Post-FIRE spending, tracking, and budgeting, oh my!

About 16 months ago, I left behind my 23-year biotech career and started writing this blog, and later started making videos with my friend Eric at Two Sides of FI. After I began talking more openly about my FIRE journey via these outlets, I quickly learned that a few questions came up very frequently. Some of the most common include:

What are you going to do next?”

Aren’t you bored?”

“How is living on a budget going?”

I’ve spoken to the first two questions in previous posts and videos but haven’t spent much time on the last. Perhaps it’s because it’s a rather mechanical question and I didn’t really think it was terribly interesting to write about. But as it’s come up repeatedly it seemed a good topic for an article.

Looking back: “The old days”

I’ve never been someone who was terribly interested in budgeting at home (unlike at work where it was required). But I have always analyzed our spending. Until the last few years, I tracked expenses in Excel or Google Sheets with the support of Mint.com. It always kept my mind at ease to know what money was coming in and going out. But I certainly didn’t have a detailed monthly budget of $X for groceries, $Y for utilities, etc. where I monitored our spending against each category and actively managed those funds.

Rather, pretty early in my work life, I began a strategy of “paying ourselves first”. In that sense, I first made sure we could meet our fixed and other essential expenses – rent or mortgage, utility bills, groceries, etc. Then, keeping our variable expenses in mind, next made sure we were meeting all our aggressive savings targets – contributions to our 401(k), IRAs, 529, and later on a taxable brokerage account. Over time, we steadily increased the savings goals in alignment with our income. We had a goal to retire early (RE) and that approach worked for us. All money remaining after that was for us to spend how we wished. So we didn’t really tightly control that spending at all. Surely this would have to change once I stopped working, right?

Pre-FIRE planning: “The goal is in sight”

About two years before my last day at work, Lorri and I got more specific about trying to nail down our “FI number” i.e. the assets required to achieve financial independence. We needed to improve the level of detail in projecting our annual expenses going forward. Using all the data we had accumulated over the years, we did just that. We made decisions about what was in or out. And then we started to zero in on the trickier aspects of post-career finances: how much would we like to spend on vacations each year? What will our healthcare costs be? Where will we live? Are there other expenses we haven’t thought much about to date that we now need to plan for? This wasn’t one conversation, but rather a series of them. Over time, we refined that model. But it was still just that: an untested model for our future budget.

I next entered our new budget into software form using You Need a Budget or YNAB (affiliate link – get a free month!), a popular budgeting package. I created a series of budget line items to correspond to all our expenses, and grouped these into high level categories:

Several category names censored here because I’m a nice guy and this is a family program!

For example, within “Entertain Me” you’ll find all the recurring subscriptions: things like Netflix, Hulu, and annual software licenses. Our emergency fund’s name reminds us that there is always money in the Banana Stand (SPOILER: Arrested Development)! Finally, “Coffee is for Closers” (NSFW audio) is where we capture our side hustle and other part time work income and expenses – more on that below. Since YNAB connects to our credit cards and bank accounts (similar to Mint), all our expenses are automatically categorized and “charged to” the correct budget items each month. It’s pretty simple, really.

This framework made it easy to make our expenses visible, and iteratively test and refine our assumptions. That also included the use of “sinking funds” for categories like our vacation savings (under “Quality of Life”), or our computer replacement fund (“Future Sh*tstorms”) to which we allocate money each month. This allows us to “save” for planned / likely expenses without having lumpy withdrawals later on – potentially at times when you wouldn’t want to take distributions, for example. This process went well, and we ended up with nearly 15 months of data prior to me stopping work. This really gave us a lot of confidence that we’d be stepping into early “retirement” with a good system in place.

Post-RE: “Where the rubber meets the road”

As soon as my last paycheck was deposited in the bank, the reality of the situation was upon us: We were drawing down and no longer saving. Our monthly “paycheck” was now an automated transfer from our brokerage Money Market account to our checking account. We’d been testing the budget for nearly fifteen months but was that enough data? With the YNAB system in place, we’d certainly have clear visibility on it.

Early in RE year one, I developed a practice of reconciling our expenses weekly. That took about 10-15 minutes once I got comfortable with the process. I ensured things were categorized correctly (like Mint you basically “train” the software), and paid any bills due that weren’t already on autopay. If we overspent in any categories, I moved money around in the budget and adjusted spending elsewhere if needed. This wasn’t super rigorous, but was rather a useful exercise to retrain our brains about spending and making good choices. Lorri is wholly uninterested in a regular “budget meeting”, and at this stage it’s not really necessary. We just check in with each other if there are decisions to be taken.

Earlier I mentioned that we have a small amount of employment income: Lorri does some tutoring and works one day a week at a brewery. I work one day a week at a winery tasting room. We don’t plan for that optional income in the budget as it’s not assured and our FI number didn’t contemplate it. Rather, we treat that money as a sort of “slush fund” in the budget, and mostly spend it on fun stuff outside our discretionary funding in the main budget – for entertainment, wine, special occasion dinners out, etc. Do we need to use that money because we can’t possibly ever go over our budget? Definitely not. We just view it as being responsible, particularly in these earliest years post-RE where the Sequence of Returns Risk (SRR) is highest (more on that in a future post!).

Beyond the mechanical: “How does it really feel?”

OK so the operational stuff is pretty basic. But how did it truly go? Well, early on I will freely admit I was a little anxious at times. I was scrutinizing expenses more than I needed to, occasionally to the irritation of Lorri. I didn’t mean to come across like I was micromanaging the budget, but I know it felt that way. My motivation was just to ensure I knew what we were spending to confirm that our budget was accounting for all our true needs and desires. Mapping unclear expenses (I’m looking at you, Venmo, PayPal, etc) to categories helped me understand our spending a lot better.

There were times were I worried that our discretionary spending was growing and that our optional “fun jobs” were at risk of becoming mandatory, because we wouldn’t want to curb spending back to purely budgetary levels. I’m keeping an eye on it but I don’t believe it’s a real issue. While we’re both enjoying the extra money we are bringing in, we know it’s not required. Our current withdrawal rate (WR) is below 3% given market performance. So we could certainly elect to increase that amount if we need to, as my target max WR is 3.5% presently. But as I mentioned earlier, it also gives me a lot of comfort knowing that in these first 3-5 years where SRR is highest, we are acting more conservatively.

Have there been any surprises? Not too many, thankfully. Our out-of-pocket healthcare expenses are higher than forecasted in 2021 vs. 2H20. It’s not a huge deal, but I have increased our monthly transfer a little to ensure we can pay these bills without dipping into emergency funds or cutting back in other areas. We’re still well within the guard rails around our withdrawal rate. We’ll soon be shopping for an ACA plan for 2022 as our COBRA runs out. I expect a little lower premium (but a higher deductible) based on last year’s research, so that will also help add some funds for OOP costs and perhaps we’ll lower our WR back down.

Current status + future plans

Largely, I’m feeling good about the budget at the present time. I’m a bit looser now about how I think about our expenses and I find myself asking very few questions of the family at this point. I definitely still think more about spending than I did pre-RE and I know that’s a good thing. Importantly, we have ample “fun money” and other discretionary funds available and that’s working out well. We don’t feel overly constrained like some of the folks in a recent Two Sides of FI video do!

The YouTube channel is also starting to earn a little money at this point given our channel’s growth. If that continues, it could lead us to further reduce our WR due to the additional income – or perhaps we’ll allocate more funds to travel. Both of those sound like pretty good options to me. I’m also definitely feeling more comfortable about increasing WR after a few more years, though this will depend on market conditions.

Will I keep budgeting? Honestly, my current approach is far closer to tracking expenses than it is to budgeting. I suspect that trend will continue and I see it as good benefit for little work. Will I feel as confident in the midst of an inevitable market downturn as I do now? Perhaps not, but the systems we have in place will certainly benefit us during those times. In addition, the asset allocation strategy we have in place is absolutely intended to ensure we can properly weather those storms.

To wrap up: while it’s still early days for us, tracking + budgeting is working well and helps me feel confident. The transition from saving to spending has largely gone pretty well, with only a bit of tension or concern at times along the way. YNAB has been a really great tool to help me organize and make our expenses visible. I’m looking forward to see how I feel a year from now about all this!

How much savings do YOU need to retire? There’s an app for that!

screenshot from EZ RetireCalc app

I’ve written previously about how to determine when you can retire – an article that I think is good background to this post. The key concept underlying this point is establishing when you have amassed sufficient funds to cover all your expenses for the period you will be retired without any income from the workplace. In other words, when you are financially independent (have achieved FI) and can “live off of your investments” for the remainder of your lifetime. So how do you find that number? It’s very easy to get confused by the many powerful yet complex retirement calculators and modeling tools that are out there – it definitely happened to me early on in my own journey. Thinking about this gave me an idea…

There ISN’T an app for that – until now!

I’ve certainly generated my share of spreadsheets for calculating retirement expenses as well as other financial modeling tools. I suspect some of you have as well. That said, I am aware that not everyone enjoys doing that or knows how to do so. In addition, a few people have asked me if there are simple apps available for this purpose. I looked and was surprised that I didn’t find one. Readers of this blog may know that improving my coding skills, specifically in the area of iOS apps (i.e. iPhone and iPad) is part of my plan in this next phase of my life. So I saw an opportunity – albeit one that was a little scary when I originally thought of it. Now that I have just enough experience with app coding to be dangerous, I thought it was time to take it on! Be not afeard, right???

So that is what this post is about: an introduction to my very simple, free-of-charge EZ RetireCalc app! If you have an iPhone, this link will let you download it. For those without an iPhone, fear not! I’ll share a link at the bottom of this post about how you can use a web tool instead. Please read on to get all the information you’ll need!

By way of introduction, let’s talk about what this app is, and is not:

The EZ RetireCalc app is:

  • a simple tool that lets you input two pieces of information and from those, estimates the amount of assets needed to consider yourself financially independent (FI)
  • a straightforward starting point for your own retirement journey. There will be more work to do but this tool should help provoke thought and action on your part!
  • for Apple iPhone – sorry, I don’t presently know how to code for other platforms
  • for use as an educational and entertainment source, and is not investment advice

The EZ RetireCalc app is not:

  • a detailed retirement modeler that considers other sources of income like Social Security, pension, etc. There are other much more detailed tools out there for that purpose
  • a tool for examining asset allocation, considering the tax advantages of particular account types, or one that lets you model your success rate vs. various rates of return in the market
  • fancy, beautiful, or likely to win any design awards nor earn stacks of 5-star reviews
  • a substitute for talking with a financial advisor, tax professional, or others who are important to consult regarding any financial decisions

How to get started with the EZ RetireCalc app

There are just a few simple screens in this app – “EZ” is in the name, right? The first view you encounter helps you get started – either by reading some brief instructions, diving in with the calculator, or reviewing your past results. Selecting “I’m ready to go!” brings you to the calculator. This screen is where you will input two values: “Monthly Budget” and “Withdrawal Rate”. Slider widgets are used to select a value for each. There is also another link to the instructions here via the button in the top-right of this screen. After you choose the two values, tapping the “Calculate” button will take you to the third page, which summarizes the results. You will find a “Need help?” button below “Calculate”. Tapping that will open a browser window that will bring you to this blog post for easy reference in the future. Lastly, the “Save results” button on this page will allow you to record the output to a table. Here, you can view all saved results as well as delete any that you no longer want to retain on your phone.

So, how do you select a Monthly Budget and Withdrawal Rate? Let’s dive in!

Monthly Budget

Budgeting comes up frequently in this blog – particularly as part of describing my pre-FIRE preparation. That is because determining your monthly retirement budget is an essential part of figuring out how much you need to save. The value you want to enter using this first slider is “what will my anticipated monthly expenses be when I leave the workplace?”. In other words, how much money will you need each month in year one of retirement to cover all of your obligations: bills, mortgage or rent, insurance – everything. Yes, this includes the fun stuff like travel, dining out, etc as well. It also needs to include sufficient buffer for life’s unexpected turns, like out-of-pocket medical bills, pet emergencies, home maintenance, and so on. I use sinking funds in my own budget to account for these expenses. Give some real thought to this number. This is only an estimate for now, but doing a really good job with this estimate pays off down the road when you look back at how your retirement budget is working out!

If you’re already budgeting today, you have a big leg up on coming up with this number! If you are not, you will need to do a bit more work to come to a reasonable estimate. The more that you base this number on actual data (i.e. what you are spending now), the better off you will be. If you will move to a new area in retirement, be sure to adjust your expenses accordingly. If your retirement date is farther out, modeling inflation over time is an important thing to consider in setting this number – many will assume 3% inflation annually, even if this is an overestimate. It’s better to err conservatively here, right?

Withdrawal Rate

The second value you need to enter is a bit trickier and warrants some explanation. That is, what is your expected annual withdrawal rate as a percentage of your total assets. That includes cash, retirement savings, brokerage accounts, etc. Many people considering FIRE start with the “Four Percent Rule”, which originates from the so-called “Trinity study”. In brief, this states that if your annual spending (i.e. twelve times the “Monthly Budget” you enter) is no more than 4% of what you have saved, your funds will last through your retirement period. The truth is more complicated since the rule has some assumptions built in. For example, the Trinity study contemplates a 30-year retirement period – too short for what many are aiming to do in early retirement. At the end of the day, it all comes down to calculating your safe withdrawal rate (SWR), which by extension will lead you to how much savings you need to start with. If you save enough, you can withdraw your monthly budget from your assets each year without running out of money before you die. 

I’ve stated that the truth is more complicated – so how can we simplify it? First of all, I’m not here to say “don’t use the 4% rule”. Many in the FIRE community are very happy with it and I’m not trying to change their minds. My risk tolerance is lower than many of them, and that’s perfectly fine. To that end, if you are on the FIRE train and aspire to retire early, many believe a more conservative SWR (3.5% is common; this is my own number) is appropriate. If you are retiring in your 60s, 4% is arguably too low in many people’s estimation. In addition, if you expect to have other income – pension, Social Security, rental unit profits, etc. you can model a lower % withdrawal and therefore wouldn’t need as much in savings vs. those who won’t have those sources of income. For myself, I choose to assume no other income to make my model that much “safer” i.e. conservative. The good news is that this app makes it easy to model multiple scenarios and compare your results.

In the app instructions, I linked several good resources on the topic of selecting a withdrawal rate. One I’d highly recommend is from a recent Money Guy Show episode where they share their thoughts on this topic, including using a simple SWR table by age of retirement. Here’s a direct link to that section, though I’d suggest the whole episode (“9 Secrets to Having a Successful Retirement!”) is worthwhile! If you really want to go deep on the topic of withdrawal rate, I’ve got your covered! Early Retirement Now is a great blog and is perhaps most famous for Big ERN’s exhaustive series on Sequence of Return Risk (SRR) and withdrawal rate. I won’t pull any punches: a 40+-part series (!) is not for the faint of heart. But reading it over time took me from extreme anxiety about what my SWR should be to a position of informed confidence. This is highly recommended for the financial nerds among us! It is not required reading to use this app. If you’re considering early retirement, have a look at what 3.5%withdrawal rate yields and go from there.

Drumroll, please…the results!

After you choose your two values and press “Calculate” you are brought to the results page. Here you will find a summary of the two values you selected, plus the answer to the big question: how much would you need to save? If you want to save a copy of the results to Photos on your device, tap the share button at the top-right of the screen. Please note that the first time you run the app and try to save, iOS will ask you for permission to save to your Photos. Alternatively, the same share button will allow you to print your results or share them via Messages or social media apps you may have installed on your device. If you want to change values to try another scenario, tap the “Back” button at the top-left.

I suspect people will have one of several reactions to the results page: the number is in line with your expectations, a feeling of sticker shock because the number is higher than you thought it would be, or best of all, a surprise that you are closer to that number than you realized you were. Above all, don’t panic! If you’re among the shocked, I hope this motivates you to consider how to achieve your goals sooner. Perhaps it causes you to reconsider your current spending and saving, or causes you to think about budgeting to assess your true needs in more detail. As some will recall, I have found that the power of budgeting is all about making expenses visible so you can make intelligent decisions – like increasing your savings so you can retire sooner!

For some this may cause you to ask deeper questions: What would the impact be of Social Security on my retirement finances? What does this look like if I model in part-time work in retirement? The list is endless. There are myriad tools out there to model that level of detail. I can’t say I’ve assessed them all, as I certainly haven’t. One that I find particularly powerful yet easy to use is New Retirement (I receive no benefit from mentioning it! I just like it). But there are plenty of others. It might also cause you to talk with a financial advisor, which is certainly a reasonable course of action. Just ensure you select one having a fiduciary obligation to their clients.

But what if I don’t have an iPhone? I want that app!

OK so you are an Android user or don’t have any smartphone. Fret not! Here’s another option for you: I have made a simple web tool with the same functionality as the app, using Google Spreadsheets. Click this link for access to that and it will open in a web browser. If you would like to save a copy to your own Google Drive, select “File”, then “make a copy” in the menu bar at the top of the screen. Then you can name it whatever you like and save it in your Drive. Of course you can also just take a screenshot, print it out, or whatever you like.

In conclusion

This was certainly a useful exercise for me, and I hope I also produced something useful for you. I’m more confident about developing very simple apps at this point though I’m still spending time each day continuing my learning. I’m definitely going to keep that up!

Irrespective of what you do next, I hope this information provides you with a useful jumping off point. I suspect it may provoke conversations with your partner, friends, or family members. Perhaps it will cause you do dig into budgeting, or otherwise further investigate your current finances? Whatever comes next for you, I wish you all the best in your journey. Should you have any questions about the app or want to propose improvements to it, I’d love to hear from you.

Thanks!

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