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.
and
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!
Don't miss a thing! Sign up for the eNewsletter.
Subscribe to get extra content 3 or 4 times a year, with tons of behind-the-scenes info that never appears on the blog.
Categories: we've learned
I have faith in this plan! This is similar to how I allocated all my student loans over 4 years. I had a big lump sum given to me at the beginning of the year. I took my known big expenses off the top and then I gave myself monthly rations. Everything had/s its own savings account and I’ve been very strict that once it goes into a certain fund, it has to be used for that purpose. Money can only be moved from fund to fund if a meeting is called.
Do you plan to do a dry run before you cut the cord? It took me a while to figure out exactly what worked for me.
Glad to know that A similar approach has been working for you! We think of this period now as our dry run, by sequestering money away from ourselves. And we’re already living on an amount pretty close to what we estimate we’ll have to spend in retirement, after adjusting for the mortgage. Some of the amounts are hard to estimate, so we’re making our best guess!
A dry run would be interesting, as Kate mentioned. So at the beginning on the year you’ll decide how much you can afford to pull out and you’ll withdraw it all and then divide it up between accounts? (just clarifying that I understand the plan). I like it.
We don’t know yet if we’ll withdraw a year’s money at one — might be more like quarterly. But when we withdraw it from investments, we’ll divvy $ out to the knowable expenses accounts, and then hold the rest in an account from which we’ll pay ourselves a monthly allowance. Thanks for commenting — glad it came through! ;-)
my comments have been working just fine, I think J was saying hers don’t.
Have now heard it from a few folks, so extra glad for the ones that are working. :-D
What an inspiring post! Your plan sounds solid. Did you consider semi-retirement at all to ease into it?
If you’re planning to travel for extended periods of time, putting your home up on Airbnb would be a good way to earn extra moola while you’re not there! Unfortunately it’s against our lease agreement to rent out short-term, otherwise I’d be all over it :)
Success! ;-) And thanks! We’ve definitely considered semi retirement, but don’t have careers we can really ease out of. We do expect to consult or freelance a little after we quit, though, so maybe that counts? And Yes! We will definitely rent out our house! We live in a ski town, so have high hopes for what we can get for it.
Oh, a ski town? I may be one of your renters one day. :) I don’t have much on the retirement side. It’s a hard and variable equation, and it sounds like you guys are accounting for that. I did hear something recently about a savings account that offers buckets, though. I feel like it was Capital 360 or Ally or one of those uber trendy online accounts. Will let you know if I come across it again!
Haha — We can start a waiting list for renters if you want. ;-) Please do share if you see that bucketed account info again, though we’re hoping there will be more options for that kind of thing in the near future. We still have a few years, so it may yet happen.
Sounds like you’re thinking about this very smartly. I’ve talked to a few people who are retired and they seem to agree that setting aside money for taxes up front is essential. Without a workplace automatically taking out your taxes, it is easy to forget that they must be paid. If you don’t set that money aside, you’ll be in for a rude awakening come tax season!
That is what we want to avoid, 100%! We’ll also have to do some tax calculations for income taxes — we expect to owe very little in retirement — but may also create an account to cover those. Good reminder!
I don’t think that there is necessarily a right or wrong way to go about budgeting for your early retirement escapades – in fact, that’s one of the things that I like the most about this whole thing. Each of us has the autonomy to design a system completely tailored to us and our wants and desires. In your case, I personally believe that the tactic that you’ve outlined above is perfectly reasonable and will work well for you. Keeping things separate, as you’ve outlined, will make the process of figuring out how your living expenses are progressing throughout the year that much easier. I think you’ve come up with a wonderful plan.
For us, we probably won’t have quite the same level of separation as you guys, but we will certainly budget with the same broad spending categories in mind. Like you, we won’t have a mortgage, so that will free up a ton of resources to be used for our daily living expenses. In our case, the cost of diesel will probably play a much bigger role in the limits of our discretionary spending abilities.
Basically, we are taking our best guess at what will work for us after we retire next year, but like you said in #4, we’re flexible to the nth degree. If we find that we’ve under-budgeted in some areas, that’s fine – we’ll adjust our RV travels, eliminate our restaurant budget or, hell, find some part time work somewhere if it actually comes to that. Though we certainly don’t anticipate this, there are no guarantees in life, and early retirement is definitely included in that sentiment.
I kinda feel like we’re gonna be helicoptered up and dropped right on top of the arctic circle. We’re doing our reading now and learning as much as we can, making our best guesses about how everything works, but in the end…we’re sorta jumping in head first and we will sort things out once we get there. It’s one of those unknowns that will (probably quickly) become clear once we find ourselves up there and freezing our butts off. :)
Luckily, I’m married to a true, living-and-breathing rocket scientist, so I let her manage all the finances and come up with budgets, scenarios and fallback plans as much as I can. And, I think we’ve got a pretty solid game plan going into this, as I think you guys have as well. You guys definitely seem flexible enough to adjust as things change and expenses become more clear.
However you work it, I know you’ll be successful, and I’m definitely excited to read about what you guys end up doing after you’re done with work. Maybe one day my wife and I will roll through your area for a meet-and-greet…and, of course, a ton of hiking. :)
Ha — So true. For all the planning, there will be a big element of “winging it” no matter what. But like you, we’re confident that we’ll figure it out. Whenever people ask if we’ll have enough to live on, I remind them that we’ll have more than half of the families in the U.S. (but with lower taxes and no mortgage or rent!). If we can’t figure things out with that kind of budget, then we’re truly entitled assholes who need to jump off a cliff. :-)
After this whole anonymous blogger jig is up, we definitely want to do a meet-up!
Great point about the financial lives of families in the US. I used to work at an organization that helps children from impoverished families–talk about a reality check. I think you’ll do well. You can always be campground hosts! :)
So great that you did that important work! But I can only imagine how tough that must have been at times. And we are totally game to be camp hosts — in fact, we’ll almost certainly do it for fun sometimes! :-)
I currently operate on step #2, and it has worked really well for me. I used to budget for specific line items, but I found that exhausting + over time as my habits shifting my spending evened out to consisent level in most categories. The only thing I do pay attention to is how much I’m spending on recreation, especially in the winter! I can go total hermit so if I see $0 in that category I know it’s time to hit up yoga class or the climbing gym. Get out and do something I love!
Anyways, right now I pay all my bills, put away $x in savings, then leave myself a small amount for spending throughout the month. That helps me space out big purchases over a few months.
That approach makes so much sense — glad it’s working for you! Also love that you have resolved to spend MORE on fitness — in this space, everyone’s always talking about spending LESS, but I love your point that that’s what’s important to you, so it makes sense to spend on yoga or climbing. :-)
I wrote a post about how I budget and linked to some of my old posts showing my spreadsheets recently: https://leightpf.wordpress.com/2015/08/05/budgeting-always-stay-a-month-ahead/
I do something similar to what you’re describing (I don’t escrow my taxes and insurance!) and I use a spreadsheet for that instead of many accounts. You could also consider YNAB – it’s great for this purpose too. You can make the categories as broad or as detailed as you want. My cash flow with my current job is a bit bonkers between frontloading retirement accounts, tuition reimbursements, ESPP proceeds, salary, and stock vesting and I’m still trying to figure out how to manage that! My current system honestly sounds a bit like your proposed retirement system!
It’s a bit mind-boggling to me how you manage your finances given all the front-loading you do, but it sounds like it’s getting you the results you want, and quickly! As for our sequestered funds, we’ll definitely figure out what the options are when we’re closer to retirement — we’re hopeful that in two years there will be more options for dividing up funds within a single account, because our dislike of clutter is definitely at odds with this concept of having five thousand accounts!
Ooooh that’s a great idea for a post, thank you! I hear you on the five thousand accounts. I may like detailed budgeting, but I do it all in a spreadsheet and don’t have too many accounts :)
Glad to help. :-)
I love how this is both big picture and detail oriented. You have such a clear vision for yourselves. It’s very inspiring!
Thanks, Kara! We have a clear vision some days, for sure — and then there are the other days… ;-)
I’ve been considering using a similar method. It seems like it would be simpler that doing a line item budget.
It’s all about what works for you. Budgeting in a line item way is just not in our DNA, so we need a system like this to avoid accidentally spending money before we need it. But lots of people are good at budgeting, and for them, this system is probably overkill! :-)
As a fellow hopeful FIREr, this is super helpful in getting me thinking how to structure our cash in retirement. Question (and pardon if you’ve already addressed this before): How are you structuring your retirement portfolio and from where are you planning to withdraw money (i.e. just from non-tax-advantaged or…?).
Hi Taylor — Short answer is we’ll withdraw from our taxable index funds for the first 20ish years of retirement, and then draw on our sizeable 401(k)s. (We got an early start on the 401(k)s, so have a lot more saved up there than we do so far in our taxable accounts.) If you want a more detailed breakdown, check out: http://ournextlife.com/2015/08/10/goals-reality-and-quirks-our-asset-allocation/.
This is a very well-thought-out plan that can only lead to a very successful outcome. I especially like the part about paying yourself first where it’s the most important step in maintaining a budget. Another excellent post!
Thanks! We hope you’re right. :-)
We have found in our early retirement that there will always be surprises. Your plan should cover things just fine between your emergency fund and the various budgeted accounts/buckets. We agree on one thing that many I know in early retirement wish they did now and that is having 2 years retirement lifestyle cost in cash. It doesn’t make much of anything but its like an insurance policy to protect your income from having to make portfolio withdrawals in a down market.
Thanks for the great tip on cash — and this recent market crash is a good reminder of the importance of that! We were just talking this weekend about how unhappy we’d be if we were forced to sell off shares right now. This is the time to buy, not sell!
The approach that you put forward has a high chance of success. Years back, when I went back to get a masters after a first year of work, I applied the same approach. I granted myself a fix monthly budget for day to day living, I had a budget for renting a room,… It worked out fine
That’s great to hear — thanks!
I realise this post is a year old, but I am currently working my way through your archives.
I read a lot of PF and FIRE blogs and this is one of the most helpful blog posts I have ever read. I hadn’t given much thought to how I would manage cash flow in ER (because it still seems so far away) but this has spelled out a really great plan. While ours will no doubt be a little bit different, you’ve given us the fundamentals and inspired me to start thinking about it. Thanks!
I’m touched that you’re reading back through things… and that you’re still at it! ;-) And so glad that this is helpful to you! As non-budgeters, we’ve been thinking hard about how we can function in retirement, since *some* budgeting will be necessary. A year after writing this, we’re still planning to follow some version of the bucket approach with multiple accounts. :-)
I’m so glad to see this post! I’ve mentioned to a friend or two that we have four bank accounts for cash (checking/spending, emergency, escrow and home improvement) and I always get the “you’re crazy” look. For me, it’s easier to know what $$ is going where. The account we refer to as our escrow account, holds 1 year’s worth of property taxes, insurance, and big one-time-a-year expenses (like HOA fees). Those things tend to sneak up on you. If not for the escrow account, we’d be dipping into our emergency account to pay them, and then the transaction is painful. We like to avoid painful transactions as much as possible. I love that you also have Next Year’s Money as an account. I might have to borrow that idea.
hope this isn’t too dumb a question – what would be the difference between your Emergency Fund and Next Year/This Year’s Expenses? Keeping two years’ worth of expenses in cash sounds good so you don’t have to sell stocks/bonds in a downturn – but wouldn’t that be your emergency fund? Maybe the emergency fund is for “planned” emergencies – the replacement car when the 10 – 15 year old one bites the dust, the new roof the house will need someday, furnace, other major appliances, car maintenance – other “emergencies” that people don’t always plan for? Love your blog and I’m going through in order as well – Great inspiration!