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

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

Post by SQRT » Tue Oct 08, 2019 8:29 am

Essential vs discretionary is a relative term that will change for each individual. Each individual could rank his expenditures along a continuum from essential to discretionary. Trying to compare definitions between different people will be difficult. Obviously more agreement is possible at the extremes but in the middle we could (and will) argue all day.

The definition can change over time as well. In the short run the expenditures surrounding our snowbird house in Arizona are essential but if I had to or wanted to reduce these, I could sell the house. But it would take time.

A pretty personal thing that depends on personal objectives, personality, tastes, means,etc. Not sure why you would ask others (strangers) to help you define your definition?
Last edited by SQRT on Tue Oct 08, 2019 2:38 pm, edited 1 time in total.

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

Post by smitcat » Tue Oct 08, 2019 8:34 am

flyingaway wrote:
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.
"My problem is that I do not have a huge buffer to withstand a huge downturn without affecting the quality of my lifestyle."
Only you can determine which cost items can be reduced and how much they would affect your personal 'quality of life'.
Others cannot possibly define that for your situation - if anything it will confuse your specific situation.

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

Post by AlohaJoe » Tue Oct 08, 2019 8:50 am

flyingaway wrote:
Tue Oct 08, 2019 8:19 am
My problem is that I do not have a huge buffer to withstand a huge downturn without affecting the quality of my lifestyle.
The reality is that for most people, if they have enough money to build a liability-matching portfolio, they also have enough money to not build a liability-matching portfolio and simply withstand a huge downturn. I mean, a liability-matching portfolio for $80,000 a year costs something like $2.4 million. That's a 3.3% withdrawal rate.

There's no real way around needing lots of money if you want to remove all risk.

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

Post by dbr » Tue Oct 08, 2019 8:58 am

AlohaJoe wrote:
Tue Oct 08, 2019 8:50 am
flyingaway wrote:
Tue Oct 08, 2019 8:19 am
My problem is that I do not have a huge buffer to withstand a huge downturn without affecting the quality of my lifestyle.
The reality is that for most people, if they have enough money to build a liability-matching portfolio, they also have enough money to not build a liability-matching portfolio and simply withstand a huge downturn. I mean, a liability-matching portfolio for $80,000 a year costs something like $2.4 million. That's a 3.3% withdrawal rate.

There's no real way around needing lots of money if you want to remove all risk.
It is also true that the whole concept of a safe withdrawal rate is a withdrawal rate low enough to withstand a huge downturn already. It is built into the method. The OP may not actually know if he has enough money to sustain a huge downturn or not.

Flyingaway, what is your estimated withdrawal rate for you retirement? What in general do you want to do with the answer to your question?

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

Post by carolinaman » Tue Oct 08, 2019 9:14 am

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

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
Some expenses are highly variable from year to year, especially house maintenance and healthcare.

For example, I just spent $2800 for a septic tank repair that I had not planned for. When it has to be replaced, it will cost a lot more. I have a wooded lot and have spent more than $10,000 in recent years for removal of some very large dead or dying trees. HVAC and ductwork replacement was more than $10k a few years ago. A new french drain to remediate moisture issue cost a few thousand. And the list goes on. You may have years where these expenses are low and other years where they bust your budget.

Most of our medical and prescriptions are covered under Medicare and my employer's retirement medical plan. One area where we have had expenses and will likely have more is dental. Some dental work can get rather expensive and the dental plans I have seen are very limited.

It looks like you are budgeting for periodic car replacements which is good. However, you could hit with major repair bills for your car.

If you have exposure to any of the items I mentioned you may want to establish savings that will deal with these expensive and unplanned items.

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

Post by dbr » Tue Oct 08, 2019 9:21 am

carolinaman wrote:
Tue Oct 08, 2019 9:14 am
flyingaway wrote:
Mon Oct 07, 2019 1:32 pm

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
Some expenses are highly variable from year to year, especially house maintenance and healthcare.

For example, I just spent $2800 for a septic tank repair that I had not planned for. When it has to be replaced, it will cost a lot more. I have a wooded lot and have spent more than $10,000 in recent years for removal of some very large dead or dying trees. HVAC and ductwork replacement was more than $10k a few years ago. A new french drain to remediate moisture issue cost a few thousand. And the list goes on. You may have years where these expenses are low and other years where they bust your budget.

Most of our medical and prescriptions are covered under Medicare and my employer's retirement medical plan. One area where we have had expenses and will likely have more is dental. Some dental work can get rather expensive and the dental plans I have seen are very limited.

It looks like you are budgeting for periodic car replacements which is good. However, you could hit with major repair bills for your car.

If you have exposure to any of the items I mentioned you may want to establish savings that will deal with these expensive and unplanned items.
It is an excellent point that rather than think what is discretionary or not that a retirement budget should include a contingency allowance. Another tactic is to shock the plan with entry of a large unplanned cost some time in the future and see the effect. Large expenses to maintain property and surprisingly high dental expenses might be common issues. Another category of expenses people might have is helping family members. It is just something we do.

But all of this depends on the original balance of how much money there is compared to the spending plan. If that $80,000 is 2% of assets that is one extreme and if it is 5% of assets, that is another extreme.

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

Post by delamer » Tue Oct 08, 2019 10:08 am

dodecahedron wrote:
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.
In my state, if you are an early retiree (pre-65) and living off your tax-deferred accounts in order to delay Social Security benefits, you’ll be hit with high state/local income taxes. (Plus capital gains are taxed at the same rate as earned income, if you are selling assets in taxable accounts.)

Once you hit 65 and/or start Social Security, your taxable income will drop significantly.

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

Post by trueblueky » Tue Oct 08, 2019 10:36 am

Several mentions of housing costs being discretionary. Yes, but.

Once you own a house, you may be stuck with its costs far longer than you hoped or planned. Yes, you can move to a LCOL, downsize, live in a yurt. However, until you actually sell the former home, you have its expenses.

Been there. Done that.

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

Post by dcabler » Tue Oct 08, 2019 10:50 am

Broken Man 1999 wrote:
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 following it like businesses I've worked for, then you need to add one extra step. Lay off some of your family members to meet the budget. :D

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

Post by Broken Man 1999 » Tue Oct 08, 2019 11:02 am

dcabler wrote:
Tue Oct 08, 2019 10:50 am
Broken Man 1999 wrote:
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 following it like businesses I've worked for, then you need to add one extra step. Lay off some of your family members to meet the budget. :D
Yep, Klingons are always, always dangerous, no matter where they are found!

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

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

Post by mrgeeze » Tue Oct 08, 2019 11:07 am

20% of the annual budget on Healthcare.
The price of a new car every year.

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

Post by Admiral » Tue Oct 08, 2019 11:15 am

dbr wrote:
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.
This. Our two SS payments plus pension will cover 100% of our core expenses, if not more, from age 70. Our planning and current savings choices revolve around 1) retiring at 58/60 and covering the years before 70 when we only have the pension; and 2) significant discretionary outlays for travel/vacations etc and how those will impact the portfolio before age 70. We're about 8-10 years out, but looking at a 5% WR for a few years and then more like 2% post-70 (not counting presumed inherited assets).

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

Post by bhsince87 » Tue Oct 08, 2019 2:06 pm

mrgeeze wrote:
Tue Oct 08, 2019 11:07 am
20% of the annual budget on Healthcare.
The price of a new car every year.
It will be about 35% of the budget for us for the first 10+ years. And that's not counting dental and eyes.

If we can get below the ACA subsidy level, that drops to about 8%. So we will be doing everything possible to get down to that level!
"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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LilyFleur
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by LilyFleur » Tue Oct 08, 2019 2:10 pm

drawpoker wrote:
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.
Lots of us do not have landlines anymore, to save money.

When a woman without a driver's license ploughed into the back of my car last year, I relied heavily on my cell phone. After the police pushed my totaled vehicle to the side of the road. I called my insurance company. I googled the recommended repair shops that my insurance works with. I called rental car agencies. I took a look at the photos that the witnesses had texted me, along with the police officer, and those photos were influential as the officer wrote his report. Then I received a call from the police officer who found the woman up the road, as he was keeping me posted. I looked up directions to the repair facility as I sat in the tow truck, as the driver was not familiar with where we were going. As a single person, I cannot imagine not having a cell phone and I think my children would agree that it is important for my personal safety.

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

Post by LilyFleur » Tue Oct 08, 2019 2:12 pm

trueblueky wrote:
Tue Oct 08, 2019 10:36 am
Several mentions of housing costs being discretionary. Yes, but.

Once you own a house, you may be stuck with its costs far longer than you hoped or planned. Yes, you can move to a LCOL, downsize, live in a yurt. However, until you actually sell the former home, you have its expenses.

Been there. Done that.
And, as the plumber reminded me yesterday as I handed him my credit card, don't forget to budget for plumbing repairs for your home as it ages. Plumbing does not last forever.

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

Post by flyingaway » Tue Oct 08, 2019 10:00 pm

AlohaJoe wrote:
Tue Oct 08, 2019 8:50 am
flyingaway wrote:
Tue Oct 08, 2019 8:19 am
My problem is that I do not have a huge buffer to withstand a huge downturn without affecting the quality of my lifestyle.
The reality is that for most people, if they have enough money to build a liability-matching portfolio, they also have enough money to not build a liability-matching portfolio and simply withstand a huge downturn. I mean, a liability-matching portfolio for $80,000 a year costs something like $2.4 million. That's a 3.3% withdrawal rate.

There's no real way around needing lots of money if you want to remove all risk.
Thank you for the information. I want to have enough money (plus some buffer) before retiring. I just don't know what is enough.
It will be helpful, on the other hand, to know what is NOT enough, i.e., covering essential expenses.

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

Post by Admiral » Wed Oct 09, 2019 7:19 am

flyingaway wrote:
Tue Oct 08, 2019 10:00 pm
AlohaJoe wrote:
Tue Oct 08, 2019 8:50 am
flyingaway wrote:
Tue Oct 08, 2019 8:19 am
My problem is that I do not have a huge buffer to withstand a huge downturn without affecting the quality of my lifestyle.
The reality is that for most people, if they have enough money to build a liability-matching portfolio, they also have enough money to not build a liability-matching portfolio and simply withstand a huge downturn. I mean, a liability-matching portfolio for $80,000 a year costs something like $2.4 million. That's a 3.3% withdrawal rate.

There's no real way around needing lots of money if you want to remove all risk.
Thank you for the information. I want to have enough money (plus some buffer) before retiring. I just don't know what is enough.
It will be helpful, on the other hand, to know what is NOT enough, i.e., covering essential expenses.
Perhaps you posted it in a follow up and I missed it, but we could be more helpful if you posted not just your expenses but your complete financial picture (investments and retirement income streams).

Here's why:
Most (not all, but most) people who are able to amass a 7 figure nest egg will also receive at least 24k/year (and possibly as much as 36-44k) in social security payments. If married, x2. That SIGNIFICANTLY reduces the amount needed in the portfolio and the withdrawal rate. If one wanted to retire on 100k/year and core expenses were 60k of that, two SS payments could be 50k or more of that 60k of core costs.

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

Post by EnjoyIt » Wed Oct 09, 2019 10:18 am

Flyingaway,
As others have said, you have a lot of items on that list that are non-essential and also a mistake regarding your taxes.

The way I see it, if the economy falls on really tough times, you can easily cut back on travel and entertainment, restaurants, saving for a new car, and more than likely your health insurance expenses are not maxing out the deductible every year which I believe you are estimating into said budget. Once those are cut, your taxes would decrease substantially as well. I guesstimate your fixed, mandatory expenses are about $50k/yr which as the above poster showed would likely easily be covered by SS once you get there. Add in that medicare will cut your healthcare expenses a bit as well as your 7 figure savings, looks like you have a very comfortable retirement in your future with a very healthy safety net if the worst of the worst recession/depression in history comes around.

Congrats.

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

Post by drawpoker » Wed Oct 09, 2019 11:17 am

Admiral wrote:
Wed Oct 09, 2019 7:19 am

.....could be more helpful if you posted not just your expenses but your complete financial picture (investments and retirement income streams).
Also helpful would be his state of residence. To get a better handle on health insurance costs.

Unless he is domiciled in one of the Medicare hellholes - he and his spouse could pay for their Part B premiums plus Plan F (going in at age 65 intro rate) for each of them for a whole lot less than $20,000 a year. Then he can drop "co-pays" from his budget.

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

Post by AerialWombat » Wed Oct 09, 2019 11:32 am

trueblueky wrote:
Tue Oct 08, 2019 10:36 am
Once you own a house, you may be stuck with its costs far longer than you hoped or planned. Yes, you can move to a LCOL, downsize, live in a yurt. However, until you actually sell the former home, you have its expenses.
You can just walk away from the house. Give it back to the bank (deed in lieu of foreclosure). Not ideal, obviously, but it does rapidly eliminate the expenses.

Yurts are awesome.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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

Post by AerialWombat » Wed Oct 09, 2019 11:52 am

flyingaway wrote:
Tue Oct 08, 2019 8:12 am
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?
I do, yes. But my definition is likely vastly different than your definition, as several other posters have mentioned. For me, “essentials” relate to mere survival — literally, not dying from exposure or starvation. I’ve been homeless for extensive periods of time, so that experience reflects my viewpoint.

For example, traditional health insurance simply isn’t important to me. I can afford it now, but I don’t believe it to be necessary. I pay cash for the modest amount of healthcare services I choose to consume, and I belong to a health sharing ministry that would cover certain short-term acute needs. I also have a DNR and advance directives to not use heroic measures, will not fight chronic conditions, etc. This is a quality of life choice.

Few other Bogleheads would make such a choice, but I have. This is the “personal finance is personal” thing.

I would encourage you to take inventory of your current spending, then create at least two “tiers” of spending cuts you would be willing to make if your income was significantly cut. This will help you determine what is essential to you.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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willthrill81
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by willthrill81 » Wed Oct 09, 2019 11:54 am

flyingaway wrote:
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.
I believe this is a useful exercise.

You might tackle it this way: if your income were cut in half, what spending would/could you give up?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by drawpoker » Wed Oct 09, 2019 11:59 am

willthrill81 wrote:
Wed Oct 09, 2019 11:54 am

You might tackle it this way: if your income were cut in half, what spending would/could you give up?
Ouch. :shock:

That is not very likely, is it. You must play tackle for the Redskins. Or Dolphins. :P

A better approach would be - If the value of your portfolio was cut in half (like in 2008) what could/would you give up?

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

Post by randomguy » Wed Oct 09, 2019 12:14 pm

drawpoker wrote:
Wed Oct 09, 2019 11:59 am
willthrill81 wrote:
Wed Oct 09, 2019 11:54 am

You might tackle it this way: if your income were cut in half, what spending would/could you give up?
Ouch. :shock:

That is not very likely, is it. You must play tackle for the Redskins. Or Dolphins. :P

A better approach would be - If the value of your portfolio was cut in half (like in 2008) what could/would you give up?
If your portfolio was cut in half in 2008, you wouldn't have to cut anything. Anyone holding 100% stocks in retirement is saying they don't need income from their portfolio. Personally I would have had about a 25% loss and that is something that is expected. It is something to watch over the next 5-10 years but their is no need to react to short term market flucations.

In the end you will find a way to survive on what you have.

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

Post by willthrill81 » Wed Oct 09, 2019 12:26 pm

drawpoker wrote:
Wed Oct 09, 2019 11:59 am
willthrill81 wrote:
Wed Oct 09, 2019 11:54 am

You might tackle it this way: if your income were cut in half, what spending would/could you give up?
Ouch. :shock:

That is not very likely, is it. You must play tackle for the Redskins. Or Dolphins. :P

A better approach would be - If the value of your portfolio was cut in half (like in 2008) what could/would you give up?
I agree that it's not at all likely, but that's not the point. It would illustrate what is truly essential, and whatever isn't is, by definition, discretionary.

The more flexibility a retiree has in one's retirement spending (i.e. the lesser the percentage of one's spending that is essential), the less exposed the retiree is to sequence of returns risk and poor average returns.
Last edited by willthrill81 on Wed Oct 09, 2019 1:35 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by flyingaway » Wed Oct 09, 2019 1:22 pm

AerialWombat wrote:
Wed Oct 09, 2019 11:32 am
trueblueky wrote:
Tue Oct 08, 2019 10:36 am
Once you own a house, you may be stuck with its costs far longer than you hoped or planned. Yes, you can move to a LCOL, downsize, live in a yurt. However, until you actually sell the former home, you have its expenses.
You can just walk away from the house. Give it back to the bank (deed in lieu of foreclosure). Not ideal, obviously, but it does rapidly eliminate the expenses.

Yurts are awesome.
As I said in the Original Post, the house is paid off. It may be downsized or sold in case of real problems. That is a difference between essential and discretionary that I want to figure out.

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

Post by Admiral » Wed Oct 09, 2019 1:38 pm

flyingaway wrote:
Wed Oct 09, 2019 1:22 pm
AerialWombat wrote:
Wed Oct 09, 2019 11:32 am
trueblueky wrote:
Tue Oct 08, 2019 10:36 am
Once you own a house, you may be stuck with its costs far longer than you hoped or planned. Yes, you can move to a LCOL, downsize, live in a yurt. However, until you actually sell the former home, you have its expenses.
You can just walk away from the house. Give it back to the bank (deed in lieu of foreclosure). Not ideal, obviously, but it does rapidly eliminate the expenses.

Yurts are awesome.
As I said in the Original Post, the house is paid off. It may be downsized or sold in case of real problems. That is a difference between essential and discretionary that I want to figure out.
But no one can tell you what the right answer is. You might be amenable to selling your home and call your house "discretionary." I never would, so for me keeping it falls under "it's essential." For me, travel is essential, but I don't need a car. For you, travel might be discretionary but you might need a car where you live.

You see the problem?

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

Post by dbr » Wed Oct 09, 2019 1:40 pm

flyingaway wrote:
Wed Oct 09, 2019 1:22 pm


As I said in the Original Post, the house is paid off. It may be downsized or sold in case of real problems. That is a difference between essential and discretionary that I want to figure out.
It isn't as simple as essential vs discretionary. May be sold or downsized is a scenario that could come to pass. That means you have to contemplate multiple possibilities and decide what your plan would be in each case. Classifying the expenses does not help a lot with that.

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

Post by dbr » Wed Oct 09, 2019 1:43 pm

Admiral wrote:
Wed Oct 09, 2019 1:38 pm


But no one can tell you what the right answer is. You might be amenable to selling your home and call your house "discretionary." I never would, so for me keeping it falls under "it's essential." For me, travel is essential, but I don't need a car. For you, travel might be discretionary but you might need a car where you live.

You see the problem?
And some people would see selling the house and renting an apartment or moving to a part of the country they always wanted live in and cheaper as a welcome opportunity. In other words getting rid of the house would be essential.

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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 » Wed Oct 09, 2019 3:41 pm

flyingaway wrote:
Tue Oct 08, 2019 10:00 pm
AlohaJoe wrote:
Tue Oct 08, 2019 8:50 am
flyingaway wrote:
Tue Oct 08, 2019 8:19 am
My problem is that I do not have a huge buffer to withstand a huge downturn without affecting the quality of my lifestyle.
The reality is that for most people, if they have enough money to build a liability-matching portfolio, they also have enough money to not build a liability-matching portfolio and simply withstand a huge downturn. I mean, a liability-matching portfolio for $80,000 a year costs something like $2.4 million. That's a 3.3% withdrawal rate.

There's no real way around needing lots of money if you want to remove all risk.
Thank you for the information. I want to have enough money (plus some buffer) before retiring. I just don't know what is enough.
It will be helpful, on the other hand, to know what is NOT enough, i.e., covering essential expenses.
Let me address the "I want to have enough money / before retiring" issue.

First, you need to answer your "essential vs discretionary" question, based on your needs, past practice, and your likely spending in retirement. It doesn't have to be perfect, but it has to be realistic. It sounds like you're a few years from retirement, and your realistic appraisal may change over time.

What I have found to be useful is putting all my information into retirement planning software. There are a number of free standing ones, and the big investment managers (Vanguard, Fidelity, etc.) have them as well. I have most of my money / investments with Fidelity, and use their retirement planner. The advantage for me with Fidelity is the planner automatically loads the finance totals from both their accounts and the other accounts I've linked to my Fidelity Full View. It takes into account the asset allocation of my accounts in their predictive model. It allows you to fill in your expected tax rate. You also fill in your expected social security filing and amounts, plus pensions if you have them.

There is a budget function which allows you to fill in your expenses, and you can designate which are essential and discretionary. The budget detail section breaks down into useful categories, and allows for additional custom additions. You can also add in beginning and end dates for different income items, expense items, and one time occurrences. In my case, I've included part-time income for two more years, two more years of house payments, five years of extra help for kids, and a greater travel budget for the first 10 years of retirement. If I was planning to sell our house in X years, and downsize, I can add in $XXX from the sale.

What you end up with is a graph / table showing your income and expenses up to your planning date (death) by year. You can modify by average, below average, or significantly below average market returns to see how your plan performs. One advantage is rather than relying on a consistent withdrawal rate, the planner automates additional withdrawals during early retirement before social security, extra expenses for housing before the mortgage pay-off, extra kid's help, extra travel, etc that occur in the earlier years of retirement.

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willthrill81
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by willthrill81 » Wed Oct 09, 2019 3:51 pm

Admiral wrote:
Wed Oct 09, 2019 1:38 pm
flyingaway wrote:
Wed Oct 09, 2019 1:22 pm
AerialWombat wrote:
Wed Oct 09, 2019 11:32 am
trueblueky wrote:
Tue Oct 08, 2019 10:36 am
Once you own a house, you may be stuck with its costs far longer than you hoped or planned. Yes, you can move to a LCOL, downsize, live in a yurt. However, until you actually sell the former home, you have its expenses.
You can just walk away from the house. Give it back to the bank (deed in lieu of foreclosure). Not ideal, obviously, but it does rapidly eliminate the expenses.

Yurts are awesome.
As I said in the Original Post, the house is paid off. It may be downsized or sold in case of real problems. That is a difference between essential and discretionary that I want to figure out.
But no one can tell you what the right answer is. You might be amenable to selling your home and call your house "discretionary." I never would, so for me keeping it falls under "it's essential." For me, travel is essential, but I don't need a car. For you, travel might be discretionary but you might need a car where you live.

You see the problem?
The distinction is potentially meaningful even though it is subjective. If someone is willing to reduce or eliminate a certain expense if the need arises, then that means that they are more able to take on risk with the assets needed to fund those expenses.

Under current law, we hope to be able to satisfy all of our essential spending needs from SS benefits alone at age 70 (even with the ~20% anticipated haircut), and if that is indeed the case, then our portfolio at that time will only be needed for discretionary spending, and that means that we can take on significantly more risk than if we needed our portfolio to pay for food and property taxes.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by EnjoyIt » Wed Oct 09, 2019 9:33 pm

flyingaway wrote:
Wed Oct 09, 2019 1:22 pm
AerialWombat wrote:
Wed Oct 09, 2019 11:32 am
trueblueky wrote:
Tue Oct 08, 2019 10:36 am
Once you own a house, you may be stuck with its costs far longer than you hoped or planned. Yes, you can move to a LCOL, downsize, live in a yurt. However, until you actually sell the former home, you have its expenses.
You can just walk away from the house. Give it back to the bank (deed in lieu of foreclosure). Not ideal, obviously, but it does rapidly eliminate the expenses.

Yurts are awesome.
As I said in the Original Post, the house is paid off. It may be downsized or sold in case of real problems. That is a difference between essential and discretionary that I want to figure out.
To me essential means, expenses that you must pay every month/year without turning your whole world upside down.

I agree with you, a house may not be something very easy to just sell off during a downturn which makes your property tax essential. You can definitely defer some minor maintenance on this home, but if the roof, HVAC, water heater go, those I would assume need to be replaced.

Travel and eating out is not essential, they are luxuries. Sure it may be roughing it needing to eat at home more often but no one suffered from eating in every day.
Entertainment is another luxury that is not essential and can be transitioned into lower cost ways of entertaining oneself.

Here is our list of essential spending:
Property tax
Utilities
Insurance
Groceries
Necessary home maintenance that can not be delayed
Pool chemicals because it cost way more to clean a green pool as opposed to just doing the work yourself
Health Insurance and other health related expenses
Gym membership (but can be downgraded to something less fancy)
Child expenses which will go away eventually....we hope :)

Here are our luxuries / discretionary spending:
eating out
maid
yard service
pool service
Foreign travel
Continental travel
Local \ Entertainment
Gifts
Donations
Less essential home Maintenance
Updated vehicle
netflix
amazon prime
fancy gym

I see our list of luxuries and I can immediately start making cuts from there if necessary. I realize that I can cut everything, but maybe I don't need to. Right off the bat, we can eliminate large travel expenses such as foreign travel or ski trips for a few years which is a very large line item on our budget. Also, the maids and pool service can go. That alone will decrease our expenses significantly and likely be more than enough.
If that is not enough we can stop all gifts and donations and hold off on that newer car I have been eyeing or painting the guest bedroom.
If that is not enough we can cut back on local travel and eat out less often.

The way I see it, we have many levers to pull if we need to. We can do it for a few years or we can do it indefinitely if that really becomes a reality for us.

Realistically, like Willthrill, SS will cover all of our essential expenses and then some, which means all this cash we have been saving and investing is for discretionary spending.

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

Post by Admiral » Thu Oct 10, 2019 6:27 am

willthrill81 wrote:
Wed Oct 09, 2019 3:51 pm
Admiral wrote:
Wed Oct 09, 2019 1:38 pm
flyingaway wrote:
Wed Oct 09, 2019 1:22 pm
AerialWombat wrote:
Wed Oct 09, 2019 11:32 am
trueblueky wrote:
Tue Oct 08, 2019 10:36 am
Once you own a house, you may be stuck with its costs far longer than you hoped or planned. Yes, you can move to a LCOL, downsize, live in a yurt. However, until you actually sell the former home, you have its expenses.
You can just walk away from the house. Give it back to the bank (deed in lieu of foreclosure). Not ideal, obviously, but it does rapidly eliminate the expenses.

Yurts are awesome.
As I said in the Original Post, the house is paid off. It may be downsized or sold in case of real problems. That is a difference between essential and discretionary that I want to figure out.
But no one can tell you what the right answer is. You might be amenable to selling your home and call your house "discretionary." I never would, so for me keeping it falls under "it's essential." For me, travel is essential, but I don't need a car. For you, travel might be discretionary but you might need a car where you live.

You see the problem?
The distinction is potentially meaningful even though it is subjective. If someone is willing to reduce or eliminate a certain expense if the need arises, then that means that they are more able to take on risk with the assets needed to fund those expenses.

Under current law, we hope to be able to satisfy all of our essential spending needs from SS benefits alone at age 70 (even with the ~20% anticipated haircut), and if that is indeed the case, then our portfolio at that time will only be needed for discretionary spending, and that means that we can take on significantly more risk than if we needed our portfolio to pay for food and property taxes.
That might be true. But that's not what the OP has asked. They have asked about a classification system, not about cutting expenses generally.

Hence, it is totally subjective.

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

Post by flyingaway » Thu Oct 10, 2019 8:30 am

EnjoyIt wrote:
Wed Oct 09, 2019 9:33 pm
To me essential means, expenses that you must pay every month/year without turning your whole world upside down.

I agree with you, a house may not be something very easy to just sell off during a downturn which makes your property tax essential. You can definitely defer some minor maintenance on this home, but if the roof, HVAC, water heater go, those I would assume need to be replaced.

Travel and eating out is not essential, they are luxuries. Sure it may be roughing it needing to eat at home more often but no one suffered from eating in every day.
Entertainment is another luxury that is not essential and can be transitioned into lower cost ways of entertaining oneself.

Here is our list of essential spending:
Property tax
Utilities
Insurance
Groceries
Necessary home maintenance that can not be delayed
Pool chemicals because it cost way more to clean a green pool as opposed to just doing the work yourself
Health Insurance and other health related expenses
Gym membership (but can be downgraded to something less fancy)
Child expenses which will go away eventually....we hope :)

Here are our luxuries / discretionary spending:
eating out
maid
yard service
pool service
Foreign travel
Continental travel
Local \ Entertainment
Gifts
Donations
Less essential home Maintenance
Updated vehicle
netflix
amazon prime
fancy gym

I see our list of luxuries and I can immediately start making cuts from there if necessary. I realize that I can cut everything, but maybe I don't need to. Right off the bat, we can eliminate large travel expenses such as foreign travel or ski trips for a few years which is a very large line item on our budget. Also, the maids and pool service can go. That alone will decrease our expenses significantly and likely be more than enough.
If that is not enough we can stop all gifts and donations and hold off on that newer car I have been eyeing or painting the guest bedroom.
If that is not enough we can cut back on local travel and eat out less often.

The way I see it, we have many levers to pull if we need to. We can do it for a few years or we can do it indefinitely if that really becomes a reality for us.

Realistically, like Willthrill, SS will cover all of our essential expenses and then some, which means all this cash we have been saving and investing is for discretionary spending.
I would like to point out, as we aging, assisted living and more healthcare costs may become essential, which might not be covered by social security only.

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

Post by rotorhead » Thu Oct 10, 2019 8:42 am

Don't understand all the anguish in this post by the OP. Living expenses don't magically change category after retirement; except perhaps those directly associated with one's employment - clothing, shoes, dry cleaning, fuel and repairs for autos, etc. You got to eat, you got to have a place to live, clothes to wear, autos, etc, etc, etc.

Take a look at the 50/30/20 budget formula and advice; and see if it helps you sort things out.
Only you can decide whether each expense is Essential or Discretionary.

I've been retired 16 years now; and it isn't that hard to figure out.

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

Post by EnjoyIt » Thu Oct 10, 2019 8:43 am

Admiral wrote:
Thu Oct 10, 2019 6:27 am
willthrill81 wrote:
Wed Oct 09, 2019 3:51 pm
Admiral wrote:
Wed Oct 09, 2019 1:38 pm
flyingaway wrote:
Wed Oct 09, 2019 1:22 pm
AerialWombat wrote:
Wed Oct 09, 2019 11:32 am


You can just walk away from the house. Give it back to the bank (deed in lieu of foreclosure). Not ideal, obviously, but it does rapidly eliminate the expenses.

Yurts are awesome.
As I said in the Original Post, the house is paid off. It may be downsized or sold in case of real problems. That is a difference between essential and discretionary that I want to figure out.
But no one can tell you what the right answer is. You might be amenable to selling your home and call your house "discretionary." I never would, so for me keeping it falls under "it's essential." For me, travel is essential, but I don't need a car. For you, travel might be discretionary but you might need a car where you live.

You see the problem?
The distinction is potentially meaningful even though it is subjective. If someone is willing to reduce or eliminate a certain expense if the need arises, then that means that they are more able to take on risk with the assets needed to fund those expenses.

Under current law, we hope to be able to satisfy all of our essential spending needs from SS benefits alone at age 70 (even with the ~20% anticipated haircut), and if that is indeed the case, then our portfolio at that time will only be needed for discretionary spending, and that means that we can take on significantly more risk than if we needed our portfolio to pay for food and property taxes.
That might be true. But that's not what the OP has asked. They have asked about a classification system, not about cutting expenses generally.

Hence, it is totally subjective.
I guess if you really want to be nit picky like some people on anonymous forums can be, just about it anything could be considered discretionary.

But, let us be realistic about some of it. There are some things that are generally essential spending such as food, shelter, and health. One's shelter can be a luxury and discretionary such as a really nice home vs a studio apartment in a bad neighborhood. But, selling a home in the midst of financial turmoil will likely not be an ideal event therefor I figure one's current home and all the expenses of living in that home are essential which include, property tax, mortgage, HOA fees, utilities and mandatory maintenance. Services that are home luxuries such as maid, yard, pool, delivery, etc are discretionary.

Next, groceries are mandatory and essential, one needs to eat, but no one must eat in a restaurant. Buying healthy food is essential because that goes with health, and spending on one's health and well being is essential. Which is why I include a gym membership as essential spending as well.

Which leads me to the last essential item which is healthcare and for early retirees can be a very large line item on the essential spending list. In today's environment this can be a little tricky because if one was to cut back on almost all non essential spending, that family should qualify for ACA subsidies dropping the cost of healthcare expenses. Either way, healthcare I believe is an essential line item.

Everything not on the list above is in some way or another discretionary and can be rated from completely non-essential to almost-essential. Car expenses is a nice example of almost essential in my area. Everything is pretty spread out and although I can Uber or ride a bike to the grocery store and gym, having a car makes life significantly easier which means car expenses would be one of the last things I would cut if rough times required significant budgetary restraint. Expensive travel on the other hand, although nice is completely non-essential and would be one of the first things I would remove from my budget.

As per your comment, OP is asking for a classification system with the mindfulness of cutting expenses if one ever needs to. This means the classification system needs levels. Maybe from 1-5 where 1 is essential and 5 is totally discretionary with 2-4 being levels of discretionary that may be cut in the order if the need arrises.
This is how I would rate OP line items:

1) house (tax + insurance + utilities,) healthcare, house maintenance, groceries, fed/state tax
2) car and car expenses,
3) clothes, travel only to see kids, cheaper phone service, tolerate more extreme temperatures at home (lower utilities)
4) leisure and entertainment, lawn service
5) travel outside of seeing kids/grandkids, restaurants, maid

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

Post by EnjoyIt » Thu Oct 10, 2019 8:54 am

flyingaway wrote:
Thu Oct 10, 2019 8:30 am
....
I would like to point out, as we aging, assisted living and more healthcare costs may become essential, which might not be covered by social security only.
Assisted living and aging is not in a bubble and just an added expense on its own. If one needs assisted living, they are selling their home and cutting back on many other expenses such as property tax, maintenance, utilities, lawn service etc. Plus there will be significantly less travel as one needs "assistance." I can only assume leisure and restaurants expenses may change some as well. So yes, expenses may be very significant in the last few years of one's life, but if one is prepared to spend down the nest egg a bit, it should not be that big of a deal.

Edit: Also wanted to add, if you healthcare expenses go up, they may be tax deductible turning your fed income tax to $0
Last edited by EnjoyIt on Thu Oct 10, 2019 9:24 am, edited 2 times in total.

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

Post by dknightd » Thu Oct 10, 2019 8:56 am

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.

... snip ...

(P.S. I would like my fixed income and social security part to cover my essential expenses).
Having recently gone through the same exercise, here are my thoughts.
Food, water and shelter are essential to survive. But I/we wanted to do more than just survive when I retired.
We want to be comfortable. And continue to enjoy our lives.

So I estimated what it would take for us to have a comfortable enough retirement. Then I estimated what it would take for one of us to remain comfortable when the other one died.

This is important. You have to plan for both of you, and you have to plan for one of you dying first.

The numbers I came up with are 72k for 2, 54k for 1. I'll paste my estimated categories below.
Then I asked my wife to do the same exercise. This took some persuading. But it was important to me that she did this. I wanted to make sure that we were both comfortable before I stopped working for money. She did it only for us as a couple, her numbers were a little higher, but in the same range (she came up with 82k in case you are wondering.) Again, I think it is important that both of you agree on how much you need for a comfortable retirement.

To me it is essential that we will both be comfortable. Both our numbers came out a little below what we spend now. But in the same ball park. We have lived a comfortable enough life, and had a few splurges, so far so good :)

So then I started looking at how we would generate this income. DW has a $350/month pension from work (she retired last year). We took this as lifetime for both of us. A small amount, but not negligible (it covers part of what I call hobbies). DW will claim SS at her FRA, I'll claim at 70. I bought an SPIA with full survivor benefit (I might buy a little more later, if needed). Her pension, my SPIA, and SS should cover our "comfortable enough" expenses forever. When one of us dies, we'll loose one SS check, but still be OK. We have enough in "safe" investments to carry us till I'm 70. We have enough beyond that for occasional splurges.

If SS is cut back by 25% we would have to tighten our belts, but probably would be OK, and comfortable enough.

Sorry for the long winded response. Having recently retired I thought you might find my thought process useful.

Here is the copy and paste from the "back of my envelope" :
for two people:
housing 1-2 (probably use 2 to include property tax, utilities, cell phone, internet) (2)
food 1 (this amount might be high, includes eating out) (1)
health 1-2 (probably 1 is enough) (1)
cars/travel 1 (is that enough? Probably since hobby/travel could be tapped for this)(.5)
hobby/travel 1 (.5)
taxes 1 (probably less, but leave at 1)

total= 6-8 - probably 6 is enough (or even 5 would be OK) 7 would be better, 8 would be "deluxe".
(number in paren is what I figured to be "comfortable enough") (6)

72K-84K-96K /year

for one person:
housing 1-2
food .5
health 1-2 (probably 1 is enough)
cars/travel .5
hobby/travel .5
taxes 1
4.5 - 6.5 about 3/4 of two people
54K-66K-78K /year

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

Post by dknightd » Thu Oct 10, 2019 9:41 am

EnjoyIt wrote:
Thu Oct 10, 2019 8:54 am
flyingaway wrote:
Thu Oct 10, 2019 8:30 am
....
I would like to point out, as we aging, assisted living and more healthcare costs may become essential, which might not be covered by social security only.
Assisted living and aging is not in a bubble and just an added expense on its own. If one needs assisted living, they are selling their home and cutting back on many other expenses such as property tax, maintenance, utilities, lawn service etc. Plus there will be significantly less travel as one needs "assistance." I can only assume leisure and restaurants expenses may change some as well. So yes, expenses may be very significant in the last few years of one's life, but if one is prepared to spend down the nest egg a bit, it should not be that big of a deal.

Edit: Also wanted to add, if you healthcare expenses go up, they may be tax deductible turning your fed income tax to $0
It is impossible to predict what assisted living will cost. Our plan is to take care of each other for as long as possible. Then sell the house since it might not be needed. Maybe we should hire a maid now, so that cost can be removed later . . . If one of us has to go into assisted living half of our discretionary spending will disappear. Probably OK since we'd rather spend our time with our loved one.

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

Post by EnjoyIt » Thu Oct 10, 2019 10:05 am

dknightd wrote:
Thu Oct 10, 2019 9:41 am
EnjoyIt wrote:
Thu Oct 10, 2019 8:54 am
flyingaway wrote:
Thu Oct 10, 2019 8:30 am
....
I would like to point out, as we aging, assisted living and more healthcare costs may become essential, which might not be covered by social security only.
Assisted living and aging is not in a bubble and just an added expense on its own. If one needs assisted living, they are selling their home and cutting back on many other expenses such as property tax, maintenance, utilities, lawn service etc. Plus there will be significantly less travel as one needs "assistance." I can only assume leisure and restaurants expenses may change some as well. So yes, expenses may be very significant in the last few years of one's life, but if one is prepared to spend down the nest egg a bit, it should not be that big of a deal.

Edit: Also wanted to add, if you healthcare expenses go up, they may be tax deductible turning your fed income tax to $0
It is impossible to predict what assisted living will cost. Our plan is to take care of each other for as long as possible. Then sell the house since it might not be needed. Maybe we should hire a maid now, so that cost can be removed later . . . If one of us has to go into assisted living half of our discretionary spending will disappear. Probably OK since we'd rather spend our time with our loved one.
That's a fun comment. If you don't need a maid, then don't hire one just to cut back later. It may be possible you will need a maid as you get older and the back can't handle what it used to. Who knows. Why not save $100 every two weeks in a fund as if you were spending $100 biweekly on maid services? I guess that is silly also.

But yeah....The big unknown and potentially very expensive future line item is healthcare expenses. Personally I am not too worried about end of life care. While able to, we will take care of each other as much as possible and hire some assistance in home as needed. This money will come from previous other spending that we won't be able to do because of health issues. When it is time for assisted living, we will sell our home and move into a place that does not have as high of a cost of living. We will use the house proceeds and previous house expenses to cover that cost. If we need nursing home care, we are okay with depleting the savings account significantly. I suspect even if we dig deep in those funds, I do not foresee it going to $0 and there will still be a decent inheritance left over when we both die. Just to point out...we are big proponents of a living will and a do not resuscitate if our heart stops. Last thing we want is to wake up permanently bed ridden with a feeding tube and a catheter helping us just stay alive. Hopefully that will keep our end of life care on the potential lower side. One thing that would significantly deplete out portfolio is long standing dementia requiring a decade of assisted living and nursing home care. Again, we should be okay considering how we would transition to pay for it and don't mind using up our wealth for that event.

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willthrill81
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Re: What are the essential and discretionary expenses in a retirement budget?

Post by willthrill81 » Thu Oct 10, 2019 10:26 am

EnjoyIt wrote:
Thu Oct 10, 2019 8:43 am
As per your comment, OP is asking for a classification system with the mindfulness of cutting expenses if one ever needs to.
It's not just for cutting expenses if the need arises, although that is a very good use of this information as it directly impacts how much risk one is exposed to (i.e. return risk and sequence of return risk). Retirees may want to implement the income flooring strategy, whereby all of their essential spending is covered by guaranteed income sources, such as SS benefits, pension, SPIA payouts, etc., and the remainder of their portfolio, which will be used to cover discretionary spending, is invested as aggressively as the retiree desires. This can give retirees both peace of mind and good (though obviously not perfect) protection from poor portfolio performance, behavioral errors, declining cognitive abilities, elderly fraud, etc., while still giving them some upside potential.

Even though I am an aggressive investor and am not a huge SPIA fan, if our essential spending weren't covered by anticipated SS benefits by age 70, I would strongly consider annuitizing enough assets via a SPIA with a COLA to cover the gap.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by EnjoyIt » Thu Oct 10, 2019 10:33 am

willthrill81 wrote:
Thu Oct 10, 2019 10:26 am
EnjoyIt wrote:
Thu Oct 10, 2019 8:43 am
As per your comment, OP is asking for a classification system with the mindfulness of cutting expenses if one ever needs to.
....
Even though I am an aggressive investor and am not a huge SPIA fan, if our essential spending weren't covered by anticipated SS benefits by age 70, I would strongly consider annuitizing enough assets via a SPIA with a COLA to cover the gap.
We are very similar regarding SS though we do not have the same investing strategy as you. Only thing, is that we will likely retire pretty early which will put significant years between that date and SS. Which I believe is also similar to your plan. We already work part time today. For us, having flexibility by having low essential expenses gives us peace of mind that we should be able to withstand just about anything baring a true calamity.

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

Post by willthrill81 » Thu Oct 10, 2019 11:17 am

EnjoyIt wrote:
Thu Oct 10, 2019 10:33 am
willthrill81 wrote:
Thu Oct 10, 2019 10:26 am
EnjoyIt wrote:
Thu Oct 10, 2019 8:43 am
As per your comment, OP is asking for a classification system with the mindfulness of cutting expenses if one ever needs to.
....
Even though I am an aggressive investor and am not a huge SPIA fan, if our essential spending weren't covered by anticipated SS benefits by age 70, I would strongly consider annuitizing enough assets via a SPIA with a COLA to cover the gap.
We are very similar regarding SS though we do not have the same investing strategy as you. Only thing, is that we will likely retire pretty early which will put significant years between that date and SS. Which I believe is also similar to your plan. We already work part time today. For us, having flexibility by having low essential expenses gives us peace of mind that we should be able to withstand just about anything baring a true calamity.
Yes, that is the case for us as well. Our essential spending will hopefully be 2-2.5% of our portfolio balance when I retire, although we plan to withdraw significantly more than that. We'll probably have a 15-20 year gap between retirement and beginning SS benefits, but if we encountered horrific returns for the first ~10 years, we would certainly consider claiming SS benefits early in order to take the strain off our portfolio. And for the purposes of determining our annual withdrawals (using the time-value of money formula), at least for those first 10 years or so, we'll probably make withdrawals with no anticipation of ever receiving any SS benefits at all simply in order to add another layer of security to our plan, although I have little doubt that we'll get something. Part of this as well comes from my concerns about the long-term viability of Medicare and the possibility of means-testing, which could also impact SS benefits, significantly increasing our costs. We might even get a double-whammy from SS benefits being significantly lower than anticipated and spending significantly more on healthcare in retirement than anticipated, so ignoring SS benefits until we get much closer to claiming does not seem recklessly conservative to me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by flyingaway » Thu Oct 10, 2019 12:21 pm

willthrill81 wrote:
Thu Oct 10, 2019 11:17 am
EnjoyIt wrote:
Thu Oct 10, 2019 10:33 am
willthrill81 wrote:
Thu Oct 10, 2019 10:26 am
EnjoyIt wrote:
Thu Oct 10, 2019 8:43 am
As per your comment, OP is asking for a classification system with the mindfulness of cutting expenses if one ever needs to.
....
Even though I am an aggressive investor and am not a huge SPIA fan, if our essential spending weren't covered by anticipated SS benefits by age 70, I would strongly consider annuitizing enough assets via a SPIA with a COLA to cover the gap.
We are very similar regarding SS though we do not have the same investing strategy as you. Only thing, is that we will likely retire pretty early which will put significant years between that date and SS. Which I believe is also similar to your plan. We already work part time today. For us, having flexibility by having low essential expenses gives us peace of mind that we should be able to withstand just about anything baring a true calamity.
Yes, that is the case for us as well. Our essential spending will hopefully be 2-2.5% of our portfolio balance when I retire, although we plan to withdraw significantly more than that. We'll probably have a 15-20 year gap between retirement and beginning SS benefits, but if we encountered horrific returns for the first ~10 years, we would certainly consider claiming SS benefits early in order to take the strain off our portfolio. And for the purposes of determining our annual withdrawals (using the time-value of money formula), at least for those first 10 years or so, we'll probably make withdrawals with no anticipation of ever receiving any SS benefits at all simply in order to add another layer of security to our plan, although I have little doubt that we'll get something. Part of this as well comes from my concerns about the long-term viability of Medicare and the possibility of means-testing, which could also impact SS benefits, significantly increasing our costs. We might even get a double-whammy from SS benefits being significantly lower than anticipated and spending significantly more on healthcare in retirement than anticipated, so ignoring SS benefits until we get much closer to claiming does not seem recklessly conservative to me.
Since our social security money will be relatively small, we plan to use it as a safety net. We will exclusively depend upon on our portfolio for everything.

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

Post by flyingaway » Thu Oct 10, 2019 12:26 pm

dknightd wrote:
Thu Oct 10, 2019 8:56 am
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.

... snip ...

(P.S. I would like my fixed income and social security part to cover my essential expenses).
Having recently gone through the same exercise, here are my thoughts.
Food, water and shelter are essential to survive. But I/we wanted to do more than just survive when I retired.
We want to be comfortable. And continue to enjoy our lives.

So I estimated what it would take for us to have a comfortable enough retirement. Then I estimated what it would take for one of us to remain comfortable when the other one died.

This is important. You have to plan for both of you, and you have to plan for one of you dying first.

The numbers I came up with are 72k for 2, 54k for 1. I'll paste my estimated categories below.
Then I asked my wife to do the same exercise. This took some persuading. But it was important to me that she did this. I wanted to make sure that we were both comfortable before I stopped working for money. She did it only for us as a couple, her numbers were a little higher, but in the same range (she came up with 82k in case you are wondering.) Again, I think it is important that both of you agree on how much you need for a comfortable retirement.

To me it is essential that we will both be comfortable. Both our numbers came out a little below what we spend now. But in the same ball park. We have lived a comfortable enough life, and had a few splurges, so far so good :)

So then I started looking at how we would generate this income. DW has a $350/month pension from work (she retired last year). We took this as lifetime for both of us. A small amount, but not negligible (it covers part of what I call hobbies). DW will claim SS at her FRA, I'll claim at 70. I bought an SPIA with full survivor benefit (I might buy a little more later, if needed). Her pension, my SPIA, and SS should cover our "comfortable enough" expenses forever. When one of us dies, we'll loose one SS check, but still be OK. We have enough in "safe" investments to carry us till I'm 70. We have enough beyond that for occasional splurges.

If SS is cut back by 25% we would have to tighten our belts, but probably would be OK, and comfortable enough.

Sorry for the long winded response. Having recently retired I thought you might find my thought process useful.

Here is the copy and paste from the "back of my envelope" :
for two people:
housing 1-2 (probably use 2 to include property tax, utilities, cell phone, internet) (2)
food 1 (this amount might be high, includes eating out) (1)
health 1-2 (probably 1 is enough) (1)
cars/travel 1 (is that enough? Probably since hobby/travel could be tapped for this)(.5)
hobby/travel 1 (.5)
taxes 1 (probably less, but leave at 1)

total= 6-8 - probably 6 is enough (or even 5 would be OK) 7 would be better, 8 would be "deluxe".
(number in paren is what I figured to be "comfortable enough") (6)

72K-84K-96K /year

for one person:
housing 1-2
food .5
health 1-2 (probably 1 is enough)
cars/travel .5
hobby/travel .5
taxes 1
4.5 - 6.5 about 3/4 of two people
54K-66K-78K /year
Thank you for this detailed list of budget items. For our hypothetical $80K budget, we could also cut if needs arise.
Travel and leisure are obvious target. Healthcare may or may not be. House may or may not be.
Sometimes, I just tell my wife that working a few more years definitely solves all the problems.

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

Post by willthrill81 » Thu Oct 10, 2019 12:27 pm

flyingaway wrote:
Thu Oct 10, 2019 12:21 pm
Since our social security money will be relatively small, we plan to use it as a safety net. We will exclusively depend upon on our portfolio for everything.
In that case, it would seem to me that you have less ability to take on the risks associated with volatility than otherwise.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by EnjoyIt » Thu Oct 10, 2019 12:54 pm

willthrill81 wrote:
Thu Oct 10, 2019 12:27 pm
flyingaway wrote:
Thu Oct 10, 2019 12:21 pm
Since our social security money will be relatively small, we plan to use it as a safety net. We will exclusively depend upon on our portfolio for everything.
In that case, it would seem to me that you have less ability to take on the risks associated with volatility than otherwise.
Indeed. I would sit and think pretty hard on what items I would cut from my budget and in what order if financial turmoil ensued shortly after retirement as I did in the list above. Keep in mind, that the only time in history where one actually needed to make cuts from a 4% withdrawal was the first few years of a 1966 retirement for it to last 30 years. Any other time in history those cuts were not necessary unless one wanted to leave a significant inheritance.

What I am trying to say, is if one was to retire let us say in 2008 and because of the financial meltdown, they decreased spending from $80k down to $65k for 3 years until markets appeared to be improving. Not only was it unnecessary, but because they did that, this couple would be in a very good place right now. Obviously the future will not look exactly like the past, but doing some belt tightening during years of depressed returns can do wonders to a portfolio that is not experiencing the worst times in history or the worst times in the future.

In addition a 4% withdrawal in the past, on average created wealth instead of consumed it. It is possible that one ends up with more and more money over the first 10 years of retirement.

Nobody knows what will really happen which is why its good to discuss it, view our options and be prepared for all potential scenarios.

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

Post by willthrill81 » Thu Oct 10, 2019 1:36 pm

EnjoyIt wrote:
Thu Oct 10, 2019 12:54 pm
willthrill81 wrote:
Thu Oct 10, 2019 12:27 pm
flyingaway wrote:
Thu Oct 10, 2019 12:21 pm
Since our social security money will be relatively small, we plan to use it as a safety net. We will exclusively depend upon on our portfolio for everything.
In that case, it would seem to me that you have less ability to take on the risks associated with volatility than otherwise.
Indeed. I would sit and think pretty hard on what items I would cut from my budget and in what order if financial turmoil ensued shortly after retirement as I did in the list above. Keep in mind, that the only time in history where one actually needed to make cuts from a 4% withdrawal was the first few years of a 1966 retirement for it to last 30 years. Any other time in history those cuts were not necessary unless one wanted to leave a significant inheritance.
While we know that such cuts were unnecessary with the benefit of hindsight, today's retirees don't have that huge advantage. Therefore, they should make plans for how they will adjust their spending, particularly with regard to reductions, on the basis of portfolio performance. Many plan to just 'wing it', but I think that this is a recipe for disaster. We recommend that investors have an investment policy statement that they stick to, so why should retirees not have a withdrawal policy statement?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by EnjoyIt » Thu Oct 10, 2019 2:11 pm

willthrill81 wrote:
Thu Oct 10, 2019 1:36 pm
EnjoyIt wrote:
Thu Oct 10, 2019 12:54 pm
willthrill81 wrote:
Thu Oct 10, 2019 12:27 pm
flyingaway wrote:
Thu Oct 10, 2019 12:21 pm
Since our social security money will be relatively small, we plan to use it as a safety net. We will exclusively depend upon on our portfolio for everything.
In that case, it would seem to me that you have less ability to take on the risks associated with volatility than otherwise.
Indeed. I would sit and think pretty hard on what items I would cut from my budget and in what order if financial turmoil ensued shortly after retirement as I did in the list above. Keep in mind, that the only time in history where one actually needed to make cuts from a 4% withdrawal was the first few years of a 1966 retirement for it to last 30 years. Any other time in history those cuts were not necessary unless one wanted to leave a significant inheritance.
While we know that such cuts were unnecessary with the benefit of hindsight, today's retirees don't have that huge advantage. Therefore, they should make plans for how they will adjust their spending, particularly with regard to reductions, on the basis of portfolio performance. Many plan to just 'wing it', but I think that this is a recipe for disaster. We recommend that investors have an investment policy statement that they stick to, so why should retirees not have a withdrawal policy statement?
Technically you are correct though I wonder how to create such a plan.
What kind of an equity draw down would get you to start cutting spending and by how much?
At what point can a retiree stop the austerity and spend as usual?

I realize that you plan on using time value of money, but most retirees will not. Many will start with a percentage of portfolio withdrawal and adjust as necessary. How do you recommend we adjust as necessary? Do I just use the VPW worksheet? Although it can help me for the following year, what do I do mid year if my portfolio drops by 10% or is stagnant as it has been in the last 12 months? Or do I just decide to spend 20% less the following year and re-evaluate at the end of next year. I guess I just don't know how to proceed in a month by month basis.

I would love to write a retirement policy statement for myself with some kind of rulebook.

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

Post by ExitStageLeft » Thu Oct 10, 2019 4:27 pm

EnjoyIt wrote:
Thu Oct 10, 2019 2:11 pm

Technically you are correct though I wonder how to create such a plan.
What kind of an equity draw down would get you to start cutting spending and by how much?
At what point can a retiree stop the austerity and spend as usual?

I realize that you plan on using time value of money, but most retirees will not. Many will start with a percentage of portfolio withdrawal and adjust as necessary. How do you recommend we adjust as necessary? Do I just use the VPW worksheet? Although it can help me for the following year, what do I do mid year if my portfolio drops by 10% or is stagnant as it has been in the last 12 months? Or do I just decide to spend 20% less the following year and re-evaluate at the end of next year. I guess I just don't know how to proceed in a month by month basis.

I would love to write a retirement policy statement for myself with some kind of rulebook.
I have developed a rule that I think will work for DW and I. Keep in mind that this is all just a model at this point, and nobody knows nothin' anyhow.

I am experimenting with different spending levels and profiles and have a flexibility factor that I would apply in years when the market has a negative return. The factor ranges from zero to ten percent, and here's how I implement it:

For years when the market return is positive, then withdraw the planned amount. For other years, reduce the planned withdrawal by the lesser of the portfolio loss or the flexibility factor.

Here's a scenario of how I would apply it:

Portfolio value: $1M
Core expenses: $80k
Planned spend: $100k
Fixed income: $60k
Planned Withdrawal: $40k
Flexibility: 10%
Max reduction: $10k (10% of desired spend)

If market is good, withdraw $40k and have a fun year. If market is bad then reduce spending. If portfolio value drops in value by more than $10k then withdraw $30k and don't have quite as much fun. If portfolio drop is less than $10k then reduce withdrawal by that amount. Using this rule I can turn a FIRE scenario with ~95% success rate into one with 100% success.

This sort of rule only works when there is enough room between the core expenses and the desired spend. And I don't take it as gospel that I have developed a perfect spending plan. Rather, it allows me to quantify how much we would have to reduce our spending in a down year and still have confidence in not running out of money. As long as I can keep the core expenses in line with the plan (!) it seems like a workable strategy.

In my spreadsheet I play with initial spending levels and see how much I have to increase the flexibility percentage to get to a 100% success. It's impressive what just a little bit of flexibility can do with low negative return years.

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