake Insurance
 3%  Home Maintenance
 2%  HOA Dues (includes swimming pool, spa and tennis court maintenance)
 9%  Medical/Dental/Vision Insurance
10% Taxes
 2%  Utilities
38% Total

And here's our discretionary list, including the percentage of total annual budget revenue each is projected to consume:

Discretionary annual spend
 3%  Auto Fuel 
 2%  Cash (Our weekly mad money allowances)
 5%  Charitable Donations
 2%  Clothing
 1%  Electronics
 3%  Entertainment
 2%  Gifts
 1%  Gym
 3%  Hobbies
 3%  Home Decor
 1%  Housecleaning Service
15% Major Items (Auto replacement, home remodel, major home repairs)
 1%  Personal Care (Haircuts, beauty products, etc.)
 2%  Restaurants
18% Travel
62% Total

Most of these categories are "use it or lose it," meaning whatever is unspent at the end of the year remains unspent in our portfolio. Four categories, however, will accrue for future usage. These are:

• Home Items (I plan to continue to update my home decor as I feel necessary.)
• Home Maintenance (After one year of accruals, we will probably feel comfortable releasing future unused portions back into our portfolio.)
• Travel
• Major Items

Over the last 10 months I've been able to reduce our overall spend significantly by identifying a lot of waste, and cutting it out of our budget altogether. This included raising our insurance deductibles, cancelling all online subscriptions, cooking at home the majority of the time, and reducing our weekly auto fuel consumption by grouping errands, even doing some by bicycle or foot. We've also identified more efficient ways to achieve the same results, such as consolidating our land line, internet and cable services into one bundled package, using our public library instead of purchasing books and magazines, getting the occasional movie from RedBox instead of streaming them from our cable provider, planning our weekly menu around supermarket sales, taking group dance, piano and tennis lessons instead of private, and even moving to a vegetarian/quasi-vegan lifestyle. (Moving away from meat has resulted in a 15% reduction in our overall grocery spend, to my pleasant surprise.)

And a note about medical insurance, top of mind for anyone considering early retirement. We elected to go with a high deductible HMO plan that includes prescription coverage with a small co-pay, and basic preventative care at no additional cost. We are comfortable with this option because it's 1) highly unlikely either one of us will need more than preventative care for some years to come given our current states of health, 2) we can afford to pay the deductibles should it become necessary in any given year, and 3) we are covered for all other expenses, ensuring a catastrophic illness would not wipe us out financially.

Having such a large percentage of our annual spend marked as discretionary allows for considerable peace of mind as we prepare to move into dual early retirement in May. In the event our portfolio under-performs in any given year, we can easily adjust our discretionary spend and ride it out for as long as necessary. And we've also not included the cash value of our home in our long term planning, giving us the added cushion of knowing we could sell it and move to something less expensive to free up equity should it ever become necessary.