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!

How to decide where to live in retirement?

moving van in front of a house

Talk about a weighty and also very personal question! All the way back in my very first post, I mentioned that my family relocated just a few short weeks after I left the workplace. How did we decide where to live? This is certainly an important question for all retirees, whether early or at a more traditional retirement age. For some, this answer was decided long ago – whether to stay in their current home, turn a once-vacation property into a primary residence, or some other predetermined path. But for others, it’s a decision made much closer to when they achieve FIRE – and that was the case for my family. We made our final decision on where to live just six months before the big move! How? Read on…

Financial elements are essential to consider – and easier in some respects

A key aspect of deciding when you can retire is determining how much you need to save, which comes from establishing your retirement budget. That budget must of course include the cost for housing, whether that means a new or existing mortgage, current or estimated monthly rent, or at minimum the cost for upkeep, utilities, and all those other things that come along even if you already own your retirement home. For the last eight years prior to my retirement, we lived in the San Francisco Bay Area – among the highest cost of living regions in the world. The budget on which we wanted to live in retirement wouldn’t support us staying there (and we didn’t want to anyhow). So our decision on where to live in retirement was absolutely influenced by our target monthly housing cost. As we were planning to buy a home this meant a mortgage. Spoiler alert: the house we ended up purchasing was less than 1/3 the price that a comparable home would cost in the Bay Area!

Another essential aspect to consider is taxation – particularly in the United States where this aspect varies a lot. There are myriad YouTube videos and articles written about the “Top 10 Places to Retire”, as you may have found. From a financial perspective, these pieces tend to focus on things such as whether a state has income tax and/or sales tax, the relative cost of property taxes, and how they treat taxation of retirement income such as Social Security. There is no question these are key topics to consider. In our case, we elected to stay in California for now, despite the high state income and sales taxes – more on that later. That said, the latter differs based on municipality, and we are now living in a town that has a lower sales tax rate than what we had farther north.

How to pay for healthcare is essential to consider as well, and is a topic I’ve covered previously. If you plan to keep the health insurance you have presently in retirement, ensuring you will maintain access to doctors, clinics, and other elements of healthcare is essential. The availability of these resources, as well as the cost of to access them, often differs markedly based on geographic area, so this warrants investigation. In addition, the cost of your monthly healthcare premiums – even within the same health plan and insurance provider, also can differ substantially. In our case, our monthly premiums are >$300 cheaper in the town we moved to just a few hours south of our previous location – for the very same plan & coverage! If you will shop for a plan on the ACA exchange, the options differ quite a bit depending on which state you are looking at. As healthcare absolutely impacts your retirement budget, these costs must be investigated early so they can be factored in.

These are just a few of the financial factors to consider. Other costs will vary based on area as well, and should be investigated. In our case, our utilities and our auto insurance got cheaper when we moved, which was certainly positive for our retirement budget!

Beyond money – the truly important things

In many respects, finances are the “easy” part of the equation. They are tangible, readily defined, and easily investigated. We definitely spent far more time thinking about all of the other reasons we would want to live in one area vs. another. Leaving the workplace is a big move. Relocating your family is yet another big move (literally, sometimes!). Therefore, there are myriad factors worth considering before making a decision. After all, post-retirement – whether FIRE or traditional, you will no longer spend the majority of your waking hours at work. Where do you want to live? This isn’t just weekends and holidays, but every day! We started from a position of no limitations; staying in the US was likely but not certain. How could we decide when the options were so many?

A bit more than a year before I was to leave the workplace, we started to get serious about planning our future move. It was time to move from daydreams to action! After a period of research and a variety of discussions, we took an international move off the table for the foreseeable future. Our daughter was going to be entering high school and as a family we decided that she would graduate from a US school. We determined that our passion for international living would for the time being, be met by vacation travel (little did we know COVID-19 was around the corner). Besides, we knew we could revisit that decision later. OK so how to choose where to live in the US?

My wife, Lorri, and I decided we would each make a prioritized list of things that defined our ideal retirement town. We each spent time separately coming up with a list of 10-15 factors that mattered to us. We asked our teenage daughter for input as well. For example, living in an area with easy access to hiking and biking, the quality of schools, and various aspects of climate are examples of factors we listed. Then we came together to consolidate and force-rank our list. Since I approach most problems with an engineering mindset, a spreadsheet was central to this process! We then used those factors to evaluate a list of potential areas we’d been considering. This would help us decide what remained on the list, what was off the list, and where we needed more data to make a determination. Here’s a snapshot:

You’ll note that I added some of the financial factors to the table as well. We also used quantitative or qualitative scoring to place each factor into one of three grades: red/yellow/green. This gave us a really good foundation to prioritize our further research. But we weren’t done yet!

Making the decision: there’s no substitute for visiting in person

Next, we started digging in deeper on the areas that ranked highest. That involved a lot of reading and also researching otherwise online. We deprioritized some cities based on our findings, and removed others from consideration. For the former, we decided we might visit them later, but they weren’t on the top of the list. We also started leaning towards staying in California despite some of the financial downsides, due to ready access to the great CA state university system and climate advantages (very important to Lorri!). Next we planned our first visits, including ones to several different parts of California.

If there’s one thing I learned pretty quickly, it is that there can be a big difference between virtual vs. in-person research. I know that seems painfully obvious, but I was surprised several times by how quickly we cooled on a town once we spent a day or two there vs. our initial interest level. It’s also a very different thing to think about vacationing somewhere vs. living there full-time and year-round. Again, that sounds terribly obvious but it really is a mindset shift which I believe you have to undertake.

Lorri was really great about helping us stay focused on the key questions and ensuring we got what we needed to out of our visits. As a simple example, she recommended we walk to downtown from neighborhoods that seemed interesting, as this is something we’d be doing often post-move. It was also important to go beyond the more tourist-type stops and check out the local scene – the stores, schools, entertainment, and other resources. I’m someone that has moved 11 or 12 times since graduate school, and I’ve never spent so much time really thinking through what it would be like to live somewhere new. I had always been working full-time before, and admittedly hadn’t always been terribly thorough in considering these aspects.

So how did we land on the Central Coast? Sure, the great wine was a positive influence but it was a good deal more than that! Honestly, it just felt right. Yes, it ticked the most boxes on the spreadsheet (it is #7 on the screenshot above). But it was a good deal more than that. I had a strong feeling after our first visit, and this sentiment only grew stronger after a few more trips. I believe we kept our minds very open to the other options on our list – and I think this is essential. But I also believe that all three of us in the family felt this was the right spot for us pretty early on in the process. Following the methods we had laid out just made us that much more confident in our selection, particularly in the context of the other areas under consideration. There are always trade-offs, of course. But we are very happy with the decision we made!

But it’s also not necessarily a permanent decision!

Despite having a pretty solid process that we feel was the right level of due diligence, I don’t want to suggest some absolute permanence in the decision we made. We are always open to the possibility of change! For us, we felt it essential to make a decision on somewhere we think we might want to live for the rest of our lives. More than six months later, we are feeling great that we did a good job of that. But it’s still early of course. That said, we also have a built-in hedge here given the very active tourism in this area. By that I mean we could easily rent our new home down the road, should we decide to live elsewhere either part- or full-time. We still have a very real international living itch to scratch and vacations may not be sufficient!

That said, this is an important decision and one to take very seriously. However, it is effort well spent and that time taken will pay off many-fold once you realize how happy you are in your new town. This is not an area where you want to have buyer’s remorse! While COVID-19 restrictions means we cannot do all that we wish to explore our new area, we are very thankful that we prioritized being within a 30-min. walk to downtown – and also having ample access to hiking and outdoor activities!

I wish you luck in your own search, whether near-term or farther down the road!

A brief diversion – some have recommended that I start a Twitter account for this blog, which I’ve now done. If you’re so inclined you can now follow me on Twitter: https://twitter.com/nextphaseisnow. That also means I can now do fun stuff here in the blog like refer you to my last post:

The ideal time to start is yesterday and the second best time is today!

beer can with koozie, stating "this $1 beer cost me $88)"

The best time to start what you ask? Saving and investing for your retirement, of course! That title captures some wise words, I hope you agree – or soon will. It’s certainly never bad to start saving at any time, but playing catch up can be expensive – both in terms of increased dollars needed per unit time to achieve one’s goals, as well as the tradeoffs you have to necessarily make to save more. If you have designs of early retirement as I did, it’s crucial to think about this concept sooner rather than later and to act accordingly. It is effort that will pay off many times over.

Multiplication is our favorite mathematical operation

I’ve mentioned my favorite financial podcast, The Money Guy, before. I was lucky enough to score one of one their insulated can koozies in the past, hence the picture you see here. Most people who would read a financial / early retirement blog understand the power of compound interest. However, the sheer magnitude of it can still surprise even the most informed person when they are presented with the data. The photo here is a great example. It’s represents that considering the projected S&P 500 index growth over time, every dollar invested in an associated index fund by a 20 year-old can be predicted to manifest an $88 value by the age of 65. Now that is powerful multiplication! For more info on this topic including the multipliers for different starting ages, check out “How Powerful Are Your Dollars?” on their Resource page . That resource and this post are great to share with recent high school graduates, those still in college, or those off to their first job. The message is simple: the dollars you save early on are powerful and should be prioritized!

Getting started: Don’t leave stacks of cash on the table!

I’m often asked how to get started, particularly right out of college or in that first job after high school (though knowing what I know now, I would have started contributing to a Roth IRA as soon as I had earned income in high school!). Many people will state they simply aren’t able to save very much – and certainly not to the tune of 15-20% of income that many in the financial advisement community rightfully recommend. The first concept I always raise is to not leave “free money” on the table. By that I mean if you are fortunate enough to be at a company with a 401(k), 503(b), or other retirement vehicle with an employer match – do whatever you reasonably can to contribute up to the match! Otherwise that free money offered up for you will not be in your investment portfolio.

Deferred gratification is your most powerful tool

OK but how can you contribute enough to realize that match? Of course you have other expenses competing for dollars: rent, bills, perhaps student loans. This is where the concept of deferred gratification comes in. It’s worth evaluating your full spectrum of options. Do you “need” a new car or truck right out of school? Of course not. You could drive your existing car longer, buy used, or maybe you don’t actually need a car, because you have other transit options. Maybe it makes more sense to rent vs. buying a home? It’s tempting to fall into the trap of lifestyle creep just because your income “allows” it. Take it from me – it’s better to drive that clunker a little longer, because the investment dollars in those early days are worth so much in the long term. I drove my old Dodge Dart, followed by my base model Saturn (read: no power steering) for years before I finally bought a new car. And I didn’t buy a “nice” car until I was in my 40s. Why? I wanted to save more for retirement and I didn’t “need” a nice car. These are choices, of course! But delaying those bigger ticket items longer means more ability to save when the impact is the greatest. On this topic, if you haven’t read “The Millionaire Next Door” by Thomas Stanley, I’d recommend it.

The earlier you get comfortable with the concept of deferred gratification, the better. I recommend you make it your practice to increase your investment contributions every time your income increases. Some retirement plans have an option to do this automatically when you get a raise, which is great! Otherwise, the inevitable lifestyle creep can rear its ugly head. That means spending more just because you’re able to do so, which is completely in conflict with any goals of early retirement. It’s not a race to “keep up with the Joneses” after all, right?

So life is just toil and NO fun, is that the key to success?

Of course not! We all get to decide every day how we allocate the dollars we have coming in. I merely suggest that I believe it’s important to really think about your priorities and ensure that your savings match those intentions. For my family, we decided long ago that experiences were valued much higher than “stuff”. So we were elected to put our money towards a nice vacation once a year, along with less costly trips (National Parks visits, for example) in between. We have always felt that the return on our “invested” dollars for vacations was huge! This is something we absolutely will continue to do in retirement, and for which we have budgeted explicitly. You need to decide what is most important to you. As far as I know we get one shot at living so of course you need to enjoy it in the ways that make sense to you.

Bringing it home

Prioritizing saving was definitely central to my own path towards early retirement. I also didn’t stop with my 401(k). I started contributing after-tax dollars to a brokerage account as soon as I could, along with increasing my 401(k) as my income grew. I did this because for me and my family, my retiring early was a priority. If it is for you as well, I encourage you to do a few things: evaluate your budget, and see where there might be opportunities to increase your savings rate. Look into automatically increasing your investment rate as your salary increases if this is an option. Consider whether that big ticket item you’re considering truly is a priority now, or if it can be deferred for a later date. If this is all a big ball of confusion, consider talking with a financial advisor – one with a fiduciary responsibility to you. You don’t have to go it alone.

Good luck! If early retirement is your goal, take a look at your own situation and what you can do to achieve financial independence (FI) sooner!