I’m so frustrated understanding how you walk away from work completely on early retirement and also budget for lumpy expenses (major home repairs that spring up every 10 years, new mattress, new car, etc). Do you just amortize all those things over the length of your retirement period and include them in your annual expenses? Keep an emergency fund in a HYSA? If you do the emergency fund, how do you safely replenish it from your nest egg without increasing your SWR by too much?
Thanks!!
How do you account for big lumpy expenses?
byu/No-Yam9689 infinancialindependence
Posted by No-Yam9689
25 Comments
Large lumpy piles of cash
You should expect roughly 1-3% of your home’s value on expenses.
The average annual cost needs to be included in your SWR income. You’re past spend should be a good ballpark for future costs, plus headroom.
I’m not recommending you follow my advice.
I keep a static 100k in money market that is strictly for the “unknown” lumpy expenses.
If I don’t use it I put the extra interest into my investment portfolio
It’s really over the top conservative but I sleep like a baby.
You include them in your expected expenses. It’s not that hard, brainstorm every lumpy expense you had in the last decade, check what they cost, and then build that into your projections going forward. Your SWR has to include all of that.
I have a savings account set up where I put aside a certain amount of money, each paycheck, to pay for house expenses like that. Smooth going into the account and lumpy going out.
I have a separate column for these sorts of expenses for each year. I like to plan on a monthly basis so I divide that lumpy expense by 12 and add it to my monthly budget. I’ve done it for the past 3 years. I’m still at least 5-10 years from retirement so in 4-7 years I’ll have a pretty good estimate of what this averages out to and how it affects my monthly budget.
In my budget I amortize expenses over the expected lifespan. Things like roofs windows furnace appliances etc etc. just like you’d have vehicles budgeted etc.
Yes to the amortize the expenses (essentially).
Either amortize and add to annual expenses, or calculate the amount you expect to spend on lumpy expenses during retirement (i.e. $20k for a new car every 10 years, $5k for a new roof every 20 years, or whatever) and add that amount to your FI number.
There are lumpy expenses that are predictable, like $2k a year for my disability insurance, or $5k every year scattered throughout the year for furniture.
Then there are unpredictable lumpy expenses that you can expect to happen eventually, even if you don’t know when, like having a car breakdown cost $5k or a new HVAC costing $15k, etc.
Those two categories you should really be building into your budget and saving up for.
The other lumpy expense are the ones that you’re never had and you’d never expect, and those ones you simply just need to have a large enough cushion to absorb comfortably prior to really being truly financially independent or retiring early.
This is my plan:
– Try to estimate lumpy expenses and amortize into my annual spend
– set aside a cash fund to handle those expenses, maybe something like 50k
– after drawing from the fund, slowly replenish each month back into the fund
– if another expense comes up before the cash pile is replenished, draw from stocks
The goal is to keep my annual spend somewhat consistent to avoid making my income too high in a year with lumpy expenses
Yes, amortization is the way.
Say you estimate your average expenses per year in retirement to be $50k. That should include your day-to-day (rent/mortgage, food, insurance, netflix, etc, etc). But also allocations for those lumpy expenses.
If you plan on buying a $30k car once every 10 years, then that is $3k/year. Say you also anticipate $3k/year on average for home repairs/maintenance (new roof every 20 years, new water heater every 8, new hvvac every 15, plumber every so often, etc). Maybe another $3k/year in unplanned health issues. Then another $1k/year in other stuff (technology replacement like phone/tablet/computer, new mattress, appliances, whatever).
Well that is $3k+$3k+$3k+$1k = $10k/year on average in lumpy expenses that might come out to $0 most years and a few $k other years and $30-40k some years (new car + new HVAC hit the same year, for example).
So what that means is that if you peg your annual spend at $50k including these lumpy expenses–expenses which your estimated spend number must include–then you should really be spending $40k/year in your day-to-day and discretionary expenditures and then simply pay the piper when the big stuff comes due.
My retirement number is based on annual spending, which includes big lumpy expenses.
My money makes more money than I made by working.
To be really honest, it’s what sent me back to work after I testFIRED in 2023. I wanted to do a bathroom remodel and didn’t feel comfortable front loading a large expense like that
But what other have said is the conventional wisdom.
A. Have a fat stack of cash from which you can buy high priced items or pay for lumpy expenses
B. Your budget should include a certain dollar amount or percentage for such expenses, so in some years you will have a surplus
I add 200k to my fire number. That accounts for it.
So my fire number for liquid assets is 3.5M for the purposes of calculating SWR, but I need 3.7M before I will pull the trigger. I figure that should take care of things like a new roof, new car, new HVAC, other shit that breaks etc
I have about 10 brokerage accounts I use as digital envelopes that I still have auto transfers set up monthly into. Things like our hobbies, trips, gifts, donations, car repairs, and home maintenance are all items. When I sell money market funds each month from my bond ladder account, that money goes into checking and I “pay myself first” for these items. Large accounts get invested in money market accounts.
It’s probably over engineered but I have time and I like this model, it served me well in my earning years.
Budgeting software helps get you more in touch with your cash flow habits. They do not handle non-recurring expenses well. That said, if you carry enough insurance and budget for an extra 10-20k/year* in surprise costs you’ll be fine. If you don’t spend it you put it to work elsewhere, if you spend a little less or a little more those should even out with each other, and if you have a big unexpected expense… well… that’s life. If you don’t want to bear the risk of those you’ll need either insurance or greater savings to absorb it.
*that’s my number, it might be different for you depending on the size of your home, the value of your car, and how many other fancy things you have to maintain that something can go wrong with. fwiw I have no kids.
I wish I had 10 yrs between major home expenses. But yes, figure out what your home costs per month or year to maintain and make sure that amount is liquid enough to access in a couple weeks.
If you expect to pay $100k a decade for stuff like this, then you budget for that annually and even monthly. Yes, go ahead and convert investments into income each year according to your full budget. Whatever you don’t spend can sit in HYSA, bonds, or even back in the stock market.
You do want to convert it each year so that you don’t explode your tax liability in random years where you do have higher spending
You amoritize obligations you’ve already incurred.
You annualize obligations you plan to incur.
I’m not being pedantic: I’m pointing out that money works the same way ‘backwards’ or ‘forwards’ from any point in time. In your yearly budget, include both the amounts for future planned expenses, and surprise expenses (separate them).
Smooth your lumpy dough for the best baked bread.
Yes you just amortize them.
Most people recommend 2%-3% of home value per year for expenses that you describe, however that is a lot less of a well-defined relationship at the outlier of home value ranges and your experience is subject to be slightly different, so plan accordingly.
> Do you just amortize all those things over the length of your retirement period and include them in your annual expenses?
That’s what we’ll try to do.
It’s what we’ve been doing now, while accumulating.
We rigorously track our spending and let it inform our budget.
Big lumpy spend is a **major** part of our spend. I don’t expect that to change.
My budget says I’m allowed to spend $10k on house maintenance and upkeep every year. If I don’t spend it all and don’t see a big expense coming, my wife gets to do something frivolous with most of it. If I overspend in a year, I borrow from the next year.
Budget says I can spend $50k on my car every 10 years. That mostly means I spend $300-$1k/year, then pay cash for my next car.
Every category of lumpy type of expenses has a budget and I have some rule for managing it over multiple years. I keep about 1 year of expenses in cash. It grows by interest and dividends and any other income and we pay all expenses out of it. If I had lots to replenish for some reason, I’d plan how much to take from which sources to keep my taxes minimized. We’ve got 401k, taxable investments, Roth IRA, or HSA if it’s medical.
If my budget fails, I do have some extra money because I’m the sort who wears both a belt and suspenders.
Excuse me, that’s my wife.