What are the essential and discretionary expenses in a retirement budget?

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flyingaway
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What are the essential and discretionary expenses in a retirement budget?

Post by flyingaway » Mon Oct 07, 2019 1:32 pm

I am having some trouble in determining what are the essential and discretionary expenses in a retirement budget. I understand that the discretionary expenses are the ones that you could cut if your financial situation becomes bleak.

To facilitate discussions, here is a hypothetical annual retirement budget:

(1) house (paid off, tax + insurance) $10,000
(2) car (one, tax + insurance + new car funding) $5,000
(3) healthcare (insurance + co-pay) $20,000
(4) daily expenses (groceries + gas + clothes + etc.) $8,500
(5) house maintenance (repair + lawn care) $5,000
(5) leisure (travel + entertainment) $15,000
(6) utilities (water + electricity + phone + internet) $4,500
(7) income tax (federal + state) $12,000
---------------------------------------------------------------------------------------
Total: $80,000

At the first glance, it seems that only the leisure item is discretionary, everything else is essential. But if we want to travel to see our children, then it becomes essential. House insurance and tax are essential, but if we can downsize in a real bleak situation, then we may cut that expense by a half.

So when you make your retirement budget, what are the discretionary items and how do you decide them?

(P.S. I would like my fixed income and social security part to cover my essential expenses).

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Artful Dodger
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by Artful Dodger » Mon Oct 07, 2019 1:47 pm

I think your list and rationale are reasonable.

Almost all the expenses you list are in my list of essential items.

Travel, eating out, entertainment (concerts, shows, plays, etc) are discretionary.

Some of your expenses are flexible. Groceries can be reduced or increased. Some home maintenance will be more important than others (furnace breakdown vs replacing gutters), and can be pushed off. Phones and internet can be shopped. Your health insurance can be flexible. Your pre-Medicare premiums may well be $10k, but actual costs will likely vary alot from year to year. Years ago, we had HSA type plans, and averaged $1500 to $2500 most years. Only once did we hit our maximum deductible / out-of-pocket.

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Artful Dodger
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by Artful Dodger » Mon Oct 07, 2019 2:11 pm

One other thought I have...

I just spent some time downloading cc reports to come up with exactly what we spend. One problem is I'll have 40 to 50 grocery store, 30 for target or walmart, 60 or 70 for Home depot, Lowe's, Ace, Menard's, and another 50 or 60 general use charges. All these can add up to $25k or more. I know a lot are essential, but there's a bunch that are discretionary, and each visit will have a mix of both.

I'm like you. I want my SS at age 70 plus my wife's pension to cover the majority of the essential, and I think they will. I've also chosen to buy LTC to cover that potential event.

dbr
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by dbr » Mon Oct 07, 2019 2:18 pm

Essential vs Discretionary is a false dichotomy.

A better thought process might be to start at the other end and think through what the plan would be if one had to reduce spending at some point in time of if one had to define a plan that set a lower level on spending. Actually the alternative could be to consider a plan for increased spending as well.

Broken Man 1999
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by Broken Man 1999 » Mon Oct 07, 2019 2:27 pm

dbr wrote:
Mon Oct 07, 2019 2:18 pm
Essential vs Discretionary is a false dichotomy.

A better thought process might be to start at the other end and think through what the plan would be if one had to reduce spending at some point in time of if one had to define a plan that set a lower level on spending. Actually the alternative could be to consider a plan for increased spending as well.
Perhaps use a zero based budget, like some businesses have tried.

Start with the absolute needs, work your way up until you hit the maximum you are comfortable to spend.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

bhsince87
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by bhsince87 » Mon Oct 07, 2019 2:34 pm

Seems pretty good. I have our budget broken down into more fine categories, but for planning purposes, your's looks fine.

I have separate categories for dental and eye care, since they don't seem to be covered by the health insurance plans we're looking at.

Also have a separate category for gifts and charitable contributions, which are considered discretionary.

Plus I have a "miscellaneous" of $250 a month for unexpected expenses and a bit of a buffer.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

delamer
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by delamer » Mon Oct 07, 2019 2:41 pm

There are certain categories of expense that are mandatory, but the level of spending is not. For instance, we buy our dinner entrees from a specialty store because we like the quality and they require minimum preparation. But we could reduce our food expenses by buying cheaper entrees that need more preparation.

So our specialty store is discretionary, but entrees are essential.

We buy used luxury cars, but could drive Hondas. Cars are essential, but Audis are not.

And maybe we would drive Hondas (cars are essential) if it allowed us to continue to travel (discretionary) without spending from our savings.

I don’t know how you account for these issues in your scenario.

Maybe you need to try another breakdown — short-run fixed expenses (property taxes, auto insurance, etc.) versus short-run variable expenses (food, out-of-pocket medical, etc.)?

drawpoker
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by drawpoker » Mon Oct 07, 2019 3:22 pm

I think the whole premise here is flawed.

Essential and discretionary expenses are just that. Doesn't matter where you are in life, retired or still working. The nature of those categories don't change a whit :|

For everyone who will jump in and say, what about costs of visiting the grandkids, buying them presents, etc.

For people not yet retired, just substitute "friends & family" for "grandkids". And file under "travel", discretionary item.
Gifts are gifts. Regardless of who is the recipient.

And so on.

runner3081
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by runner3081 » Mon Oct 07, 2019 3:33 pm

You can really get into the weeds on this.

One could argue that yes, phone and internet are essential. BUT, is anything more than a $10 per month cell phone or the slowest high speed internet essential, no.

Northern Flicker
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by Northern Flicker » Mon Oct 07, 2019 3:40 pm

Only you can draw the line between essential and discretionary. If you have the assets to fund the leisure expenses with your income floor and want to have high confidence that they are covered, make them essential and include them in your income floor.
Risk is not a guarantor of return.

jebmke
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by jebmke » Mon Oct 07, 2019 3:44 pm

Some capital expenses, which you have not listed, can be discretionary or semi-discretionary (control the timing). We did a lot of renovation work that could have been delayed or in some cases, not done at all. Other capital items were mandatory - like when the 30 year old heat pump crapped out.
When you discover that you are riding a dead horse, the best strategy is to dismount.

drawpoker
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by drawpoker » Mon Oct 07, 2019 4:35 pm

runner3081 wrote:
Mon Oct 07, 2019 3:33 pm
........One could argue that yes, phone and internet are essential.......
Oh? Phone, yes. Everyone needs the ability to call 911

Internet? Nope. Everyone can go to the public library and use it there for free

runner3081
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by runner3081 » Mon Oct 07, 2019 4:43 pm

drawpoker wrote:
Mon Oct 07, 2019 4:35 pm
runner3081 wrote:
Mon Oct 07, 2019 3:33 pm
........One could argue that yes, phone and internet are essential.......
Oh? Phone, yes. Everyone needs the ability to call 911

Internet? Nope. Everyone can go to the public library and use it there for free
No, cell phone service is NOT truly essential. Any phone, even without service will dial 911.

drawpoker
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by drawpoker » Mon Oct 07, 2019 4:47 pm

runner3081 wrote:
Mon Oct 07, 2019 4:43 pm

No, cell phone service is NOT truly essential. Any phone, even without service will dial 911.
Not true anymore. Years ago, people used to be asked to donate their old cell phones to domestic abuse shelters to give to women. Now, technology has changed so much, there are only a handful of cell phone models still around that can be relied upon to dial local 911, not the next county over, when they are not connected to a carrier.

randomguy
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by randomguy » Mon Oct 07, 2019 5:16 pm

drawpoker wrote:
Mon Oct 07, 2019 4:35 pm
runner3081 wrote:
Mon Oct 07, 2019 3:33 pm
........One could argue that yes, phone and internet are essential.......
Oh? Phone, yes. Everyone needs the ability to call 911

Internet? Nope. Everyone can go to the public library and use it there for free
Pretty much all spending over about 15k is discretionary. But most of them would require lifestyle changes people aren't going to make unless they really have to. The OP isn't going to sell their house and live in rented room in shared housing, start taking the bus, and so on that would get the spending down. You can get cell phone service for well under 30/month. In an 80k budget, it probably wouldn't be the first thing I am cutting:)

In the OP case the travel is obviously discretionary. But what about things like buying half as many clothes, running the car and extra year, not doing that house repair cause you can put off repaving the driveway another 3 years, buying chicken instead of steak, putting off that dental work for a while, and so on. A lot of those "Essential" expenses could be cut without drastically changing their lifestyle if they had to be. How far you are comfortable going is going to end up pretty personal. You might be fine giving up the prime rib but not the grand kid visits.

MathWizard
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by MathWizard » Mon Oct 07, 2019 5:33 pm

flyingaway wrote:
Mon Oct 07, 2019 1:32 pm
I am having some trouble in determining what are the essential and discretionary expenses in a retirement budget. I understand that the discretionary expenses are the ones that you could cut if your financial situation becomes bleak.

To facilitate discussions, here is a hypothetical annual retirement budget:

(1) house (paid off, tax + insurance) $10,000
(2) car (one, tax + insurance + new car funding) $5,000
(3) healthcare (insurance + co-pay) $20,000
(4) daily expenses (groceries + gas + clothes + etc.) $8,500
(5) house maintenance (repair + lawn care) $5,000
(5) leisure (travel + entertainment) $15,000
(6) utilities (water + electricity + phone + internet) $4,500
(7) income tax (federal + state) $12,000
---------------------------------------------------------------------------------------
Total: $80,000

At the first glance, it seems that only the leisure item is discretionary, everything else is essential. But if we want to travel to see our children, then it becomes essential. House insurance and tax are essential, but if we can downsize in a real bleak situation, then we may cut that expense by a half.

So when you make your retirement budget, what are the discretionary items and how do you decide them?

(P.S. I would like my fixed income and social security part to cover my essential expenses).
I agree that these seem to be fairly reasonable of what is essential and what is not.

For health care, most of that should be past 65, when you have medicare. You do pay for medicare, and you have copays.
I am estimating $5200/person/yr, so $10.4K/yr. when both of us are alive, $5.2K after that.

In Utilities, did you forget heating, or is your heat electric?
For me, water/sewer/electricity would be about $1,000/yr. , which does not include hot water and heat which are natural gas.
Heating runs another $1000/yr for me.

MikeG62
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by MikeG62 » Mon Oct 07, 2019 5:39 pm

OP, this post from Michael Kitces may provide additional food for thought...

https://www.kitces.com/blog/retirement- ... ve-bridge/

An excerpt from the article:

“In essence, separating “essential” vs. “discretionary” expenses by looking at categories of spending doesn’t necessarily work. Instead, the better approach is perhaps to segment spending within each category into the “Core” expenses that form the nucleus of the household’s lifestyle, from the truly discretionary (and more easily adaptable) expenses within each category (from the upscale restaurants to the designer clothes). In other words, there’s a potential layer of Core vs. Adaptive expenses in every spending category.”
Real Knowledge Comes Only From Experience

drawpoker
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by drawpoker » Mon Oct 07, 2019 5:47 pm

At first I thought these projections were for a single. But I see OP references the pronoun "we" in several places, so now I have to assume this is a couple :?:

$8,500 a year for "groceries, gasoline and clothes" works out to $708 a month. Even if you spend only $100 of that on gas for the car, and nothing on clothes, that leaves just barely $600 a month for groceries. For the 2 of you.

Does that seem realistic to you?

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FrugalInvestor
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by FrugalInvestor » Mon Oct 07, 2019 5:54 pm

flyingaway wrote:
Mon Oct 07, 2019 1:32 pm
I am having some trouble in determining what are the essential and discretionary expenses in a retirement budget. I understand that the discretionary expenses are the ones that you could cut if your financial situation becomes bleak.

To facilitate discussions, here is a hypothetical annual retirement budget:

(1) house (paid off, tax + insurance) $10,000
(2) car (one, tax + insurance + new car funding) $5,000
(3) healthcare (insurance + co-pay) $20,000
(4) daily expenses (groceries + gas + clothes + etc.) $8,500
(5) house maintenance (repair + lawn care) $5,000
(5) leisure (travel + entertainment) $15,000
(6) utilities (water + electricity + phone + internet) $4,500
(7) income tax (federal + state) $12,000
---------------------------------------------------------------------------------------
Total: $80,000
It's not simply either/or. I would say that all the items I have bolded in your list above have at least some discretionary component. If they can't be eliminated they can at least be reduced or deferred to some degree and for some period of time.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

bhsince87
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by bhsince87 » Mon Oct 07, 2019 5:59 pm

drawpoker wrote:
Mon Oct 07, 2019 5:47 pm
At first I thought these projections were for a single. But I see OP references the pronoun "we" in several places, so now I have to assume this is a couple :?:

$8,500 a year for "groceries, gasoline and clothes" works out to $708 a month. Even if you spend only $100 of that on gas for the car, and nothing on clothes, that leaves just barely $600 a month for groceries. For the 2 of you.

Does that seem realistic to you?
DW and I have been spending less than $400 per month on food for many years. And we eat very well.

Of course, that doesn't count dining out, which is only occasional at this point. I file eating out as "entertainment".
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

rich126
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by rich126 » Mon Oct 07, 2019 6:13 pm

bhsince87 wrote:
Mon Oct 07, 2019 5:59 pm
drawpoker wrote:
Mon Oct 07, 2019 5:47 pm
At first I thought these projections were for a single. But I see OP references the pronoun "we" in several places, so now I have to assume this is a couple :?:

$8,500 a year for "groceries, gasoline and clothes" works out to $708 a month. Even if you spend only $100 of that on gas for the car, and nothing on clothes, that leaves just barely $600 a month for groceries. For the 2 of you.

Does that seem realistic to you?
DW and I have been spending less than $400 per month on food for many years. And we eat very well.

Of course, that doesn't count dining out, which is only occasional at this point. I file eating out as "entertainment".
I'd agree that $600 a month on groceries for 2 people seems high if anything, especially if it only includes groceries and not stuff like eating out. I probably spend about $50 a week for one person. Gas wise I have an easy commute and only fill up the gas tank once every two weeks for about $35. Everyone is different. I'm not a steak or expensive eater (at least not at home).

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by dodecahedron » Mon Oct 07, 2019 6:19 pm

flyingaway wrote:
Mon Oct 07, 2019 1:32 pm
I am having some trouble in determining what are the essential and discretionary expenses in a retirement budget. I understand that the discretionary expenses are the ones that you could cut if your financial situation becomes bleak.

To facilitate discussions, here is a hypothetical annual retirement budget:

(1) house (paid off, tax + insurance) $10,000
(2) car (one, tax + insurance + new car funding) $5,000
(3) healthcare (insurance + co-pay) $20,000
(4) daily expenses (groceries + gas + clothes + etc.) $8,500
(5) house maintenance (repair + lawn care) $5,000
(5) leisure (travel + entertainment) $15,000
(6) utilities (water + electricity + phone + internet) $4,500
(7) income tax (federal + state) $12,000
---------------------------------------------------------------------------------------
Total: $80,000

At the first glance, it seems that only the leisure item is discretionary, everything else is essential. But if we want to travel to see our children, then it becomes essential. House insurance and tax are essential, but if we can downsize in a real bleak situation, then we may cut that expense by a half.

So when you make your retirement budget, what are the discretionary items and how do you decide them?
Everything on your list looks like it has a discretionary element to me. As you mentioned housing could be reduced by downsizing, which could also reduce house maintenance and utilities. Even without downsizing, I have drastically reduced my electric usage with various conservation measures. One car could become less than one car (occasional ridesharing, inexpensive grocery delivery services, public transit)--many older folks need to do this anyway because of health conditions that make it impractical to drive. Your income tax number looks awfully high to me if you are MFJ (¨we¨) unless you live in a very high tax state with no break for retirement income, in which case income tax is discretionary (you could move to a lower tax state.) Travel could maybe be reduced by moving closer to your kids. Your health care number looks very high if you are Medicare eligible, unless you have very high dental bills or LTC insurance premiums. Daily expenses could go down (if you got rid of the car, gas would disappear or you could just drive it less to reduce gas usage (as I try to do anyway for environmental reasons); clothing needs other than replacing worn socks and underwear are pretty discretionary (I also try to do reduce my purchases of new clothes and new ¨stuff¨ in general for environmental reasons); food costs could be reduced by careful menu planning and shopping judiciously.

drawpoker
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by drawpoker » Mon Oct 07, 2019 6:23 pm

rich126 wrote:
Mon Oct 07, 2019 6:13 pm
I'd agree that $600 a month on groceries for 2 people seems high if anything......
Oh, dear. :shock: Funny how things can be taken so differently :oops:

I meant $600 a month for 2 was on the low side!

After all, besides food, the catch-all term "groceries" also must include the other "stuff", toilet paper, paper towels, dish soap, the usual other household cleaning supplies. It must since those are not on the list anywhere else. Which brings the allotted amount for actual food even skimpier :(

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flyingaway
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by flyingaway » Mon Oct 07, 2019 6:44 pm

drawpoker wrote:
Mon Oct 07, 2019 5:47 pm
At first I thought these projections were for a single. But I see OP references the pronoun "we" in several places, so now I have to assume this is a couple :?:

$8,500 a year for "groceries, gasoline and clothes" works out to $708 a month. Even if you spend only $100 of that on gas for the car, and nothing on clothes, that leaves just barely $600 a month for groceries. For the 2 of you.

Does that seem realistic to you?
Note that this is a hypothetical retirement budget, but it mimics our current spending.
We do not eat out locally very often. We eat at restaurants on vacations.

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flyingaway
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by flyingaway » Mon Oct 07, 2019 6:56 pm

dodecahedron wrote:
Mon Oct 07, 2019 6:19 pm

Everything on your list looks like it has a discretionary element to me. As you mentioned housing could be reduced by downsizing, which could also reduce house maintenance and utilities. Even without downsizing, I have drastically reduced my electric usage with various conservation measures. One car could become less than one car (occasional ridesharing, inexpensive grocery delivery services, public transit)--many older folks need to do this anyway because of health conditions that make it impractical to drive. Your income tax number looks awfully high to me if you are MFJ (¨we¨) unless you live in a very high tax state with no break for retirement income, in which case income tax is discretionary (you could move to a lower tax state.) Travel could maybe be reduced by moving closer to your kids. Your health care number looks very high if you are Medicare eligible, unless you have very high dental bills or LTC insurance premiums. Daily expenses could go down (if you got rid of the car, gas would disappear or you could just drive it less to reduce gas usage (as I try to do anyway for environmental reasons); clothing needs other than replacing worn socks and underwear are pretty discretionary (I also try to do reduce my purchases of new clothes and new ¨stuff¨ in general for environmental reasons); food costs could be reduced by careful menu planning and shopping judiciously.
I would still like to have a rough number that I cannot go below. If everything became flexible, eating rice and beans and living under a bridge could become an option.
Or maybe I could set a number that is a half of what my realistic retirement budget as the essential retirement budget number.

KlangFool
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by KlangFool » Mon Oct 07, 2019 7:03 pm

OP,

How do you pay 12K in income taxes with 80K of expenses (including the taxes)?

KlangFool

delamer
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by delamer » Mon Oct 07, 2019 7:10 pm

KlangFool wrote:
Mon Oct 07, 2019 7:03 pm
OP,

How do you pay 12K in income taxes with 80K of expenses (including the taxes)?

KlangFool
It’s possible in some states.

You have to withdraw the 80K, to live off 68K.

trueblueky
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by trueblueky » Mon Oct 07, 2019 7:19 pm

Details matter:

Golf -- The Old Course? club membership? twice a year at Clayton Municipal?
Theater -- West End? Broadway? community theater season? Clayton Jr High?
Concert -- NY Philharmonic? Ryman Auditorium? Clayton HS band?
Sports -- Super Bowl? Alma Mater homecoming? Clayton Little League?
Dining out -- Le Bernardin? Ruth's Chris? Outback? Food truck?

So, if I told you we go to the theater ten times a year, see 3-4 baseball games a year, and eat out a couple of times a week, what would you budget? Only you know what that would entail for you.

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flyingaway
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by flyingaway » Mon Oct 07, 2019 7:29 pm

KlangFool wrote:
Mon Oct 07, 2019 7:03 pm
OP,

How do you pay 12K in income taxes with 80K of expenses (including the taxes)?

KlangFool
I said this is just a hypothetical retirement budget. Because I want I round number $80,000.

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flyingaway
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by flyingaway » Mon Oct 07, 2019 7:30 pm

trueblueky wrote:
Mon Oct 07, 2019 7:19 pm
Details matter:

Golf -- The Old Course? club membership? twice a year at Clayton Municipal?
Theater -- West End? Broadway? community theater season? Clayton Jr High?
Concert -- NY Philharmonic? Ryman Auditorium? Clayton HS band?
Sports -- Super Bowl? Alma Mater homecoming? Clayton Little League?
Dining out -- Le Bernardin? Ruth's Chris? Outback? Food truck?

So, if I told you we go to the theater ten times a year, see 3-4 baseball games a year, and eat out a couple of times a week, what would you budget? Only you know what that would entail for you.
These costs are almost zero for us.

drawpoker
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by drawpoker » Mon Oct 07, 2019 7:39 pm

Why even waste time trying to draw up a budget? Budgets are supposed to be for people who either don't manage money very well, or, have had some bad luck, faced unexpected high expenses and are in over their heads. So they go to some free financial counseling center and the worker throws up their hands and says you need to draw up a budget and stick to it

Wouldn't it be a heck of a lot easier, and free up a whole lot of that valuable leisure time, just to forget "budget" and stick with good old-fashioned withdrawal rate formula? Whether you pick 2%, 3%, 4% or some other number, when you realize you are getting close to that in your spending for the year, you just dial back on a few things. Works for me :mrgreen:

btw, just where did you find that hypothetical chart that you say pretty much mirrors your own? They are listing only $5,000 ($416 a month) for "house maintenance, repair & lawn care". #5 on the list. It must be a pretty high-end house if the insurance and taxes come to $10,000 a year. That $416 would just cover grass cutting around here, leaving nothing for actual repairs and maintenance of the house itself. Seems strange to me. But what do I know..... :?

delamer
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by delamer » Mon Oct 07, 2019 7:47 pm

drawpoker wrote:
Mon Oct 07, 2019 7:39 pm
Why even waste time trying to draw up a budget? Budgets are supposed to be for people who either don't manage money very well, or, have had some bad luck, faced unexpected high expenses and are in over their heads. So they go to some free financial counseling center and the worker throws up their hands and says you need to draw up a budget and stick to it

Wouldn't it be a heck of a lot easier, and free up a whole lot of that valuable leisure time, just to forget "budget" and stick with good old-fashioned withdrawal rate formula? Whether you pick 2%, 3%, 4% or some other number, when you realize you are getting close to that in your spending for the year, you just dial back on a few things. Works for me :mrgreen:

btw, just where did you find that hypothetical chart that you say pretty much mirrors your own? They are listing only $5,000 ($416 a month) for "house maintenance, repair & lawn care". #5 on the list. It must be a pretty high-end house if the insurance and taxes come to $10,000 a year. That $416 would just cover grass cutting around here, leaving nothing for actual repairs and maintenance of the house itself. Seems strange to me. But what do I know..... :?
“budgets are supposed to be for”...

Maybe people who find them helpful? If you can’t be bothered that’s fine, but why would it matter to you what others do?

I spend about an hour a year setting up our budget and another hour per week updating the numbers. My leisure isn’t overly impacted.

And I know a lot more people who didn’t have a budget who got in financial trouble then I do people who chose to “waste time” doing a budget who got in financial trouble.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by dodecahedron » Mon Oct 07, 2019 7:53 pm

delamer wrote:
Mon Oct 07, 2019 7:10 pm
KlangFool wrote:
Mon Oct 07, 2019 7:03 pm
OP,

How do you pay 12K in income taxes with 80K of expenses (including the taxes)?

KlangFool
It’s possible in some states.

You have to withdraw the 80K, to live off 68K.
Please tell me in what state this would be true. I used NBER TaxSim to estimate taxes in the ¨usual suspect¨ high tax states. $12K for federal and state combined is too high in all of them.

Even if the couple has no taxable account and no Roth accounts, a typical retiree couple living on 80K would have an averqge of around 30K in SS and need to withdraw $50K from their traditional tax-deferred accounts. That yields a federal tax bill of $5,200.

In NY, the state tax bill is ZERO. (Yes, although notorious for taxes in general, NY is quite generous in treatment of retirement income. They don´t tax SS at all and the first $20K of pension or IRA distributions per person are exempt also. Standard deduction wipes out the rest of the taxable income.) In California, the state tax bill is $200. In CT, the state tax bill is $1,500. In NC, it is $1,800. In Hawaii (the worst, as far as I can tell), it is $2,200.

(All numbers above rounded to nearest hundred dollars. I am also assuming that both members of the couple are 65.)

Even if they are deferring SS and withdrawing the entire $80K as ordinary income, I can´t find any state where the total income tax (fed plus state) are $12K.

Of course, if they pay attention to livesoft´s advice, their tax bills can be much lower than TaxSim´s estimates listed above.
Last edited by dodecahedron on Mon Oct 07, 2019 7:55 pm, edited 1 time in total.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by Dottie57 » Mon Oct 07, 2019 7:53 pm

I think drawing up a budget gives you an idea of what you can spend in retirement. I did the exercise before retiring so I could know If I had enough to keep up the same life style.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by delamer » Mon Oct 07, 2019 8:03 pm

dodecahedron wrote:
Mon Oct 07, 2019 7:53 pm
delamer wrote:
Mon Oct 07, 2019 7:10 pm
KlangFool wrote:
Mon Oct 07, 2019 7:03 pm
OP,

How do you pay 12K in income taxes with 80K of expenses (including the taxes)?

KlangFool
It’s possible in some states.

You have to withdraw the 80K, to live off 68K.
Please tell me in what state this would be true. I used NBER TaxSim to estimate taxes in the ¨usual suspect¨ high tax states. $12K for federal and state combined is too high in all of them.

Even if the couple has no taxable account and no Roth accounts, a typical retiree couple living on 80K would have an averqge of around 30K in SS and need to withdraw $50K from their traditional tax-deferred accounts. That yields a federal tax bill of $5,200.

In NY, the state tax bill is ZERO. (Yes, although notorious for taxes in general, NY is quite generous in treatment of retirement income. They don´t tax SS at all and the first $20K of pension or IRA distributions per person are exempt also. Standard deduction wipes out the rest of the taxable income.) In California, the state tax bill is $200. In CT, the state tax bill is $1,500. In NC, it is $1,800. In Hawaii (the worst, as far as I can tell), it is $2,200.

(All numbers above rounded to nearest hundred dollars. I am also assuming that both members of the couple are 65.)

Even if they are deferring SS and withdrawing the entire $80K as ordinary income, I can´t find any state where the total income tax (fed plus state) are $12K.

Of course, if they pay attention to livesoft´s advice, their tax bills can be much lower than TaxSim´s estimates listed above.
Interesting.

I was thinking of all ordinary income, both spouses under age 65 and including all state/local taxes.

Does that change the result?

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by dodecahedron » Mon Oct 07, 2019 8:15 pm

delamer wrote:
Mon Oct 07, 2019 8:03 pm
Interesting.

I was thinking of all ordinary income, both spouses under age 65 and including all state/local taxes.

Does that change the result?
I made them age 60 and made all $80K ordinary income (distributions from tax deferred account). Their federal tax goes to $6,300. Their NY tax goes to $3,400. So still below $10K total. Even in Hawaii, which seems to be the worst, total is below $11K.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by delamer » Mon Oct 07, 2019 8:22 pm

dodecahedron wrote:
Mon Oct 07, 2019 8:15 pm
delamer wrote:
Mon Oct 07, 2019 8:03 pm
Interesting.

I was thinking of all ordinary income, both spouses under age 65 and including all state/local taxes.

Does that change the result?
I made them age 60 and made all $80K ordinary income (distributions from tax deferred account). Their federal tax goes to $6,300. Their NY tax goes to $3,400. So still below $10K total. Even in Hawaii, which seems to be the worst, total is below $11K.
Well, I’d argue that below $11K isn’t far from $12K, but I’ll concede your point.

BTW, here’s info on local areas with income taxes: https://www.thebalance.com/cities-that- ... es-3193246

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by AlohaJoe » Mon Oct 07, 2019 8:31 pm

flyingaway wrote:
Mon Oct 07, 2019 1:32 pm

House insurance and tax are essential, but if we can downsize in a real bleak situation, then we may cut that expense by a half.

So when you make your retirement budget, what are the discretionary items and how do you decide them?
Virtually none of the things you list are "essential", as you yourself note. They are just "wants". There is no black & white when it comes to spending. Sure, we all need a place to live. But living in that house in that neighborhood, which costs $10,000 a year, isn't "essential" in any normal sense of the word. Rich retirees use the word "essential" to makes their "wants" seem less selfish. "It isn't that I want to live like this, it is just essential." Just embrace your wants & desires instead of cloaking them in the language of "essential". After all, tons of retirees end up selling their houses and moving to a retirement condo with totally different expenses.

You could get a roommate, switch to vegetarian, stop driving a car, cancel your TV subscription, etc, etc. Lots of people in straightened circumstances do all kinds of things like that.

Anyway, I am retired and the way I think about my spending is a gradient rather than a black-or-white "essential/discretionary" dichotomy. What level of spending do I consider "status quo"? What level of spending do I consider "splurging"? What level of spending do I consider "moderate belt tightening"? If there's a 70% crash what kinds of changes in our lifestyle would be easy to make? Hard to make? And each category has slightly different knobs & levers. We could cut out all restaurant eating pretty quickly. We could take fewer international vacations. We could keep a clunker vehicle many years longer than expected. We could reduce the amount of meat we eat. We could fire our maid. We could pause our existing hobbies and look for new ones.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by dodecahedron » Mon Oct 07, 2019 8:45 pm

delamer wrote:
Mon Oct 07, 2019 8:22 pm
BTW, here’s info on local areas with income taxes: https://www.thebalance.com/cities-that- ... es-3193246
I am not familiar with the details of city taxes in all the states, but I will note that the cities in NY that levy local taxes (NYC and Yonkers) would also be charging ZERO taxes to my ¨typical¨ retiree couple (the one getting $30K in SS plus $50K in distributions from retirement accounts) for exactly the same reason that their NY state taxes would be zero.

San Francisco´s city income tax is only on earned income according to your link, so it would also be zero if the couple is no longer working.

A big surprise to me (I learned this about 15 years ago when I started supervising a VITA site) is the significant breaks that state & local governments generally give to senior citizens. It was not really on my radar screen before then.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by Small Savanna » Mon Oct 07, 2019 10:01 pm

Another way to look at this - we all get used to a certain lifestyle, and even though a lot of it isn't essential, we're in the habit of having certain things. So if you stop at Starbucks every day now, how would it feel about giving that up?

As a first step, take a detailed look at what you're spending now, before retirement. Go over your bank statements and credit card statements for the last year or two, and add up all consumption. If you have less than that to spend in retirement, it will feel like a pay cut, and will be at least slightly painful.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by AerialWombat » Mon Oct 07, 2019 10:06 pm

AlohaJoe wrote:
Mon Oct 07, 2019 8:31 pm
Virtually none of the things you list are "essential", as you yourself note. They are just "wants". There is no black & white when it comes to spending. Sure, we all need a place to live. But living in that house in that neighborhood, which costs $10,000 a year, isn't "essential" in any normal sense of the word. Rich retirees use the word "essential" to makes their "wants" seem less selfish. "It isn't that I want to live like this, it is just essential." Just embrace your wants & desires instead of cloaking them in the language of "essential". After all, tons of retirees end up selling their houses and moving to a retirement condo with totally different expenses.
+1 to this. One person's "essential" is another person's pure luxury. It sort of amuses me that threads on this general topic are so common on this forum.
flyingaway wrote:
Mon Oct 07, 2019 1:32 pm
(1) house (paid off, tax + insurance) $10,000
(2) car (one, tax + insurance + new car funding) $5,000
(3) healthcare (insurance + co-pay) $20,000
(4) daily expenses (groceries + gas + clothes + etc.) $8,500
(5) house maintenance (repair + lawn care) $5,000
(5) leisure (travel + entertainment) $15,000
(6) utilities (water + electricity + phone + internet) $4,500
(7) income tax (federal + state) $12,000
---------------------------------------------------------------------------------------
Total: $80,000
For example, I know quite a number of retirees whose expenses for 1, 3, 5, the other 5, and 7 are all ZERO, and 6 is very miniscule. Here is one month for one such person:

Gas: $150
Vehicle Insurance: $30
Vehicle Registration: $10
CoachNet Roadide Assistance: $21
Propane: $15
Groceries: $300
Laundry/Soap/Razors/etc: $40
Pet Food: $30
Cell phone: $10
Medicare: $135
----------------------
Total: $741

Social Security check: Just over $1,100. No pension, no "side hustle".

Now I realize that this isn't the MMM forum, nor is this a #VanLife YouTube channel, but this budget is for one person and a dog that I know in real life. This person has chosen this lifestyle (it was not thrust upon them). I don't know the exact amount of his nest egg, but after sale of his old home plus a small IRA, I'd guess he has $200k-$300k stashed away, so he is far from destitute. The inevitable vehicle repairs are not a problem.

Boondocking on BLM and National Forest land in a Class B RV isn't the life that most Bogleheads would probably choose, but it's a perfectly acceptable life to live, and only requires $9,000 per year to make happen.

I only point out this one extreme to illustrate that most of the OP's "essentials" are, in fact, optional luxuries.

Further example: I'm single, eat out 1-2 meals per day, drink (too much) good Scotch, have an iPhone, fastest Internet I can get, a new construction 3 bedroom, 3 bath home with a mortgage, etc... and I only spend $2,800 per month (including mortgage, taxes, insurance), and this is living high on the hog by my own standards.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by bhsince87 » Mon Oct 07, 2019 11:18 pm

AerialWombat wrote:
Mon Oct 07, 2019 10:06 pm
AlohaJoe wrote:
Mon Oct 07, 2019 8:31 pm
Virtually none of the things you list are "essential", as you yourself note. They are just "wants". There is no black & white when it comes to spending. Sure, we all need a place to live. But living in that house in that neighborhood, which costs $10,000 a year, isn't "essential" in any normal sense of the word. Rich retirees use the word "essential" to makes their "wants" seem less selfish. "It isn't that I want to live like this, it is just essential." Just embrace your wants & desires instead of cloaking them in the language of "essential". After all, tons of retirees end up selling their houses and moving to a retirement condo with totally different expenses.
+1 to this. One person's "essential" is another person's pure luxury. It sort of amuses me that threads on this general topic are so common on this forum.
flyingaway wrote:
Mon Oct 07, 2019 1:32 pm
(1) house (paid off, tax + insurance) $10,000
(2) car (one, tax + insurance + new car funding) $5,000
(3) healthcare (insurance + co-pay) $20,000
(4) daily expenses (groceries + gas + clothes + etc.) $8,500
(5) house maintenance (repair + lawn care) $5,000
(5) leisure (travel + entertainment) $15,000
(6) utilities (water + electricity + phone + internet) $4,500
(7) income tax (federal + state) $12,000
---------------------------------------------------------------------------------------
Total: $80,000
For example, I know quite a number of retirees whose expenses for 1, 3, 5, the other 5, and 7 are all ZERO, and 6 is very miniscule. Here is one month for one such person:

Gas: $150
Vehicle Insurance: $30
Vehicle Registration: $10
CoachNet Roadide Assistance: $21
Propane: $15
Groceries: $300
Laundry/Soap/Razors/etc: $40
Pet Food: $30
Cell phone: $10
Medicare: $135
----------------------
Total: $741

Social Security check: Just over $1,100. No pension, no "side hustle".

Now I realize that this isn't the MMM forum, nor is this a #VanLife YouTube channel, but this budget is for one person and a dog that I know in real life. This person has chosen this lifestyle (it was not thrust upon them). I don't know the exact amount of his nest egg, but after sale of his old home plus a small IRA, I'd guess he has $200k-$300k stashed away, so he is far from destitute. The inevitable vehicle repairs are not a problem.

Boondocking on BLM and National Forest land in a Class B RV isn't the life that most Bogleheads would probably choose, but it's a perfectly acceptable life to live, and only requires $9,000 per year to make happen.

I only point out this one extreme to illustrate that most of the OP's "essentials" are, in fact, optional luxuries.

Further example: I'm single, eat out 1-2 meals per day, drink (too much) good Scotch, have an iPhone, fastest Internet I can get, a new construction 3 bedroom, 3 bath home with a mortgage, etc... and I only spend $2,800 per month (including mortgage, taxes, insurance), and this is living high on the hog by my own standards.
It would be nice if you would use yearly numbers like the OP did.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by RetiredCSProf » Tue Oct 08, 2019 12:38 am

I asked a similar question on the Forum a few weeks ago. My question was prompted by an investment review with TRowe advisor on whether I would outlast my savings in retirement. I was guessing that 25% of my expenses are discretionary, but I've yet to confirm it.

One response I found helpful on this forum is to consider that each category has some portion of essential expenses and some portion that is discretionary; e.g., food vs the extra cost for organic. Also, it's a personal choice. For me, having a gym membership is essential but I consider paying for a personal trainer at the gym to be discretionary.

I considered trying to calculate my essential expenses by having a "bare essentials" month, where I would spend only what was absolutely necessary. The problem with that approach is that:
  • Some expenses are paid less frequently (auto insurance, property taxes)
  • I may be delaying and not deleting expenses (e.g., waiting an extra month to get the piano tuned)
When I met with the TRowe advisor again, I brought up my dilemma with essential vs discretionary expenses. We went over my budget and the one item that he thought looked out-of-whack is the monthly allowance I gift to my son who is in college. I consider the gift essential (regardless of whether my son spends or saves his allowance) but others may see the gift as discretionary.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by flyingaway » Tue Oct 08, 2019 8:09 am

RetiredCSProf wrote:
Tue Oct 08, 2019 12:38 am
I asked a similar question on the Forum a few weeks ago. My question was prompted by an investment review with TRowe advisor on whether I would outlast my savings in retirement. I was guessing that 25% of my expenses are discretionary, but I've yet to confirm it.

One response I found helpful on this forum is to consider that each category has some portion of essential expenses and some portion that is discretionary; e.g., food vs the extra cost for organic. Also, it's a personal choice. For me, having a gym membership is essential but I consider paying for a personal trainer at the gym to be discretionary.

I considered trying to calculate my essential expenses by having a "bare essentials" month, where I would spend only what was absolutely necessary. The problem with that approach is that:
  • Some expenses are paid less frequently (auto insurance, property taxes)
  • I may be delaying and not deleting expenses (e.g., waiting an extra month to get the piano tuned)
When I met with the TRowe advisor again, I brought up my dilemma with essential vs discretionary expenses. We went over my budget and the one item that he thought looked out-of-whack is the monthly allowance I gift to my son who is in college. I consider the gift essential (regardless of whether my son spends or saves his allowance) but others may see the gift as discretionary.
I want to distinguish essential and discretionary expenses because I am considering to invest differently for each part. I don't know if this is the so-called liability matching portfolio.

In theory, our $80K retirement budget can be reduced by 25% with house downsizing (with corresponding lifestyle reduction). We could even sell the house and live in an apartment (with corresponding lifestyle reduction), which seems to be a 50% reduction from my original budget.

Topic Author
flyingaway
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by flyingaway » Tue Oct 08, 2019 8:12 am

AerialWombat wrote:
Mon Oct 07, 2019 10:06 pm
AlohaJoe wrote:
Mon Oct 07, 2019 8:31 pm
Virtually none of the things you list are "essential", as you yourself note. They are just "wants". There is no black & white when it comes to spending. Sure, we all need a place to live. But living in that house in that neighborhood, which costs $10,000 a year, isn't "essential" in any normal sense of the word. Rich retirees use the word "essential" to makes their "wants" seem less selfish. "It isn't that I want to live like this, it is just essential." Just embrace your wants & desires instead of cloaking them in the language of "essential". After all, tons of retirees end up selling their houses and moving to a retirement condo with totally different expenses.
For example, I know quite a number of retirees whose expenses for 1, 3, 5, the other 5, and 7 are all ZERO, and 6 is very miniscule. Here is one month for one such person:

Gas: $150
Vehicle Insurance: $30
Vehicle Registration: $10
CoachNet Roadide Assistance: $21
Propane: $15
Groceries: $300
Laundry/Soap/Razors/etc: $40
Pet Food: $30
Cell phone: $10
Medicare: $135
----------------------
Total: $741

Social Security check: Just over $1,100. No pension, no "side hustle".

Now I realize that this isn't the MMM forum, nor is this a #VanLife YouTube channel, but this budget is for one person and a dog that I know in real life. This person has chosen this lifestyle (it was not thrust upon them). I don't know the exact amount of his nest egg, but after sale of his old home plus a small IRA, I'd guess he has $200k-$300k stashed away, so he is far from destitute. The inevitable vehicle repairs are not a problem.

Boondocking on BLM and National Forest land in a Class B RV isn't the life that most Bogleheads would probably choose, but it's a perfectly acceptable life to live, and only requires $9,000 per year to make happen.

I only point out this one extreme to illustrate that most of the OP's "essentials" are, in fact, optional luxuries.

Further example: I'm single, eat out 1-2 meals per day, drink (too much) good Scotch, have an iPhone, fastest Internet I can get, a new construction 3 bedroom, 3 bath home with a mortgage, etc... and I only spend $2,800 per month (including mortgage, taxes, insurance), and this is living high on the hog by my own standards.
So, do you have a separate internal considerations for essential and discretionary expenses? Do you have a plan to reduce spending if your portfolio is in trouble?

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by KlangFool » Tue Oct 08, 2019 8:16 am

flyingaway wrote:
Tue Oct 08, 2019 8:09 am

I want to distinguish essential and discretionary expenses because I am considering to invest differently for each part. I don't know if this is the so-called liability matching portfolio.

In theory, our $80K retirement budget can be reduced by 25% with house downsizing (with corresponding lifestyle reduction). We could even sell the house and live in an apartment (with corresponding lifestyle reduction), which seems to be a 50% reduction from my original budget.
flyingaway,

So, does that only 40K of your budget is essential? Only you can answer that question. Is it essential for you to stay at the current house?

This is all subjective.

KlangFool

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by flyingaway » Tue Oct 08, 2019 8:19 am

AlohaJoe wrote:
Mon Oct 07, 2019 8:31 pm

Virtually none of the things you list are "essential", as you yourself note. They are just "wants". There is no black & white when it comes to spending. Sure, we all need a place to live. But living in that house in that neighborhood, which costs $10,000 a year, isn't "essential" in any normal sense of the word. Rich retirees use the word "essential" to makes their "wants" seem less selfish. "It isn't that I want to live like this, it is just essential." Just embrace your wants & desires instead of cloaking them in the language of "essential". After all, tons of retirees end up selling their houses and moving to a retirement condo with totally different expenses.

You could get a roommate, switch to vegetarian, stop driving a car, cancel your TV subscription, etc, etc. Lots of people in straightened circumstances do all kinds of things like that.

Anyway, I am retired and the way I think about my spending is a gradient rather than a black-or-white "essential/discretionary" dichotomy. What level of spending do I consider "status quo"? What level of spending do I consider "splurging"? What level of spending do I consider "moderate belt tightening"? If there's a 70% crash what kinds of changes in our lifestyle would be easy to make? Hard to make? And each category has slightly different knobs & levers. We could cut out all restaurant eating pretty quickly. We could take fewer international vacations. We could keep a clunker vehicle many years longer than expected. We could reduce the amount of meat we eat. We could fire our maid. We could pause our existing hobbies and look for new ones.
I am only semi-retired and in serious consideration to get out entirely. My problem is that I do not have a huge buffer to withstand a huge downturn without affecting the quality of my lifestyle. So I want to consider what could be sacrificed in case of needing. But I am mainly seeking other people's opinion, specially those who are retired.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by Shallowpockets » Tue Oct 08, 2019 8:22 am

OP. Why are you fishing around based on a hypothetical budget? Surely we all have parts of our spending we could cut or eliminate if we had to. Do you have to? And when and if you do, you will most certainly see your budget in a clearer light. The trim will be incremental as the time of your finance deficit goes on. A little here, a little there, then a whole category.
If you don't have to cut and your finances are such that you are OK now, live your life.
When it moves beyond the hypothetical, then come back here and state your case.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by HomeStretch » Tue Oct 08, 2019 8:23 am

As mentioned already, essential and discretionary expenses may have an element of both (i.e., groceries are essential but amount spent can be reduced, if necessary).

Rather than categorizing your $80k retirement budget between essential and discretionary, consider calculating your “pared down” retirement budget. For example, you mentioned downsizing your house.

Once you know your pared down budget and retirement income (like SS):

1. You can, as you mention, invest differently for the pared down budget net of retirement income over your life expectancy versus the remainder of your portfolio.

2. Alternatively, set your asset allocation such that the dollar amount of the “safer” fixed income portion covers your pared down budget net of retirement income for xx years. The xx years can be anywhere from 10 years to the # of years life expectancy remaining. Your portfolio remainder would be higher risk investments like equities.

Suggest you keep a minimum of 30% in equities to allow your portfolio keep up with inflation.

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Re: What are the essential and discretionary expenses in a retirement budget?

Post by dbr » Tue Oct 08, 2019 8:28 am

Keep in mind that the backstory to all of this is presumably the desire to set up a liability matching portfolio approach to asset allocation based on matching the essential expenses with an LMP and the discretionary one's with a "risk" portfolio. At least I have to imagine that is where this is coming from. I don't know what else would generate exactly this question using those words.

I personally think one of the obvious difficulties with the LMP + risk approach is the ambiguity of answering exactly the question the OP is asking.

But again, if one wants an LMP + risk asset allocation one can set the LMP and that defines what is essential, rather than the other way around. What is left in your assets defines what is discretionary. Note that the ultimate LMP is just the annuitized income streams a person has from Social Security, pensions, and annuities.
Last edited by dbr on Tue Oct 08, 2019 8:29 am, edited 1 time in total.

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