Thursday, March 22, 2012

Budget Allocation in Early Retirement

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.

Posted by at   

2 comments:

  1. Do you find the dental insurance to be worth the premium for the limited benefit (in my experience) that it provides? I'll have access to a good group health insurance plan in early retirement (until age 65) but I'm learning that my current dental and vision coverage isn't included in this bridging health insurance offering.
    My current dental coverage probably nets me a benefit greater than my current premium but its coverage tops out quickly if you need implants and/or crowns. I haven't yet looked into cost/benefits of post retirement dental insurance - easy to find? Good coverage?

    Reply

  2. Yes on both. Vision will be provided automatically with the medical HMO insurance plan we are signing up for, and dental insurance will run about $25 per month for each of us, or $50 in total. Our primary reason for purchasing both vision and dental insurance is to capitalize on the ability of the insurance provider to negotiate wholesale rates for care vs the retail rates we'd likely be subject to otherwise.

    Reply

- No comments:

Wednesday, March 21, 2012

Feb - March

Wednesday, March 21, 2012

Establishing Priorities to Achieve Early Retirement

I placed a post about my husband's upcoming retirement on my Facebook page, and it wasn't too long before the first "must be nice!" reply appeared. So let me assure all that might be viewing this post that while yes, early retirement  is nice, it's also available to a whole lot more folk than just my husband and myself. The question, really, is are you making early retirement a priority, or do your spending decisions indicate otherwise?

In conversations over the years with friends and acquaintances that are feeling squeezed, I can often identify spending behaviors that don't appear to correlate with their not-enough-money-to-ever-retire-early complaints. As an example, I recently had an exchange with an acquaintance that was considering leaving the profession of teaching because it left them feeling too financially stretched to ever retire early. However, this friend has such an over-accumulation of stuff purchased over the years they have to rent storage space at the cost of $75 a month. Which is $9,000 over the ten years they've been doing it, plus the loss of interest had this money been invested, plus, of course, the purchase cost of the unused items themselves. This friend also enjoys dining out on a very frequent basis, and watches for all new computer gadget releases with baited breath, buying each latest-and-greatest as soon as it hits the stores. And has the hefty credit card charges and monthly service contract fees that go along with chasing technology.

I also have a 50'ish friend lamenting about retirement that drives a late model luxury car, owns an iPhone and and iPad (plus the monthly service fees that go along with) and just purchased and remodeled an enormous new home.

And another that doesn't believe that vacations should ever involve cooking, but rather should always be spent in expensive hotels that necessitate eating every meal out. And as a result doesn't feel they will be able to afford to retire ahead of age 65.

From my perspective, all of these folk have a good amount of additional money to sock away monthly toward an earlier-than-65 retirement objective . . . they are just choosing to direct it elsewhere. Which is totally their prerogative by the way, but which would seem to indicate that early retirement really isn't their priority after all. 


In our case, we knew early retirement was a priority, and tried hard to align our spending decisions accordingly. First and foremost, we lived below our means for many, many years. We also had to repeatedly resist the temptation to ratchet up our standard of living each time our paychecks increased, because as tempting as it was to do so, it was directly counter to our stated objective of early retirement. 

We followed a 90/10 rule with our salary increases, company bonuses, tax refunds and other monetary windfalls - we saved 90% of the net, and spent the other 10% on something we both wanted, generally travel. We refinanced our home twice in order to lock in a lower rate of interest on our mortgage, and then worked to pay it off as fast as we could, ultimately in 17 years rather than 30. We primarily purchased used vehicles, and kept them for a really long time. 

We also tried to be very careful about what we got used if it wasn't congruent with our projected early retirement budget. We kicked around the idea of getting involved with golfing or scuba diving, but ultimately decided we weren't willing to work the extra years necessary to include either in our retirement budget. It did, however, make both financial and physical sense to build our early retirement life around activities like hiking, running and bicycling. Aside from them being things we enjoy tremendously, they had the advantage of being good for us, and virtually free no matter where we were. 

Each dollar saved put us closer to the point when we could retire - the point at which 3% of our amassed portfolio could cover our projected annual retirement income needs.

I guess the point I'm trying to make is that achieving early retirement is not impossible. It's a combination of living beneath your means and working to increase your savings % each year, paying off your home as quickly as possible, resisting the urge to spend "found" money, resisting recreational shopping or eating, looking for inexpensive ways to build regular fun and satisfaction into your life and never taking your eye off the ball. 
Posted by at   

8 comments:

  1. I am tired of defending our leaving the regular work force. We are willing to live with less. We are not complaining of "not having". Still, it drives me crazy to hear, "I don't think you are fully thinking what you really need." I am 54 and hubby is 60. We are not slugs, but we both enjoy the freedom to be ourselves. Our grandparents did it all, well into their 90's, with much less.

    You have done an excellent job explaining what we understand for ourselves.

    Thanks

    Reply

  2. I really enjoyed your post. It's nice to read that someone else has the same general ideas of "living beneath our means".

    Thanks for the post!

    Reply

Wednesday, March 27, 2013

Part 1 - Our Deflation-Driven Retirement (Fixed Expenses)

First a basic definition of what I mean by deflation: Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the real value of money over time; conversely, deflation increases the real value of money. This allows one to buy more goods with the same amount of money over time.

Yep, that's precisely what's been incurring in our household since I retired in 2011; we've spent less each consecutive year, even as we feel like we are receiving more in return. But not by accident - far from it. With the luxury of time in retirement to dig in and analyze our budget, diligently track our spend, and consistently look for more efficient ways to achieve the same end result, our overall annual spend has dropped each year since.

This is one of the significant shifts in perspective I experienced in early retirement - there is a finite amount of resources to spend in any given year if we wish to remain fully funded up to, and ideal beyond, our projected life spans. Once I realized that a 3% or less withdrawal rate really means a 3% or less withdrawal rate - period, no exceptions - I started looking for ways to drive down our fixed expenses, beef up our discretionary expenses, and look for creative ways to get more bang for our buck in both categories.

I'll start by focusing on Fixed Expenses. 

I initially identified the following budget line items to tackle: cell phone, groceries, internet, cable, landline phone, electricity, natural gas, water/trash, vehicle insurance and home insurance. Here is what transpired over time as a result:

  • Cell phones - Analyzed our bill, found some unnecessary line items such as caller ID and geographic proximity of caller, and had them removed. Discovered 411 calls were now $1.99 and stopped making them. Discovered text messaging ran .20 per message and had it turned off. Discovered there was an employer discount that could be applied, and had it added. Elected to stay with Basic Phones rather than Smart Phones until we could make the switch without increasing our rates. After giving this more thought, have decided that with our portable GPS unit and Kindle Fires, we have all the on-the-go technology access we need, and upgrading to Smart Phones, even at no increase in annual service cost, holds no appeal at this time. We do, however, plan to leave Verizon in August, when our contract is up, and move to a non-contract provider instead, likely Walmart's StraightTalk, which will decrease our current annual cell phone costs even more.
    • 2011: $1,200 
    • 2012: $1,000
    • 2013: $  750 (Projected once we transition to StraightTalk in August)
  • Groceries - Initiated meal planning. Began planning our meals around weekly sale items. Looked for sales in advance of holiday events and anticipated entertaining. Stopped purchasing most convenience foods and began preparing meals and snacks from scratch. Utilized leftovers for subsequent lunches, or incorporated them into subsequent dinners. The net result of all of this with regard to food quantity now on hand? Some weeks I end up with so much food as a result of cooking almost everything from scratch, I have to literally put off my grocery shopping until we "catch up."
    • 2011: $6,000
    • 2012: $4,700 (we budget $5,200, but I ended up with over $500 left at the end of the year)
    • 2013: $4,700*
  • Internet/Cable/Landline - Initially bundled all three in 2011, resulting in a $600 a year savings. Went further in 2012 and dropped both cable and landline phone service. Purchased Roku units instead, to stream internet content through our TV's. Pressed hard and received a $29.99 monthly offer for continuing with internet, which I accepted.
    • 2011: $1,600
    • 2012: $   360
    • 2013: $   407 (Our provider began charging for our internet modem for the first time ever, likely because they were losing so many cable service customers)
  • Electricity: Began opening windows in the evening instead of simply cranking up the A/C. Moved the A/C setting up little by little, from 68 to our current 78 during the day/77 at night settings, which now feels "normal" and quite comfortable. Unplugged appliances like our toaster, can opener and other seldom used, easy to reach items, after usage. Connected our TV's to power strips, which we turn to off when they are not in use.
    • 2011: $1,600
    • 2012: $1,000
    • 2013: $1,000*
  • Natural gas - Already pretty low here in temperate Southern California, but we still managed to shave some costs by limiting our usage during cool winter mornings to one hour in the morning, and about the same in the evening. (We upgraded to double pane windows some time ago, and our home retains it's temperature pretty consistently as a result.)
    • 2011: $265
    • 2012: $250
    • 2013: $250*
  • Water/Trash - We have no real control over our trash expenses, but we have total control over our water usage expenses. Primarily we began turning off our sprinklers each time rain was projected, and then left them off until a week after the last rain. In the summer, we cut back on the number of days we watered, and began hand watering areas that appeared to need more.
    • 2011: $1,200
    • 2012: $   900
    • 2013: $   900*
  • Auto/Motorcycle/Trailer Insurance - Discovered redundant coverages for Roadside Assistance over the three policies and had them removed. Analyzed cost of maintaining motorcycles based on our limited usage, and decided to sell them. 
    • 2011: $1,600
    • 2012: $1,200
    • 2013: $1,200*
  • Homeowners Insurance: Increased deductibles from $1,000 to $2,000. Analyzed renewal and discovered we were being charged for liability on a rental property we no longer owned. Had the charge removed, and also a credit applied for the entire time period we were charged incorrectly.
    • 2011: $911
    • 2012: $681
    • 2013: $681
    * No change anticipated based on usage and spend to date.

The net result of the above deflationary moves, i.e., finding cheaper ways to achieve the same end result, and which resulted in no change whatsoever in our quality of life, yielded almost $4,500 dollars in annual savings. And I include the sale of our motorcycles in that quality of life assessment. Because we rarely rode them anymore, they had become more a source of stress than pleasure every time we passed by them in our garage. Instead, we rolled the proceeds that resulted from selling them, plus our prior Fleetwood canvas travel trailer, into the purchase of our new TrailManor hardsided travel trailer. Which we enjoy tremendously, and utilize more than both our old travel trailer and motorcycles combined.

I'm confident there is more waste still waiting to be tackled, but assuming no rate increase, I'm satisfied enough with the results to leave things as they are for now. Should a rate increase be forthcoming in any of the above fixed expense categories, I'll simply start the analysis process again in order to bring us back to financial equilibrium. 

I should add that while we have an inflationary guard built into our plan, the longer we go without applying it, the better our projected end of life portfolio looks. And at this point in our early retirement, that provides me with tremendous peace of mind.


Up next: Tackling our Discretionary Expenses in order to effect deflation.


Posted by at   
Labels: , , , 

13 comments:

  1. Take a look at Page Plus for cellphones post Verizon. I have cut our bill to 22 $ per month for one smart phone and one dumb phone after reading the comments on MMM about MvNO plans. A pain, but well worth it for light users.

    Reply

  2. Like minds....I just went through our budget yesterday when I determined we were going to be drawing down our IRA at a 4.5% level starting in May, even with Social Security payments starting in June. Not good.

    I pulled out my red pen and made over $9,000 in cuts starting in 2014. Unfortunately, we have certain commitments that mean only $600-$800 in cuts for the rest of this year. But I am happy to see that in 2014 with the cuts, plus a full year of Social Security, we will have to draw out 3%. That amount will also mean we have to pay taxes only on half our Social Security benefits instead of the 85% level we would have been at without the trimming.

    Our electricity costs are a few hundred dollars more even though our home is much smaller. But, the desert gets hotter than your neck of the woods. We keep the house at 80 during the day at 78 at night. Our water/trash/sewer bill is also higher but home insurance is lower and we have no natural gas costs.

    I'm anxious to see your post on discretionarty expenses.

    Reply

  3. Great way to cut down on expenses! I imagine my husband and I will save ALOT when it's just the two of us. We are still a family of 5 (although my daughter plans to move out in July). It's good to know that expenses can shrink in retirement! :)!

    Reply

  4. Thanks for the post and the effort to catalog it for your readers. Very timely for me as I anticipate full retirement soon and am looking for places to cut costs even though my income/expense cash flow looks good. For those of us who haven't retired yet, the idea of a "fixed pie" life where we have to live "in the income box" is a little scary because there's no turning back once you let jobs or businesses go. I know MMM says you can still make money in retirement but if that happens for me it will be largely accidental as I do not ever again want to work for a living. I hope that doesn't sound arrogant; I'm just done. And I have enjoyed my career(s). I read a post on another blog recently where a lady said that she knew many people who could financially retire but they lacked the courage to do so. I kind of saw myself in that description. When you grow up in an extremely financially challenged family, the wolf never completely leaves your psychological door.

    Reply

  5. I'm assuming from your post you do not have a mortgage payment? Did that get paid off early? I think our biggest challenge in retirement would be we still will have a mortgage, and be under water on its value, here in Northern California . Any suggestions?

    Reply

An A+ Financial Report Card

We just returned home from our annual meeting with our financial planner, and she gave us a big A+. She also jokingly asked if we'd consider giving pep talks to some of her other clients on how to deal with the current financial market by containing expenses and saving more. I non-jokingly responded "Yes!", which leads to the point of this post.

In spite of the shift in popular thinking that times have never been worse, in our household they have never been better. I'm not sure I understand the doom-and-gloom crowd, but I have some thoughts on how they got there, as well as some thoughts on how they can snap out of it, so here goes . . . 
  • The financial meltdown of 2008/2009 was not fun. It took a good chunk of change off our table, and left me with a permanent shift in my overall confidence, as well as a permanent loss of confidence in the US and world financial markets. But here is my question: Was there ever a justification for being confident in the first place? Those people who experienced The Great Depression probably would say there wasn't. Those people that experienced the oil crisis, Black Monday or the dot.com bubble burst would probably say there wasn't. My parents were never able to afford being in the investment sector at all, nor were Mike's, so they would probably say there wasn't either.
  • Increasingly I'm convinced that much of the late 80's, 90's and early 2000's were about being under the illusion that we were entitled to a standard of living we really weren't. The run up in housing values was clearly unsustainable when salaries were evaluated alongside, but we didn't want to pay attention. Since we personally never pulled equity from our home to purchase consumer goods we really couldn't afford, as much as it hurt, we weren't left standing without a chair when the music eventually stopped. 
  • We were resolute about not carrying consumer debt. That made life a lot easier post-2008/2009 as well.
  • We saved 10% of our income from day one, even when it pinched to do so. We bumped our savings percentage level up each and every time we received a salary increase, even when it pinched to do so. We did not increase our standard of living significantly as our salaries went up, even though it pinched not to do so.
  • We began putting 90% of all financial windfalls, including tax returns, into savings, electing to "blow" the remaining 10% as a small reward for jobs well done.
  • We avoided falling prey to anything that would increase our fixed expenses run rate. On that list of things we rejected were: Timeshares, Smart phones, New vehicles, Leased vehicles, Luxury vehicles, Vacation homes, Premium cable, Club memberships, Season tickets, Anything requiring storage and Fancy gym memberships (our's runs $9.95 a month per person). All of which we could have easily afforded as long as we remained employed.
  • We tried to be careful what we got used to, because we recognized that for every "wouldn't this be nice" we took on, we'd have to work longer to sustain it in retirement.
  • We calculated how much we thought we needed to have saved to be able to comfortably live on 3-4% of the proceeds. We used this to evaluate each and every spending decision, and ending up taking a pass on many, many things as a result.
  • We moved into retirement with a conscious decision to withdraw at a rate lower than the prevailing norm of 3-4% in order to ensure we had room to maneuver should the economy sustain another significant hit or hits in our lifetime. We obsess about keeping our fixed expenses low in retirement for the same reason.
Flash forward to today. I watched my children struggle for about two years after college to find sustainable employment during The Great Recession, but then they did, and are now doing just fine. In comparison, I had to go to work immediately upon graduating high school, not college, and made $119 a week as a typist in 1980. That was enough money to pay for renting a room in someone else's house, make my car and car insurance payments, buy groceries to cook at home, save, and have a couple of dollars left over each week. That was it, and it never occurred to me to complain.

When I eventually got around to deciding I wanted to go to college, I did so at maximum intensity, and ended up graduating at the top of my class at a local public university. Because I graduated at the top of my class, I had three immediate job offers in spite of 1995 being a horrible year of employment for college grads. I started off making $24,000 a year, but worked smart, as well as hard, volunteering for each and every extra duty I could find, and the salary increases and promotions started to roll in.

I never worked a job with a pension, nor did my husband. I never worked a job that would grant health benefits upon retirement, nor did my husband. It never occurred to me to be angry or upset over either situation. It simply meant we needed to save, save, save if we wanted to retire well. The fact that we retired so early was a case of both good luck and prudent planning. We were lucky when one of the companies we worked at got sold, and the stock value zoomed as a result. We were prudent when we elected to put all of the financial gains that resulted from it into the bank, rather than using the money to increase our standard of living. Had we not had the good luck we did, we'd probably have needed to work a few years longer, but we were still solidly on the path toward early retirement regardless.

Life today is uncertain, but then it always has been, and our financial choices should reflect that. Sometimes we choose to live under the illusion that it's otherwise, but I believe we're playing games with ourselves when we do.

Posted by at   
Labels: , , , 

20 comments:

  1. It's funny that I now agree with everything you have done...but I bought into all the hype at an early age. I've had to completely re-educate myself! No more credit cards. NO more credit period! It will take us a while to get out of this mess..but we will. The thought of a life w/no payments to anyone that can take things away from us is my light at the end of our self-imposed tunnel. I love to read your posts as it helps motivate me. And the fact that you did all of this in So. Calif. pretty much means you should have your own TV show!! LOL You are financial rock stars!

    Reply

  2. Great post and good job on your A+!

    I think you're right about our expectations--they probably got out of whack in the 90's (with the stock and housing markets in particular), and are probably unreasonably low now (with the Great Recession). Probably normal is somewhere in the middle, which we haven't really experienced over the last 30 years.

    Reply

  3. Sounds like you were rigorous with your planning. Good idea.

    Reply

  4. Tamara,

    I think that what you have accomplished has as much to do with good lifestyle choices as it does with planning. It sounds like your mindset has always been to live within or below your means while considering the future. That approach can work for anyone who will set aside their feelings of entitlement and not fall victim to consumerist brainwashing. Hard work + sacrifice = reward.

    I read a lot of frugal living blogs, but find yours to offer the most practical and applicable advice. Stay well, have fun.

    Reply

  5. Yes, a thousand times yes!! We've always had an eye on the future, and it's worked for us too.

    A plan, even an evolving one, helps points you in the direction that you've given thought to - I'm fine with a little spontaneity, but not so much with the bigger life decisions.

    Another part of this is that we're very happy with all that we have in our life. It would take too much energy, time and dollars to be randomly striving to acquire more, do more or be more. It's not that we don't want things or experiences, etc, it's more that we want to freely and fully enjoy them.

    Reply

  6. I, for one, think this is a fabulous post Tamara. This is the exact lifestyle who have always subscribed to, living on just one salary when we both worked and maxing out on 401k contributions. We passed on many niceties along the way, valuing more the experiences and still today do not have smart phones. We love our lives and feel blessed for the opportunity to travel and feel the richness in simple pleasures along the way. I knew we were drawn to the two of you for some reason beyond the wanderlust. We share the same philosophy in life!

    Reply

  7. I think I fell prey to the 'good life' when I moved to Northern Va. and everything was about 'keeping up'. Then, I divorced with two small children which set me back financially for years. It wasn't until 2001-2002 that I started to really think about our finances. I wish I had started earlier, but life through me a couple of blows. I'm on track now, but our retirement doesn't look like it will happen for another 10-15 years, or so we think based on our savings rate.

    You were smart. Very smart. I can only imagine what my life would be like now if I did the same.

    Reply

  8. The world of economics is simply a giant cycle of ups and downs. It always has been and always will be, no matter how many jump on the bandwagon of either perpetual up markets, or doom and gloom.

    What really messes folks up is when they attempt to figure out when the up and down cycles will start or end. No one knows, no one. There is way too much emotion involved to ever behave rationally. So, moderation, staying out of debt, living below your means, and cutting expenses that no longer add to the quality of your life are the only reasonable answers. You and Mike figured that out a long time ago.

    In our marriage I was the only full time bread winner but we still managed to retire much younger than most. Magic? Luck? No - we followed the Tamara and Mike game plan.

    Reply

  9. Good post, and good comments, too!

    Reply

  10. Your story makes me smile, especially the line, "That was it, and it never occurred to me to complain." I believe that attitude, the lack of a sense of entitlement, is a big reason for your success. Great job!

    ...Tim

    Reply

Subscribe to: Post Comment (Atom)

- No comments:
Subscribe to: Posts (Atom)