The Totally Unrealistic Expenses of Early Retirement

This is Part #2 to finding your retirement number. In Part #1, we talked about which retirement equation applies to you; which depends on the existence or not of retirement income and your approach to either drawing down investment principle or living off investment income. Regardless of the approach, though, determining your level of expenses in retirement is absolutely essential.

There’s an obvious component of guessing and projecting an expense estimate for a given month that is several years into the future, so it helps to do a bit of expense tracking today. I’ve been tracking my net worth for almost five years, but only started compiling monthly financial reports (with expense details) last December.

“You Get What You Measure” is a common mantra in the business world, and the same holds true in personal finance. If you measure and report your monthly expenses, you will be inclined to try to improve that measure over time. That is exactly what has happened so far, for me. When I started out, as you can see in the graphic below (which was painfully drawn to scale), I was spending $9,345/mo—that was something like 110% of my gross income.

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Now, some nine months later, my expenses have dropped 39%, to about $5,730/mo. Pretty good, but that drop is largely attributable more to a terrible starting base (like having a mortgage plus a rent payment) rather than great current situation.

For retirement, I think I can further cut our household expenses by another 65%, leading to monthly expenses of just $1,960/mo.

It’s kinda easy to throw $1,960 together in excel without any due process behind the number. So, below I’m going to talk about each of my expense categories, where we are today, and how we’ll get to goal.

But, before we do that, let’s talk a bit about why you should at all care about this.

Retirement Expense Guesses are Not Set in Stone

First, understand that this is a moving target. Life (or my life, at least) rarely goes as planned beyond any time horizon longer than twenty minutes from now. These numbers will necessarily change as my life changes—up and down. As such, I plan to revisit these estimates (although I might not make a whole new post) about annually.

Second, and this is critical, a lot of expense reduction cost money. Namely, reducing housing costs by eliminating a mortgage, paying off cars, or cutting utilities by buying solar panels. Expense reduction, in this regard, is self-reinforcing. As I cut expenses in one area, it frees up money to accelerate the paydown of those debts or increase investments, leading to more money to do the same. A virtuous cycle, and a reason why making some of these goals a reality is not entirely dependent on only my current income in excess of current expenses.

The Goal, In Stunning Color

Housing

Now: $2,900
Retirement: $400 (Drop of 86%)

The biggest factor in my ability to retire is to eliminate my mortgage payment. In my current home, with my mortgage balance around $440k, this will take a fifteen years or more. We currently have about $50k (conservative) in equity. Each month, equity increases by about $1,200 due to principle paydown (and that also goes up slightly every month due to lower principle balance). Once a year, around tax time, we drop a big chunk into the home (~$4-5k). In four years, we should have about $150k in equity.

I reckon, based on extensive perusing, our current home (in Virginia) would equate in many Florida (where we will retire) zip codes for $230-250k. If we sold our home in early 2020 and used the $140k (net of sale) and put in on a new home, we’d still be ~$100k short. So, the new plan is to move to Florida earlier than our retirement date, and continue working in my same field. This would mean much less of my money goes to interest and taxes, freeing up a nice pile for accelerated paydown.

No matter what happens, I’ll continue working until the mortgage is paid off. This could realistically occur in early 2020, but if it takes another year, then I’ll work another year.

Autos

Now: $800
Retirement: $100 (Drop of 88%)

Car payments. They can’t last forever. Once they’re paid off (late this year and the second early next year), they’ll get sold, and we’ll be buying an efficient used family vehicle in cash. We don’t drive a ton, and any work commuting will fall away. $100/mo should cover two tanks of gas (about what we use now) and insurance (we pay about $40/mo now).

Food/Drug

Now: $450
Retirement: $450 (No change)

Grocery costs have been going steady in our household for some time now, so I think this level is our new normal. We would like to grow more of our own food. This past summer it was tomatoes and peppers, and now we have cilantro growing in the windowsill. We love the idea of sourcing our own food, so we’ll be gardening a bit more in the future. I’m not counting on any food cost reduction from this activity, though.

Groceries amount to about two-thirds of our food cost, with another third for dining out. This means we spend about $2.25 per person, per meal. We lump together anything purchased at a grocery store as groceries, though, so this includes pet stuff, baby wipes, medicine, disposable products, and much more. So, it’s probably more like $2/person/meal. I’ve shown its possible to eat for far less, and as we continue to cut out meat from our diets, I think this number might drop. As I said, though, I’m not counting on it.

Dining

Now: $225
Retirement: $150 (Drop of 33%)

We dine out a fair amount, and we love it. We’re not religiously anti-dining like a lot of FIRE bloggers. The key is dining at delicious-but-reasonable places on the cheap. Our favorites are places like Bahama Breeze or Carrabbas (both with great happy hours, generous portions, fantastic food, great atmosphere, and tons of discounted gift cards on Raise.com).

Using gift cards, going during happy hour, avoiding alcohol, or splitting the ridiculously-size entrée portions all allow dining to be not outrageously more than when cooking at home. No matter what you do, though, it’s still more expensive than cooking it yourself. But, the variety, convenience, and appeal of being served is a nice treat once or twice a week for a slight premium in cost.

I think we can still drop this amount, not by dining out less, but by being more efficient at it. Going during the day, using coupons, and even cutting out the happy hour beer specials (or maybe getting just one).

Medical Insurance

Now: $430
Retirement: $300 (Drop of 30%)

I’ve already done my due diligence on this. I can get our exact same medical plan for $270/month thanks to Obamacare subsidies. This might change for better or worse when we move in retirement, but it’s a good proxy.

Home/Other

Now: $320
Retirement: $100 (Drop of 69%)

These expenses are things related to home maintenance like Aircon North East maintenance services and emergency home repairs such as a leaky roof repair Auckland. Receipts from places like Lowes and Wal-Mart get bundled here. These costs are mostly due to us finishing our basement, so these will remain high for another few months while we finish that project out. We’ve vowed to not buy a house with any major known upgrades/repairs needed. I procrastinate far too much in this area.

In retirement, I’ll have ample time to handle most repairs myself, but we’ll have to see if $100 is stable as retirement gets closer.

Utilities

Now: $150
Retirement: $100 (Drop of 33%)

After seeing the success that my friend Vawt had with solar panels, I was sold. Once we’re in our retirement residence, this will be one of the first things we do. Also, my wife is a warm-body, and once we’re in a warm climate, we’re relatively comfortable having the house temp in the high 70’s. We will also be searching on the internet for “insulation near me” as proper home insulation helps to keep the home stay cool in the summer and warm in the winter.

Baby

Now: $100
Retirement: $100 (No Change)

We’re planning on homeschooling our kids. We might avoid some of the costs of child-rearing by doing this, but I acknowledge that this is a big unknown. To date, we’ve run drastically under the USDA’s cost estimates for child raising. As we hopefully add more kids to the mix, this is sure to go up. However, the marginal cost of children can really only go down, seein that we already have nearly every piece of equipment that we’ll need for subsequent offspring.

This is another item that is sure to fluctuate away from projections. However, I’ve surmised that children are about as expensive as the parents that raise them. I have some fun with ridiculous parental cost thinking in this post.

Phone/Internet

Now: $60
Retirement: $60 (No Change)

Our iPhone plans already run under $10/mo. Then, we have our internet package. I’m hoping for constant costs. As it were, these costs seem to only go down over time as the space becomes more competitive…we’ll see.

Cash

Now: $50
Retirement: $20 (Drop of 60%)

Cash was about $20/mo for a year until very recently. A little under-the-table basement labor is all this is right now. Not a permanent thing.

Travel

Now: $100
Retirement: $80 (Drop of 20%)

Travel hacking is the real deal. We started in late February (I personally love The Points Guy), and have accrued, on average, $518 in travel (hotels and flights) each month since then. So far, we’ve had a night in Nashville, a night in Baltimore, and a night in Miami at some great hotels. We’ve also flown to Fort Lauderdale for a crusie and to Minnesota for a wedding. We’re flying to Orlando next month, with a couple nights at a hotel. All of this is, of course, totally free. What’s more, we’re still accruing more nights and miles faster than we use them. All the while, my credit score has only gone up. Lastly, we’re probably not doing it as best as we could; we’re getting more efficient as we learn about the hacking trade.

The key to travel hacking is to stay organized. Get the minimum spend out of the way (without inflating your spending), mark it in your spreadsheet with a date to cancel (to avoid annual fees, if applicable), pay the balance in full, and ensure you keep track of all your rewards. The other key is to not get addicted to piling up all your points. Use them. Years from now, money will not really be a concern for you. Travel hacking is a way to still travel as you please at your current station in life.

There will still be costs for things like gas, cruises (which are stubbornly difficult to hack), and car rentals. However, these are miniscule against the benefit of free flights and hotels.

School/Work

Now: $50
Retirement: $0 (Drop of 100%)

I’m still paying a bit out of pocket for commuting and some schooling stuff. My wife and I are still full-time students, and this won’t continue forever.

Entertainment

Now; $15
Retirement: $20 (Increase of 33%)

Entertainment expenses haven’t been much more than a Netflix subscription in quite some time. This might go up, but not significantly. There’s tons of fun stuff to do that does not cost any money or very much money.

Gifts/Wife

Now: $60
Retirement: $80

I’d like to increase the amount of money my wife has at her discretion. So this might increase a bit.

So, What Is My Number?

In total, these expenses will amount to $1,960 per month. Across all writing efforts, I’d love to pull in $200 per month. I think this is very reasonable, and would really only require that I put in a little time each month toward doing something I will be doing anyway.

My portfolio currently yields 3.5%. However, as I move out of growth stocks and into more dividend payers, I see that yield climbing and holding steady at about 3.8%.

Using the equation from my previous post: 

And plugging in these numbers:

I need $555,789 in investable assets to retire. This is up from about $290k today. Using a simple savings calculator, and assuming $3,600/monthly contributions and an 8% CAGR, I’ll hit this number in 3.4 years. Not bad, and if I give myself an extra 1.6 years (five years total), I’ll have $150k buffer.

I’ve actually never calculated this before until right now, so this is interesting. Now that I know my “number,” and because my retirement savings are largely on auto-pilot, my #1 priority is to make those expense estimates a reality. I have five years to do it. I think I can. Even if I can’t, though, being a little late isn’t the worst thing in the world.

What do you think? Am I missing anything. Please comment below!

Thanks so much for reading Retire29.

Eric

Update (Two Months Later)

One of the best parts of why everyone should have a blog is to get feedback from other people. Nobody knows everything, and clearly I was a little aggressive in a few areas above. Based on a lot of great reader feedback in the comments, I’ve gone ahead and updated a few expense categories:

Housing: Up $50 (from $400 to $450) It became clear that I was really pushing the housing cost. This is strictly mandatory housing costs (insurance, HOA, property taxes), and does not include things like maintenance (that’s elsewhere in Home/Other). The increase in $50 is based on a  great comment from Tim, who schooled me that insurance and property tax might be higher than I expect in Florida. I had already expected slightly higher costs than we have now (on a % of home cost basis), but I’ll add a bit more for buffer.

Autos: Up $40 (From $100 to $140) After the cars are paid off, our only costs will be maintenance, gas, and insurance. Those three elements cost us about $200/mo on two luxury cars, so getting this down to $100 seemed reasonable (no commuting, regular unleaded cars, etc.). However, a couple folks brought up the replacement cost (to account for depreciation). Adding $40/mo would get me a new $10k car every 12 years.

Baby: Up $100 (From $100 to $200) $200/mo would be way more than I’d expect, but I suppose it is prudent to budget for more than I’m expecting, given the large unknowns in this area. Mrs. SSC, below, makes some valid points regarding the cost of clubs and teams, and for multiple kids this could turn into an amount large enough to budget for.

These changes combine for an increase in expenses from $1,960 to $2,150. This means my portfolio will need to be $609,666 to retire (with no mortgage or other debt), instead of $555,789. This won’t change the retirement date goal, as even this now-elevated number is still well within my buffer zone, as I expect my invested assets will be around $700-750k by mid-2020.