Our retirement budget: huge success or epic failure?

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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!

7 Replies to “Our retirement budget: huge success or epic failure?”

  1. I love how everyone uses YNAB differently. I see a lot of tutorials and examples that tend to categorize bills by *how* they are paid (fixed, variable, subscription, sinking) rather than their purpose (aka *why*).

    I put fixed and variable costs into category groups to give me a better sense of the true expenses. For example, in Transportation I include auto insurance, eventual auto replacement, auto repair, gasoline, parking, and bus passes. In Housing, I include mortgage, homeowner’s association fees, and home repair.

    This doesn’t take an additional time to set the budget, because I have to set it for each line item anyway. It does give me better insight into the true costs of housing and transportation that I would have if I spread my costs into “Fixed” and “Variable” category groups. This helps me answer questions like “how much would we save each month if we moved to an apartment?” or “what does it truly cost for us to have cars?”

    1. I really like your approach. I also completely agree – it is really interesting to see the many ways in which people use YNAB. Having started with all the Nick True videos, I definitely began with his approach. I’ve modified it over time and expect I’ll do the same again!

  2. I think the kiddo stuff deserves more than 1%.
    I’m experimenting with three budget apps after your previous post on YNAB. There are definitely some interesting revelations by slicing the categorizations different ways.

    1. Well we have just the one and she’s not incurring much spend at present. During sports seasons and when she can get out and do stuff, it does increase. I look forward to hearing back on your software exploration!

  3. Where do you put the sinking funds? Do you keep it in a separate account or does it just stay in the checking account? Also are you withdrawing from an equities every month to put in the Fidelity money market account? I’m new to your blog so please direct me to another post if you’ve covered elsewhere.

    1. Hi Jennifer, I keep them in (formerly) “high yield” savings or checking depending on the timeline for usage. I don’t know if you follow my YouTube channel, but the next few episodes will touch on retirement paychecks and asset allocation, among other topics. But in the interim – yes, we “pay ourselves” monthly via transfer from our Fidelity account. That account generally holds >10 mos of expenses coverage. It is refilled by selling “something” depending on market conditions. Thanks for following the blog!

  4. Thanks. I wasn’t aware of your Youtube channel. Great content. I look forward to watching several videos.

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