You Might Be Underbudgeting for Early Retirement

It’s a notion so ingrained in the conventional wisdom that I can’t recall where I heard it first: the idea that you’ll spend less in retirement than you spent while working. If you read traditional retirement planning advice, you’ll see the numbers 70 and 80 percent thrown around a lot, as the percentage range of your prior spending that you can expect to spend in retirement.

There are numbers assigned, so it must be science, right?

Not even a little bit.

It’s a total chicken or egg question. We know from data that retirees spend on average less than those still working, but we don’t know why that is, because no one actually asks that follow-up question in the large-scale surveys these stats come from. So isn’t it possible that people spend less in retirement because they have less to spend, not because they want to spend less?

Coupled with all of this is the lore in the early retirement community that you’ll be content with very little in early retirement, and maybe you will be! But not everyone will.

Let’s talk about why it’s worth questioning that conventional wisdom, and by extension, why you may be underbudgeting for early retirement.

Want to know a fun fact? We spend more money now than we did when we were working. (Quick reminder that we don’t share numbers. This post explains why.)

On the basics, everything is about the same, but we’re spending more in several categories:

Groceries. I’m home more now, and work used to pay for a lot of my meals when I traveled nearly every week.

Travel. We took three big international trips last year and a bunch of domestic ones. While we could travel when it was cheapest, that was still two more international trips and several more domestic ones than we would have ever had time for in a year while working.

Experiences. We can say yes to things on a whim now, and we often do. Whether that’s going to the ballet or seeing a concert, tickets cost money.

Makeup. This one is a slight joke, but I do find it hilarious that I’ve bought and worn more makeup doing book promotion in the last few months than I bought and wore during my entire working career.

Those things might be specific to us and our situation, but when you have more time on your hands, it follows that you might want to do a few things with some of that time that have a cost associated with them.

Understanding Your Priorities

Let’s use an example to illustrate a concept. A common question I get is, “What if I really love travel? Can I still retire early?” As someone borderline obsessed with travel (I recently lost my United 1K status. Please keep me in your thoughts during this trying time), I always reassure them that it is, but the truth is that the real answer is: it depends. Or, perhaps more accurately, yes, you still can, but your travel priorities might dictate whether you’re happy with the kind of travel you can actually do on a typical early retirement budget, or whether you’ll need to raise that budget a bit.

Because “travel” isn’t one thing. Buying a last-minute first class ticket to Paris and staying at the Ritz is “travel” just as much as hitchhiking across the desert southwest and sleeping in a tent is “travel.” What’s important to note is both where you fall on the spectrum of Paris Ritz to desert hitchhiking, but also how you feel about seeing the whole world versus just some destinations.

If you love seeing new places, but you’re agnostic about what they are and are game to go wherever’s cheapest, then great. As an early retiree, you can travel off-peak and chase the best deals to the most economical destinations. If, however, you’re more like us, and you have a list of places you want to see, some of them expensive, then you may find yourself choosing between overspending your budget or not seeing some of those places.

That’s no way to spend your dream life. Especially when you can plan a little better and skip having to compromise.

And that’s really just one example. Whether it’s travel or something else, spend some time considering what it is that you love about the activity that you hope will fill lots of time when your time is your own. If you’re game to do it as cheaply as possible, no matter what, then maybe it won’t cost you much more in retirement than it does now. But don’t go in assuming that.

The Perpetual Womp-Womp of Health Care

I’m working on a big health care update post, to share what it’s like to use actual health care services in early retirement, but in the meantime, I’ll just share this little nugget: our health insurance premiums went up $300 a month in 2019 vs. 2018, adjusting for plan changes. That’s a huge difference, and would sink a budget with less wiggle room.

Health care is nearly impossible to predict, and could easily end up costing more than you expect it to. Another way you could spend more than you do now – in fact, a way that you will spend more than you do now. (Prices go up as you get older. Don’t forget to factor that in.)

Related post: Early Retirement Health Care Costs for 2019 and Beyond

There’s No Downside to Giving Yourself a Cushion

If you’ve read this blog more than once, or you’re read Work Optional, you know that I’m not a big fan of the idea of saving 25 times your annual spending, the inverse of the supposedly safe “4% rule.” There are a bunch of reasons (see the links below), but among them is exactly what we’re talking about here: that you very well might end up spending more in early retirement than you expected to. Overspending your budget just a little bit when you’re already withdrawing the most you safely should could end up being a big problem, especially if you compound that with a bad sequence of returns, which our friend Karsten reminds us early retirees are statistically much more likely to experience. (Yay! ::sarcasm::)

Related post: The Fundamental Problem with the 4% Rule for Early Retirement Isn’t the 4% Rule

Related post: The Case for Conservative Early Retirement Investment Projections

Giving yourself a bigger cushion, however, in the form of an actual savings buffer, a lower safe withdrawal rate than 4% or a well-bolstered contingency built into your plan, give you a lot more safety.

But You Also Might Make Some Money

I know very few early retirees who earn $0 a year from work in one form or another. (Would-be retirement police, read this post before making a fuss.) And if you end up making a little side hustle money in retirement, that very well might provide the perfect buffer against higher-than-expected spending on the fun things that you enjoy.

Just make sure you’ve done the math on how much you might realistically net from part-time work before you start planning on that income.

Illustrative example and sidebar: I am not a fan of the “barista FIRE” term that romanticizes retail and food service work as being “stress free” and “easy.” (This seems to be an especially classist version of the more common phenomenon of assuming our own job is hard and stressful but everyone else has it easy. The grass is always greener.) But the term also shows either a limited grasp of basic math or, more likely, a big misunderstanding about how much a barista earns. Starbucks, for example, has average pay per Glassdoor of $9.43 per hour, about $8.65 after you subtract FICA. Assuming you have no other tax withheld and do not pay a health care premium out of your pay, it will take 115 hours of work to earn $1,000. Working at that rate full-time would only get you to $18,000 a year, again assuming zero taxes. Is anyone seriously giving up a highly paid job to work as a barista and get yelled at by hurried customers all day?

Of course, if you have a side hustle that pays you more lucratively, then the buffer it provides will be invaluable for both smoothing out the bumps in your spending curve and just providing a general contingency against the unpredictable.

Your Turn

Do you think you’ll spend more than you do now in early retirement? For those already retired, how does your spending compare, and how would it compare in a perfect world? Thoughts on “barista FIRE”? Spill ‘em all in the comments.