Calculating our Expenses in Retirement

To declare yourself financially independent and go running jubilantly through the streets, you have to hit your target number in investments. How do you come up with your target number?

  • You figure out your annual expenses and
  • You pick a safe withdrawal rate (SWR) that gives you the warm fuzzies

You put these two things together, stir, bring to a boil, and voila, you have a target number.


If your SWR is 4%, your target number is 25x your annual expenses.
If your SWR is 3.5%, your target number is approximately 28x your annual expenses.
If your SWR is 3%, your target number is 33x your annual expenses, etc.


But what if you, like us, are in the position of not knowing what your annual expenses are? How then does one set a target for early retirement? In this post we will cover why we have such trouble with our annual expenses, and the strategies we’ve come up with to set our target number.


Why We Don’t Know Our Annual Expenses


We use Mint. We use Personal Capital. We have spreadsheets coming out the wazoo, and yet I claim that we don’t have a handle on our annual expenses.

What I mean is that while we know exactly what our current annual expenses are, this information is less than useful given that we don’t plan to retire where we currently live. Add to that the fact that while we have a shortlist of places that might be our new home, we haven’t yet homed in on The One. And if that wasn’t quite enough ambiguity, three of our four possible new homes are in different countries than the one we currently live in. Yikes!


All of this adds an extra level of complexity to what is already not a particularly simple problem. It is all well and good to know what your current annual expenses are, but using your current expenses as a guide for your lifetime expenses is perhaps a wee bit short-sighted. All early retirees have to factor in things like ongoing health care costs, long term care in the twilight of our lives, our desire to pay for the weddings of our children, etc.

25x only works if you know the value of x. So how do you set yourself up for success if x is proving hard to nail down?


Planning in the Face of Uncertainty

calculating expenses retirement
When uncertainty looms, dig deeper!

When we first started planning our exit from the rat race, we had never tracked our expenses, so we had no idea how much we were spending. We had already decided that we would not continue to live in the Bay Area, but we had not decided where we would live – we didn’t even have the shortlist of four places that we currently have. We needed a target to aim for though, so we set ourselves a target of $100,000 a year, at a SWR of ~3.5%. What was our scientific method for choosing $100k?

  • It is a nice round number.
  • It is a comfortably large number. While 100K doesn’t go far in the pricey Bay Area, it is a fair chunk of change in most other places in the world.

With a target in place, we got serious about saving, but at the same time we worked on refining our target number. Here are some of the things we did to help us do better than “I pulled that number right out of my arse”.


Started Tracking Our Expenses

Now, nearly a year into our journey, we have been tracking and optimizing our expenses for 11 months. We have an idea of the areas where we can cut down without feeling miserable, and also which expenses we consider non-negotiable. This is powerful stuff, because it gives us an idea of how much flexibility we have in our budget, and what our bare-bones balls-to-the-wall expenses look like.

We can also use this information as a rough way to estimate our expenses in a different place. We can remove those line items that are specific to our location, and those that result from us working. For example, we can remove any expenses related to pool maintenance because we do not plan to buy another house with a pool, and we can discount income taxes and replace them with an estimate of long term capital gains taxes, or wealth tax in our new home, etc.

We’re taking advantage of a sort of global arbitrage here. We live in a very expensive area now, so if we use our budget here as a basis for living elsewhere, there is a good chance that we will end up with more than we actually need.


Researching our Potential New Home

We narrowed down the possibilities for our new home to four destinations. We then had conversations with people (friends and family) living in our target destinations about their annual spending. We have spent time on sites like The Earth Awaits (which uses Numbeo data for its budgeting projections) and on various expat forums. We’ve spent time researching how taxation works in each potential destination.


Cobbling Together a Target

Based on these inputs, we have come up with mock budgets for each of our target destinations. We started with the numbers based on actual budgets from folks who live in those places. We then tailored the budget based on what we know about ourselves and our current budget. e.g. if we know that we like to travel more often than the family we interviewed, we’ll pad that number. If we know we eat out less often than the budget described on a particular forum, we reduce that number accordingly. If we know that we will need to update our laptops every ‘n’ years, we budget for that.

We don’t consider our mock budgets to be set in stone – we are still collecting all the data we can. The more data points the better!


And The Final Number Is

We were pleasantly surprised to find that all our mock budgets worked out to be less than the $100,000 a year that we had used for our initial target calculations. We are now estimating we’ll need something more like $50,000 – $70,000 (depending on which of the four destinations we end up choosing) a year. At the SWR that makes us happy, this means that we need a Stash of close to $2 million dollars.


The Stash will not have to cover:

  • Toddler BITA’s college fund. That is over and above the $2 million.
  • The bulk of our housing costs. The equity in our current home will be used to cover most of our housing costs at our new location. We could use our equity to buy another home outright or, depending on interest rates at the time, add it to the $2 million stash, and take out another home loan.

We’re Closer To the Finish Line  

We’ve reduced our target stash size, and the obvious side effect is that we could choose to move our dates in, thus making a mockery of the name of this website, since neither one of us will be 42 when we retire.

We have not yet decided if the dates are going to move, or if we’re going to stick to our original dates and heavily pad our Stash, or something in between. It is certainly a relief to know that we could choose to step off the treadmill even earlier than we had originally hoped for.

Cue celebratory music as the lights slowly dim and the curtain swings shut.




15 thoughts on “Calculating our Expenses in Retirement”

  1. Glad to see you evolved quite a bit from when you started! Vividly remember your original post with the $100k target. Honest disclosure, thought you were out of your mind! The new goal is far more frugal than the first one and definitely has a better foundation for it. What would the new FI target date be, if you take an “optimistic look” and FI for $50k? Can you still make it before 42?

      1. I do have several VERY large boxes from Amazon. Now if I can just find a handy bridge and some tarp…..

    1. Hahahah, yes I remember your comment to that original post – your shock at our number came through quite clearly. As to your second question: since we don’t disclose our NW number on the blog (at least not yet) – I’ll email you my response : ).

  2. Woohoo!! Great job figuring out your magic number!! Isn’t it funny how it’s not actually as much as you’d think? Can’t wait to see where y’all land during FIRE! Just sayin’–Texas is pretty cheap to live in, but hot as hell.

    1. I’m thrilled that the number came down. I would have been a very sad Panda if we had needed to push the date out. I’ve only ever been to two places in Texas – Waco (I did not like that very much) and Austin (I liked that very much indeed). One of the criteria we used though to pick our final four was that we want family around – and that unfortunately rules out Texas.

  3. I think you’re smart to leave out Toddler BITA’s college fund and future housing costs out of the $2MM stash. It’s useful to not get sidetracked by the absolute total and actually work with what you can actually use for your ER.

    1. Yep, her college fund is inviolate. We do plan to use our current house for ER (we will sell, because we aren’t going to stay here) – but I like to think of the equity in our house as paying for our new house, and leave the $2 million to pay for everything else.

  4. If you are anything like us, you’ll refine your budget again. And again. Data points are good and refining them even better. The sheer cost of working (pre/after school care, summer camps for 2 kids, commuting costs x 2) was mind boggling for us when we ran the pre-FIRE and post-FIRE numbers side-by-side.

    You may want to consider putting another budget column in your spread-sheet that captures what you would cut in the event of a +20% market drop. It’s worth thinking ahead of that event. Agreeing ahead of time which places in the budget are either (a) must be deep cuts or (b) let’s not cut so hard it destroys the concept of why we are doing this great thing. It’s well worth doing that exercise..

    Your planned SWR seems prudent and the rate of 3.3% (or less if you can) will help mitigate the risk of the dreaded SoR beast.

    We also don’t include college funds in our SWR. We do factor in what we may need to add to them if education costs continue to soar. And our home value is of course not a factor in SWR either but could be liquidated if the proverbial feces hit the air circulator device…..

    1. Don’t I know it – we’ve already been through so many rounds of refinement before I published this post, and I fully expect that to continue. I’m not complaining though – I thoroughly enjoy all the fidgeting with the spreadsheets and the what-if scenarios. I hear you on the cost of working – apart from the stuff you mentioned a big one for me was the moment I had some months ago when I realized that a fairly large chunk of our current spending is taxes and that I hadn’t discounted that expense in retirement!

      About the budget: excellent point and we have that, kind of. We’ve got items that are marked as discretionary and all those will be the first to go. In addition, I don’t think we’ll stop earning exactly when we hit our target number – I suspect that one of us will keep going a bit longer to add more fat to the budget.

      It makes me happy that we are dealing with 529s and house equity in much the same way – it validates our plan and helps make me feel more confident.

  5. Hahaha, the refinement of “the number” and budget is such a constant ever evolving process. Where we started vs where we are now is hilarious to me at least. I agree with Mr. PIE that, “Yep, that number will change, and change again, and change again.”

    I believe our initial number was somewhere around $1.2 mil, and we thought we’d hit that around 2020 or 2021 time frame… We then realized that we could adjust our risk tolerances and also reduce some of the redundancies we had built into other redundancies. Also, we thought maybe that initial target number was a bit low. So we revised again, and even though the target number got bigger, the time was reduced because we started stashing more money away.

    Enter major revision #3 where we reduced our target number again, but not by much, and factored in other things, so our target date got moved up to ~2018.

    Then Mrs. SSC quit working at megacorp and went to teach and our potentially 2017, for sure 2018 date got pushed to 2020. Meanwhile, I (the initial FIRE doubter) kept bringing up the point that 2019 still seemed to work on the spreadsheet. Oh, yeah, I referred Mrs. SSC to the spreadsheet, lol. Pretty ballsy on my part, I know. 🙂

    Anyway, we’re now commencing our home building out in Canyon Lake and I’ve declared that my leave date is 21 months away barring a nuclear holocaust. Mrs. SSC will keep teaching for an undetermined number of years and we can test run the ol’ FFLC plan.

    My main point is that our plan changed a LOT in 4 years. I’m excited to read about where you end up picking to relocate to, and how your own plan evolves over time.

    You’ve got our spreadsheet with most of the numbers reflecting the 2019/Mrs. SSC keeps working version I think. If not, it’s pretty close to that case. We tried to keep our assumptions pretty conservative, but who knows how it will all really pan out. I’d also like to not depend on US healthcare but seem sort of stuck with that option, lol.

    1. “Oh, yeah, I referred Mrs. SSC to the spreadsheet, lol. Pretty ballsy on my part, I know.” And lo! The student becomes the master : )

      21 months is SO VERY EXCITING. Plus the fact that you have picked your new home base and are going to be building the house of your dreams. I am pretty excited to see how it turns out, so I hope you’re planning plenty of pictures documenting every step of the way.

      I’m glad our plan is still evolving and changing – planning is half the fun! And plans that bring the date IN, got to love those ones.

  6. Everyone always says that a target $100k in expenses sounds like too much but since we plan to stay here and I don’t foresee not having my second household to support any time soon, our number remains sky-high.

    Remind me, the stash does or doesn’t include your tax-advantaged retirement money? And would you leave those accounts alone until the required / minimum withdrawal age if you did leave the country?

    1. $100k is very reasonable with a family in the Bay Area.

      The stash does include our tax-advantaged money (401ks, HSA and Roths). Whether or not we would leave the money alone would depend on the taxation laws of our final destination. If we were in the U.S. we’d be moving money from our 401k to our Roth (the Roth conversion ladder) whenever we could not because we need that money (our taxable should have enough), but to reduce our RMD burden in the far future. If we move to a country that has a wealth tax but that wealth tax excludes 401ks, well then we’d have to spreadsheet it to figure out whether ‘n’ years of paying wealth tax is the better deal or whether ponying up RMD related taxes works out to be less money spent.

  7. What a coincidence, looks like we are both aiming for same numbers. Almost same age, Fellow Indian here, 2M is our FI number, not included fully funded 529 plans. We are close for FI and half way through 529 plans. We think we can close on both FI and 529 by 2022. However the biggest issue is with setup costs post FIRE and we don’t want to work. Just wanted to get your input

    We are not in Bay Area and our house equity as of today is around 150k after realtor fees, taxes etc. and probably would take us to 200k by 2022. we went to Amsterdam and fell in love with the place. Looks like you have some good info on Amsterdam, what’s a good setup cost in Amsterdam? We are thinking 750k in setup costs would be good for most of the places. Our short list is very similar to yours, Amsterdam, Spain, Denver and Austria. 500k for housing and 250k for the rest. Because of setup costs, it will take us probably another 5 years, like 2027. Are we over estimating setup costs in places like Amsterdam?

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