we never hide that we are not frugal by nature, we’re not budgeters, and we’ve really only succeeded at retirement saving by employing a pay ourselves first approach that is essentially tricking ourselves into thinking we have far less to spend than we actually do. that is all well and good for now, but things will definitely have to change once we quit our jobs at the end of 2017. if we proceed into retirement with no budgets and no plans, well… let’s just say our retirement won’t last very long!
once we retire early, there are definitely things we won’t be able to do anymore. for example, we won’t be able to let the bank pay our property tax and insurance for us. we’ll have the house paid off, so we’ll have no more escrow account doing that work for us. instead we’ll have to budget for those expenses. boo! ;-)
knowing that we have to change our approach in retirement has led us to think hard about what we can do to ensure we stay on track, without forcing us into a line item budget that would make us crazy. where we’ve landed is a budget approach that we think will work for us, still based on the pay ourselves first model. we’ve learned that, while we’re bad at budgeting, we’re good at restraining our spending to fit within a set amount, even if that amount is small. in the pay yourself first approach, you essentially hide money from yourself before you get a chance to spend it, and we realized that we can still keep doing this, even if we don’t have new money coming in. you could also think of this as a more tech savvy version of the envelope method.
here’s the approach that we think will work for us when we retire:
step 1: set up a series of savings accounts, a la the approach recently featured on budgets are sexy. if, in a few years, banks make it easy to sequester money into separate buckets within the same account, then we’ll do that instead. but for now, we’ll just talk accounts. we’ll plan to have a range of accounts that we’ll use to set aside money for certain knowable expenses, just like we might do with the low-tech envelope method. we plan to have accounts for:
- property tax and insurance — right off the top, we’ll put enough money into this account to cover our two property tax payments for the year, and perhaps also our homeowners and car insurance. then we don’t panic when a payment is due.
- health care — like a lot of early retirees, we plan to buy health insurance on a state or federal exchange. we haven’t decided yet what type of plan we’ll buy (we’ll decide that when we get closer), but we definitely plan to set aside the money for the year’s premiums in a separate account so we never come up short. (if we’re eligible for a health savings account when we retire — we’re not currently — then we’ll do that instead for health care costs.)
- travel — we plan to set a travel budget each year, and keep this money separate so we don’t accidentally spend it. some years the budget may be bigger, if we plan an extended trek across asia with several expensive flights, for example. and other years it will be smaller, like when we’re just traveling around north america in our future travel trailer.
- home maintenance — we plan to set aside money each year for home maintenance. not a year has passed as homeowners that we haven’t had some major expense, and we don’t want to get caught unprepared. we’ll diy what we can and shop around for any new appliances that might be needed, but would be naive not to budget for some out-of-pocket costs. of course, this can be rolled over from one year to the next if we don’t spend it. (knock on wood!)
- emergency fund— we’ll maintain an emergency fund all through retirement. it can be a lot smaller than now because we won’t have a mortgage anymore, and because we know we can live cheaply if we need to. but disasters can happen, and we want to know we can ride them out without jeopardizing a future year’s allocation of funds. we’ll make sure we can cover any insurance deductibles with our emergency fund, as well as a few major appliances or a new roof, in addition to what we’re saving in the house maintenance fund. can also be rolled over every year.
- next year’s money — we plan to follow the retiree advice of maintaining two years in cash, so one of our accounts will be for the next year’s allocation. (we’re still figuring out how and when to withdraw from our index funds, so the money may not all get into the account at the same time.)
- the rest of the current year’s money — we’ll hold most of what we take out for a given year in cash, so that we’re not worrying about market fluctuations month to month. but we won’t keep it in our checking account, where it’s easy to spend. instead, we’ll…
step 2: pay ourselves a monthly allowance. since we’re good at constraining our spending to a set amount, we want to try to maintain a system as much like our current one as possible. so we don’t plan to give ourselves access to all of our money for the year at one time. instead, we’ll figure out how much we have to spend each month, after accounting for the expenses we set aside in the other savings accounts, and then give ourselves the monthly amount on the first of each month, so it still feels like a paycheck. except it will be an auto transfer from one savings account to our checking account. that allowance will have to cover everything not already set aside in its own savings account.
step 3: track our expenses. at least for the first few years of retirement, until we fall into predictable spending patterns, we’re going to track every dollar we’re spending. in our case, we think this is especially important because we expect our numbers to differ from where our spending levels are now. why? because we travel so much for work now that we think our grocery budget could actually go up once we’re home more of the time. same for utilities. but on the flipside, we’ll be able to save money by making more foods from scratch, doing more maintenance tasks ourselves instead of hiring pros to do them for us, and even hauling and chopping our own firewood, which will cut down on heating costs. we aren’t sure how these will net out, so tracking will be essential to find out and plan accordingly for future years.
step 4: stay adaptable to different spending levels from year to year. we never want to plan on having xx thousands of dollars to spend each year. a lot of factors will impact how much we’ll have on an annual basis: obamacare subsidy limits, market performance, increasing food and energy costs, property taxes, etc. our two-tier retirement dictates that we’ll only have so many dollars to get us from ages 38 and 41 to 59 1/2. the 4 percent rule doesn’t really work for our early retirement, though we plan to live by it once we can tap our 401(k)s. instead, we have to calculate each year how much we can afford to take out to make the money stretch far enough, and making sure that we don’t lose our health care subsidy in the process. if we have a year where the market has gone gangbusters and we can afford to take out more, we’ll use the excess to fund iras or give more to charity, rather than inflating our lifestyle. because we might need to dial things back again the very next year, and don’t want it to feel like we’re giving up something we’ve grown used to.
so that’s how we’re thinking about budgeting in retirement. what ideas do you have for how we could improve this approach? anything you’ve stumbled on that is working super well for you? early retirees, we’d especially love to hear your lessons!