Early Retirement Part 3: Expenses

 

Welcome to the third installment of my Early Retirement Trilogy.  It is now time to talk about expenses.  If you missed the earlier parts or a search engine brought you here, go back and read Part 1 on the Early Retirement Mindset and Part 2 on Generating Income.

How Much Income Do I Need?

I approach the decision on when to retire from the demand side rather than the supply side.  That is, I figure out how much money I need to live the lifestyle I want and then will retire when I have a portfolio that can generate that.  Everybody has a different situation and there is no one number that is going to work for everyone.  You need to figure out what kind of lifestyle you want to live and how much that is going to cost you.  It turns out predicting how much money I will need is hard, so I plan to err on the side of caution.  So how do I get started doing that?

It's spreadsheet time, baby!  I have tracked my yearly expenses for nearly 20 years and have a pretty good idea of where my money goes.  Most years fall in a pretty tight range only varying by plus or minus 5K from the average.  There are a handful of outliers to the high side caused by one-time events: Car Purchase, Hawaiian Vacation, Pool Refinishing, etc.  Projecting the typical expenses into the future with an inflation factor is easy.  The one-time events I amortize over the years.  For example, if I typically spend $2K on vacation a year and $8K once every 4 years, that averages to $3.5K per year, so I use that number for my projections (and increase it by an inflation multiplier every year).

There are some adjustments needed when you stop working.  The biggest and stupidest is health insurance costs.

I could fill many blog posts with what is wrong with health insurance in this country but will limit my vitriol to just those parts impacting early retirement decisions for now.  When you retire early, you don't have access to Medicare until you turn 65, so you need to bridge the gap with something.  My planned income from stocks and dividends will be too great to allow me to qualify for Medicaid, so I will have to buy my own medical insurance.  At last check, premiums for the least expensive high deductible family plan in my state would run me $11K per year (and likely continue to go up faster than inflation).  That is insane!  We are all healthy and our medical bills almost never exceed $500 in a year.  We pay way, way more into the system than we get out of it.   We could potentially qualify for some subsidies to reduce that premium if our income is below something like $68K, so you can bet I will be exploring that when I retire.

Then there are college expenses for the kids (also stupid, but not to the level of healthcare since at least with college you have a choice).  For now, I assume the worst-case expense that both kids go to an expensive private university and don't get any scholarships or financial aid.  If I am financially prepared for that, then any surprise will be to our benefit rather than detriment.  I don't amortize the college costs but treat them as an expense in the year they will be due instead.  This causes a huge drawdown of capital when I'm in my 50s and is the biggest risk of not being able to bridge the gap to SS and Medicare.    

So, my trusty spreadsheet estimates I will need about $50K per year in income (increasing every year with inflation), and up to $650K for college expenses.  Like the government budget, most of that $50K is mandatory spending, not discretionary.  Things I have limited control over, like real estate taxes, health, home and auto insurance are mandatory and things like vacations and cars are discretionary.  

Note: Some of you reading this are probably saying $50K is way too low and you are out of touch.  Some of you are probably saying $50K way too high and you are out of touch.  You are both right (about the number and about me being out of touch.)  This number will vary significantly for everyone depending on their situation.  I have a pretty good idea what the salaries and expenses are for my peers in my area, but I also recognize that doesn't translate to other areas of the country.   I think this number is pretty low for a family of four in suburban Massachusetts, especially considering about half of that goes to two items: real estate tax and medical insurance premiums.  If you live in San Francisco or New York, that number may be your rent, but you should be making a higher salary to help offset that higher cost of living.  The number itself doesn't matter for the purposes of this blog.  What matters is figuring out what your number is and coming up with ways to lower it if you want to retire early.

Most people only focus on controlling the discretionary expenses and not the mandatory ones, but I will provide my thoughts on various ways to control both below.

DIY

Do It Yourself.  This is a common theme throughout this blog and is a key part of my retirement mindset.  I also live in fear of getting ripped off because I am not knowledgeable about something.  There is a Dad's Facebook group in my town that I belong to, and I am dumbfounded by how many posts there are like, "My lawnmower won't start.  Anyone have a recommendation for a good shop to take it to?"    I'm not judging them; I just don't understand.  To me, that is my lawnmower throwing down the gauntlet and saying, "Bring it on.  Let's see what you got!"  I can't back down from the challenge of figuring it out and fixing it myself.  By tackling this problem, not only do I get to learn about lawnmower repair, but I also save money in the process by not having to pay a shop for labor and their markup on parts.  What I learn from that job can then be applied six months later when the snowblower has the same problem right as a nor'easter is hitting.  

Also, what if the shop fixes something, but the problem comes back or wasn't really fixed?  Now you have to get into an awkward negotiation about payments and who should be responsible.  

I recently lost sleep over arguments with my solar panel installer over a failed component that should've been covered under their warranty that they would not honor.  I hate that more than anything.  Except maybe health insurance.  It's worth a lot of effort to me to avoid that kind of conversation.  That is undoubtedly why the poster is asking that question in the first place- they want to find a reliable repair person who won't rip them off.  

There are Youtube videos out there that tell you how to do anything you could ever want to do.  In the past year I have replaced a few deteriorating bricks in my chimney, repointed and waterproofed the whole thing, replaced a failed switch box on my solar panels (after my installer wouldn't honor their warranty and wanted $250 just to come out and diagnose the problem), fixed an exhaust hole in my car, repaired an air conditioner that wasn't blowing cold air, ran a water line to a new outdoor faucet, replaced a battery in my electric riding mower, replaced a headlight in another car and probably a bunch of other things I have forgotten about.  In addition, I mow my own lawn, open, close and maintain my pool and do other routine activities rather than pay someone to do them for me.

Not all of these tasks make sense for everyone to do.  Use some smarts to figure out what you can realistically tackle yourself.  The chimney repair, for example I didn't want to do for safety reasons.  I was forced to do it myself by the outrageous quotes from contractors.  My roof is two floors up and sloped at 37 degrees, so it is fairly steep.  The chimney was maybe 5 feet tall on the upper side and 8 feet on the lower side.  The mortar had deteriorated in places and a few bricks had pretty severe spalling.  The first quote we got was from two guys who said they could plaster over the entire thing that afternoon for $3100.  Two guys, four hours of work and less than $100 worth of plaster.  That works out to $375 per hour per person 😲.  For work that doesn't require a great degree of skill or knowledge!  Who would pay that?!

The second quote was for replacing a handful of bricks and repointing the chimney.  This came to $7600, including a $4K charge for scaffolding.  Also insane.  Are other people really paying these extortionary prices?  To the Youtubes!  I'd never done any brick work or roof work, so I had to get educated.  I learned about safety harnesses, brick repointing tools, mortar types, and how to repoint a chimney.  I bought a safety harness and line for $100, a masonry blade for my angle grinder for $20, a roof anchor for $15, a couple of board jacks for creating a flat platform for $25, a pointing tool for $10, waterproofing sealer for $35 and a $10 bag of mortar.  It took me two weekends of dusty work, but I got it done safely for $215.  I'm sure my joints don't look as pretty as what a pro could do, but they're 20 feet up on a chimney you can't see up close anyway.  That is $7400 saved.

The air conditioner repairs are even greater savings in percentage terms.  You can't get a plumber, an electrician or an HVAC person to even come out and diagnose a problem for less than $100 these days.  The last problem I fixed, all I had to do was take the cover off the outside compressor and I found a corroded wire that had broken off of the contactor terminal.  I replaced that wire, and the problem was fixed.  No cost.  I've also had to replace the motor startup capacitor in every central-air system I've ever had.  It is a common point of failure.  Those capacitors can be bought on Amazon for $15-$20 and there are lots of Youtube videos that show you how to diagnose and fix that problem.  

I mentioned lawn mowing in part 1.  Quotes for mowing my lawn come in around $80 per mow.  It would take a two-man crew probably half an hour to do.  That is $80 an hour.  Granted, they use their own equipment, but still, that is an extremely high hourly rate.  If they come once a week over the 5-month growing season, that is $1600 a year.  Instead of paying that, I put that money into an electric zero turn riding mower and can mow, trim and blow my lawn in an hour.  The electric mower is key- with lower noise and no exhaust fumes to breath, it makes mowing a much more pleasant chore.  The mower paid for itself in two years.  Plus, I can use it for fall cleanup and turn leaves into mulch for my fruit trees.

There are limits on DIY.  While I have started doing my own repairs on cars, this requires a lot of tools, some specialized, a good place to work on the car (ie not out in the driveway on a 15-degree day), and, ideally, a backup vehicle you can use while you have the other car taken apart.  

This isn't feasible for everyone, so many will have to throw themselves on the mercy of a mechanic when they have a significant problem.  Make sure you get a reliable car and find a reliable mechanic to work on it if it does develop a problem.  One interesting note:  I don't change my own oil.  Low-cost oil changes are fast and ubiquitous, so it isn't worth the effort to do that one myself.  The savings aren't there.

Car Do's and Don'ts

It pains me to say this, because I love cars, but they are a big waste of money.  Unfortunately, in America, they are a necessity.   I just saw an article saying the average American spends $830 a month on transportation costs (including payments, gas, insurance).  If that is accurate, I'm dumfounded again.  That is way higher than it needs to be.

Don't buy a new car.  I haven't always followed this one myself.  A year after I got my first job, I splurged and got a brand-new car when my old one needed repairs that cost more than the car was worth.  Granted at that time (the late 90's) the stock market was going through the roof and my retirement projections showed that if things continued that way, I would be able to retire by age 27.  So, I dropped 22 big ones on a new Honda Civic Si.  I don't regret it- I had lots of fun in that car.  That was an investment that worked out for me.  Accounting for trade in money I got for it, that car investment cost me about $145 per month over the 8 years I had it.  Not too bad.  I did have a 5-year loan on it at something like 5% interest, so I actually paid a little more in total.  Since I was just starting out, I didn't have the savings built up yet to pay cash for a car and wanted to keep what I did have in the stock market which was going up 50% a year at that time, so a 5% loan made sense.

The other new car I bought was in 2007 when gas prices were setting record highs, I had a child on the way and a 60-mile daily commute.  Used Prius's (Pria?) cost about as much as new ones at that time due to high demand, so my wife and I bought a new Prius for 24K.  Loan rates were not favorable, and the stock market was on shaky ground, so I paid cash for the car.  Unfortunately, this car got totaled in an accident and replaced with another brand new one in 2009 covered by the insurance of the person who hit us.  We still have that car today and we have no plans to replace it anytime soon.  So that 24K investment has been amortized over 15 years and counting.  That's $133 a month and dropping.  Acceptable.  Then there is the gas mileage.  This car gets about double the gas mileage of the average car, so if gas averaged about $3 a gallon over those 15 years and 130k miles, that car has saved us an additional $8K in gas costs.  I can't understand why so many people buy new cars every 4 or 5 years or *gasp* lease their cars.  You take the big depreciation hit when you drive it off the lot and then don't keep it long to amortize the cost down to something reasonable.   

You don't need to spend big bucks to have fun.  

About 8 years ago I bought a used Mazda Miata for $14K as a fun third car.  Other guys might go spend $70K on a Corvette or $100K on a Porsche to satisfy their midlife crisis needs.  I can't bring myself to do that.   As an investment, the Miata has worked out just fine.  Today the car is still worth probably close to what I paid for it, if not more.  I do regret getting such a nice one, though.  I have to take care of it and keep it clean.  I wish I had gotten an older, more beat up one.  That would probably have been a better investment for me.  

Don't get a truck.  I like trucks and often wish I had one, but the investment reality for them just doesn't make sense for my occasional need to haul stuff.  It probably doesn't make sense for most people who buy them.  Yes, I am sure there are people who need them, but look around when you are out driving.  Most of them aren't hauling anything but one person the majority of the time. 

They are big, expensive and get poor gas mileage.  I can't do that.  Instead, I got a utility trailer for $1300.  It has a bigger bed than most trucks, is easier to load and I only have to haul it around when I need it.  I don't have to navigate a big boat around the grocery store parking lot all the time because I need to pick up a yard of dirt every once in a while.

Finally, don't buy a crossover.  I don't have a good investment reason for this, I just think they all look alike, have no character and are ugly 😁

OK, that ended up being all "Dont's".  On the "Do's", side, I'd say get something reliable unless you plan to work on it yourself.  Buy used.  Buy something you like, because you should plan to keep it for the long term.  Do consider the gas mileage.  The auto industry trend towards more and more horsepower in every car is dumb.  You don't need a 3.8 second 0-60 time in your family truckster!  Take the cost and gas mileage savings of a smaller motor.

Gas mileage triggered another thought: I haven't said anything about electric cars.  In general, I like them.  While I am the perfect candidate to own one (short or no commute, solar panels, other gas-powered cars in my garage for long road trips), I don't have one. (The Aptera would be great for me.)   My other cars still work fine, and I don't plan on replacing them until absolutely necessary.    I also believe that battery technology is evolving so fast right now, that there will be lower cost options with greater range in five years.  

Boats

If it doesn't have an engine, I'd consider it.  Sailboat.  Canoe.  Kayak.  DIY raft.  For anything else, rent, don't buy, unless it is a hobby you are committed to.

Utilities

This is one of those mandatory spending categories that you can actually influence.  I had solar panels installed 10 years ago based on it meeting my good investment criteria.  I've only had to pay a few hundred dollars total for electricity over that time and have additionally been generating income from the SREC incentives offered in Massachusetts.  They paid for themselves in five and a half years and now I get free electricity.  I calculate that has saved me more than $22K in electricity bills over the past 10 years.  If your home isn't a good candidate for solar panels, look for a community solar program where you can buy panels on community land and use that to offset your electricity usage.

I would love to get rid of my heating oil expense.  Air-source heat pump technology has advanced enough that they are now capable of heating houses in my area on all but the very coldest day or two of the year.  There are incentives for them, but with our expensive electric rates ($.33 per kW/h right now!) the payback time for them is > 15 years.  If one of my central A/C units fails, replacing it with a heat pump is a no-brainer.  But replacing it outright is still questionable. Maybe if they start offering 0% interest 7-year loans I would consider it.  Furthermore, I am interested in upgrading my solar panels to newer, more efficient ones that can generate more power.  That would help reduce the payback time on the heat pump as well if I could power it with my own electricity.

Vacations

I have trouble enjoying fancy vacations.  I'll take the Motel 6 over the Ritz-Carlton every time.  The Motel 6 can provide free wifi, but the Ritz needs to charge $15 a day for it?  F-that.  And their valet parking.  And their bel hops.  And so on.  Due to my DIY mindset, I can't enjoy something when everyone has their hand out.  That isn't to say I don't like exotic locations.  I just want to make sure my investment goes towards experiences and memories and isn't wasted on wifi and valet parking.  

Many of our family vacations involve camping.  My idea of a great vacation is backpacking out to some scenic wilderness area, getting away from all man-made noise and soaking in the beauty of nature and letting it recharge me.  It just so happens this is a relatively inexpensive way to vacation as well.  

In retirement, I would like to travel more and include a significant budget for trips.  Rest assured, that budget will not be wasted on paying for parking.

Weddings

If you have made it this far in the series, you are probably pitying poor Mrs. Wisdumb for having to live with me.  There's no need for pity; she shares just about all of this philosophy with me, and she is very handy with the DIY stuff in her own right.  When we argue about money, it is about something relatively trivial, like whether the returns on paying down a rental house mortgage early will exceed the income to be had from investing that money elsewhere.

It should come as no surprise, then, that we didn't have a big, expensive wedding.  We were married by an administrator in city hall.  The bride and groom wore jeans.  We went out for a sushi dinner afterwards and threw a casual party at our house for friends a few weeks later.  No fuss. No debt.  No stress.  Good memories.

I would alienate a lot of friends and readers if I said everyone should do this, so I won't.  What I will say is think carefully about the return on investment for your wedding.  $30K spent on a wedding 20 years ago would be worth $180K today if you had put it in the S&P 500 instead.  That could cover more than 3 years of early retirement.  Think of all the memories you could've made with those 3 years that you had to spend working instead.  If you are taking out a loan or putting a wedding on credit cards, think again.  Starting your marriage out in debt is not a great way to begin.

Rent

Just a quick note on rent.  When I was younger, I always had a roommate (or several).  Sharing rent costs kept housing affordable and let me put more money into savings.  Live below your means, share your rent and save up for a down payment on your own house.  If you buy at the right time (see part 2) owning a house should work out better than renting in the long run.

Real Estate Tax

I'm not one to rail on about taxes.  I accept that they are necessary.  I just want to be sure I get the most value out of the taxes I pay.  My real estate tax bill for my primary residence has gone up by at least 33% since buying the house 10 years ago.  The house has appreciated about 75% over that same time.  So that is a net win, but the equity in the house does nothing for me unless I sell it.  It doesn't help me cover that ballooning quarterly tax bill.  That bill is hefty enough that I need to consider moving once the kids have graduated high school, assuming I have retired.  

The return on investment for that high real estate tax is a good school district.  Once the kids graduate, the direct returns in terms of education are no longer there.  Potentially, demand for housing in a good school district will still be there and house values will continue to appreciate, but you need to sell the house to harvest those gains.  I've heard stories about retired people in their 70s or 80s being forced out of their family home that they bought 50 years ago for $40K that is now worth $2M and has a $30K per year real estate tax bill that they can't afford to pay.  It's a thorny problem.  While I like my house, my roots aren't too deep in it, and I am open to moving elsewhere in retirement.  (More posts on that subject later.)

Summary

I could go on about expenses (clothes, phones, Apple products, streaming services, gym memberships, haircuts, restaurants, alcohol, etc.) but I'm in danger of needing four parts for my trilogy.  I think you have the idea by now.  Basically, just apply the investment mindset to your expenses and you may realize that much of what you are spending money on is not a good investment if you are looking for early retirement

So that is the series.  I've had fun writing this up and gathering and organizing my thoughts on these various topics.  I'd love to know what you think- add a comment or send an e-mail.  Or if you want the Wisdumb perspective on an expense I haven't covered here, post it below and I'll add my thoughts.

Good luck on your own journey to financial freedom!