Our retirement budget: huge success or epic failure?

screenshot from budgeting software

I’ve previously written about budgeting and the value of making things visible. In the year prior to leaving the workforce, I found it essential to thoroughly characterize our expenses. That way we would could finalize our “retirement” budget and pull the trigger with a high degree of confidence. Today marks seven months since I left my job, and the end of the year provides an opportunity to review how that has gone. I’ve already written about the other aspects of my first six months of retirement, so a budget review seems a good next topic. At a high level, I thought it went well! But were there any surprises lurking underneath the surface? Let’s find out…

Developing and maintaining our budget

A core element of my approach has been to develop and then monitor a zero-based budget. Put simply, this means every dollar is accounted for and “has a job”. We did the work to characterize our spending and develop our budget for nearly a year before I left the workplace. We had done this coarsely in the past as part of determining when we could retire, but more detailed work was needed. Typically I use spreadsheets for everything, but I wanted to see what budgeting options were available. After some investigative work, I landed on the software package “You Need a Budget (YNAB)” – free trial here! I am still using it today, as I find it a very easy and comprehensive way to allocate our monthly budget and monitor how we’re doing. In total I probably spend around 30 min a month managing my budget, and that’s spread out among a few different tasks, including my end of month reconciliation process.

These days income takes two forms: 1) a monthly automated transfer from our Fidelity money market account – which feels just like I’m getting a regular paycheck, and 2) money my wife Lorri brings in from part-time tutoring as well as her self publishing side hustle. Important to note is that our budget only assumes the former, and not the latter – that is just upside. If she stopped generating income tomorrow, we’d be perfectly fine. But at the present time I don’t mind the tax deduction covering a number of key expenses! Lastly, I occasionally take a consulting call, which generates a little money. Lest you think I’m yet another blogger who is actually funding his “retirement” by replacing their paycheck with lucrative side hustles – this consulting effort is intentionally kept small and presently is just covering expenses like the annual taxes CA charges me for the pleasure of doing business!

At the end of each month I allocate the income from the Fidelity transfer into the next month’s budget using YNAB. This step takes only a few minutes given all the data we have regarding our monthly expenses. How does that budget break down? Let’s see!

Introducing our budget!

This is the breakdown on a percentage basis of where our money “goes” each month. I use that term intentionally, because some of it isn’t necessarily leaving our account in that month. For example, that monthly paycheck includes money we explicit allocate to things like vacation and other sinking funds – 9% of the total. As another example, we pay auto insurance every six months. But each month, YNAB allows us to automatically allocate those funds so that we are fully funded by the time each payment comes due.

Starting from the top, you’ll see that 60% of our budget is for truly fixed costs – mortgage, health insurance premiums, auto, homeowner, and umbrella insurance, and core utilities. This category is called “Super Boring” in YNAB, as these don’t really change barring seasonal utility differences in electric and natural gas usage. That said, determining where to live in retirement was certainly influenced by what these costs would be. There haven’t been any surprises here to date.

Variable costs or “Getting Sh*t Done” in my budget parlance, are the important expenses that move around month-to-month but can certainly be cut back if that was needed. This includes groceries, products from Target/Costco/Amazon to keep the home running, clothing, cosmetics, etc. Particularly as we’ve been setting up a new house, this can be an area where we exceed our budget targets in a given month by as much as a few hundred dollars. It hasn’t been too bad but this is one spot where we’ve become a bit more diligent. We’d rather spend that money on things that are much more interesting, right?

“Financial Degeneracy” is the fun stuff! This is a healthy 9% of our budget because we are supposed to be enjoying this post-workplace life, aren’t we? It’s also the easiest area to cut back if we had to for any reason, such an unplanned expenses elsewhere. The things we include in this bucket are dining out (let’s face it – this is takeout given COVID), our wine budget (we do live in wine country after all!), hobby expenses – we are passionate beer homebrewers, as well as our personal “fun money”. That last bit is the $100 my wife and I each have monthly to spend on whatever we want without question. For me this might include video games or something for a new hobby I’m trying out. When I look at the year in review, “Financial Degeneracy” is the area where we tend to overspend – at times as much as 100% over budget. Honestly, we don’t feel bad about this at all, since 1) Lorri’s income covers this, and 2) we are barely touching our vacation funds since travel isn’t an option at present barring low-cost road trips. 2020 was a challenging year for us all, and some extra spending on fun has been one of the ways we dealt with being largely homebound.

The next three categories are simple. Subscriptions includes all scheduled expenses for services and software. This includes streaming services, internet, video game subscriptions, YNAB, Amazon Prime, etc. While these aren’t a huge spend, I love the visibility that tracking them explicitly provides us. It’s easy to make decisions about what to keep/drop. Next comes things for our daughter – sports, school trips, allowance. This is a small spend presently given the various lockdowns in 2020, and is planned to increase once the situation changes. Lastly we have generosity, which includes planned and other giving, as well as a monthly allocation for presents. The latter is a category that can simply roll over for future spending. We don’t include Christmas spending here as this is part of the sinking funds below. No surprises were found in 2020 in this category.

The last two lines are what I mentioned at the top: you know spending against sinking funds these will come “some day” – maybe this month, maybe in a year. In other words, these are expenses that you can count on at some point, but the timing is uncertain. That includes out-of-pocket medical expenses, vet bills, car repairs, laptop replacement, home repair, etc. We aren’t necessarily spending against any of that in a given month, but we are certainly planning for it. That way when the expenses come, we are prepared. We also have additional buffer in other buckets as described above should we need it. It’s not listed here, but we also maintain six months of cash in a money market as our traditional emergency fund, aka “The Banana Stand”. The only thing out of the ordinary in this bucket is lower out-of-pocket spend for medical. I say that because I had surgery early in 2020 which means we hit our max well before I left the workplace. But we have continued to put money into that sinking fund and that puts us in a good spot starting 2021.

Explicitly “saving” for vacations is also important to us, and as such it gets its own line item in our budget. It is a sinking fund as well, but one that may be planned for more easily than the others. At present we aren’t touching this very often though we continue to “contribute” to it as part of our monthly process. We are certainly looking forward to taking a nice family trip once we are able to do so!

So how did we do?

To tie up the commentary from above, I think we did well. Despite the year of research prior to leaving the workplace, putting things into practice is really where the rubber meets the road. We planned pretty well for our move, and were able to complete our home & property improvement projects as we had budgeted. Our landscaping ambitions were a bit outsized but we took the completion of this on ourselves, which ensured we controlled that cost. We largely kept to our monthly budget as well and used the income Lorri generated to cover any “shortfalls”, if you can call them that. Importantly, when we exceeded our budget it was never came as a surprise. Rather, these were deviations we took with eyes wide open.

In addition, the strong stock market performance (after a ton of volatility) also means that our true withdrawal rate in 2020 was well below the 3.5% we had planned. Given how much I thought about sequence of return risk in the year prior to leaving the workplace, this really puts my mind at ease. After our first seven months in this next phase of our lives, I feel pretty relieved all things considered about where we are. I don’t feel like I “need” to keep budgeting if I don’t want to, but the confidence I gain from continuing to track gives me a lot of peace of mind. I expect I’ll keep it up through 2021 but beyond that, we shall see!

What questions do you have about budgeting or retirement finances? I’d love to hear from you!

The exceptional value of making things visible

magnifying glass and $5 bill

As I’ve written before, my family recently moved to a new home, in a different town. That means we’ve been keeping ourselves busy with lots of chores along with some fun things, plus a hefty dose of learning opportunities! Sometimes learning means reminding yourself about good lessons you’ve experienced in the past, and to which it is worth returning.

Lessons from the garage

We spent the last few days on the herculean task of organizing our garage – chock full of boxes since the move. Our last home had substantially more storage space, including a large garage and basement area – rare for California. Things are a bit more limited in our new abode, despite it being a great home in so many ways. So we’ve been continuing our purge of items no longer needed, organizing what we want to keep into bins, and putting them on the myriad shelves we’ve assembled. It’s amazing what you unearth when you take on these kinds of tasks, isn’t it? You can find the truly valuable things – cherished mementos, relics of hobbies long forgotten, and so much more.

Those things were present all along of course. We simply lost track of them in the clutter of life. Everyone is busy, right? For myself, the lesson here is about keeping things visible. Few if any of us live in museums, of course, with all of our possessions on display. It’s also true that we tend to box up the “extra” things, burying them among our belongings, in some out of sight area. There, they can be easily forgotten, despite them being important, and valued. Our approach has been to use clear storage bins, with items grouped appropriately so you can easily look at a shelf and see all that is being stored. We won’t soon forget what we have after this exercise – one we will need to keep doing going forward for it to succeed.

Lifestyle creep, hidden expenses, and the way out!

Our experience with the garage reminded me of the start of my budgeting journey, something that was central to my retirement decision making process and preparation. As I wrote, itemizing your current true spending rate is vital to determine your estimated spending in retirement. Only by digging into the details can you understand all of those costs easily hidden – things like software subscriptions, meals out, gifts, all those things that automatically renew, and the list goes on. Few people really understand the sum of their spending, particularly as it has increased over time. One of the perils of getting raises and advancing in your career is that your spending generally goes up! By making your expenses visible, you can make informed decisions about what is truly important and should be maintained, vs. what can be reduced or even eliminated.

What I have found effective and very relevant to this topic, is the value in keeping your spending visible. In other words, this shouldn’t be a one-time activity. By regularly tracking of your expenses – in a notebook, a spreadsheet, or with software like my favorite – You Need a Budget (YNAB) – free trial here!, everything is out in the open. You can see how spending patterns change and make adjustments as needed. If your expenses are higher in one area in a given month, you can adjust and reduce spending elsewhere – or take from a sinking fund account set up for that purpose. This kind of process also facilitates conversation with your partner, allowing you to make informed decisions together.

I’m not describing labor intensive work! In the approach I use, transactions are automatically imported into the software and 90% of the time, correctly categorized and my budget adjusts without me doing anything. I do a 10-minute check-in each week and then do a brief end-of-the-month reconciliation and confirm next month’s budget. This small amount of time allows me to keep our finances not only visible and accurate, but provides us confidence that we know the true state of things, and can plan appropriately. This is vital in retirement to ensure you maintain your calculated safe withdrawal rate. And if you’re not retired, this can help keep your spending in check, allowing you to pay off debt more quickly, increase your saving rate, and perhaps reach your financial independence goals sooner!

What examples do you have of the value of making things visible? I’d love to hear from you.

photo credit: “Monument Magnified” by b_ungar is licensed under CC BY-NC-ND 2.0

The freedom to spend your time as you want

clock

I’ve written a bit about retirement providing the freedom to spend your time how you want. It really is a remarkable thing to consider each day separately and define it how you wish. This is something you dream about as soon as you make the decision to retire, of course. That’s not to say life doesn’t provide all kinds of “must do” activities and chores – reality still exists! Outside of those essential matters, time truly is yours to spend how you wish in retirement. There is no boss other than yourself. We all think we know what this will be like but experiencing it is a different thing entirely.

Only two months into this I have found the freedom to spend time as I wish can be overwhelming. Candidly, I didn’t expect that at all! I think some of that is just how I’m wired. I have many interests, some of which I’ve been excited to explore for years. If I’m not careful, I’ve found I can get myself wrapped around the axle of not knowing what to do next. As others have written, having routines can help with this. For example, I’ve started to block time for chores vs. learning and personal development. It’s not a schedule, but structuring the time helps me organize that vast space of the “what could be”. I’ve seen the positive impact of this already but I know I have to keep at it.

The other thing I’m trying to avoid is the peril of stretching myself too thinly. I am prone to feel like I need to make progress in multiple areas at the same time else I’m falling behind. I’ve been documenting my “idea funnel” of things I’d like to explore using Notion, while reminding myself it’s a wish list. There is no pressure to advance on these things today. I capture things that are truly tasks separately, and deadlines often apply. Right now, I am focusing on two areas for personal development and pleasure: this website and cooking. Reminding myself of that prioritization is helping me not feel guilty about lack of progress in other areas. We all need to define our critical few priorities, whether retired or not!

I expect my feelings on these topics will continue to evolve as I gain more experience in this new way of living. I’m looking forward to reading my posts six months or a year down the line to see just how much has changed. I am fully prepared to be very surprised!

[I’ve realized my initial posts have been a bit lengthy. This is my attempt to put a shorter article together to capture the kinds of things I’m thinking about. Please do share any feedback on the various article types and what is of most interest to you! Thanks.]

photo credit: “IMG_5353” by pockethifi is licensed under CC BY 2.0