Budgeting For Sporadic Stuff

sporadic expenses

If you are trudging along determinedly towards financial independence, and possible early retirement, it is safe to say that you have a target number in mind. It is also a pretty safe bet that you came up with that target number by calculating your annual expenses and then multiplying that number by 25 (for a 4% withdrawal rate) or 33 (for a 3% withdrawal rate), or something in between.

While the 25x rule is elegant, if you diligently sock away 25 times your annual expenses and then sail away into the sunset, chances are that the day will come when you will find yourself digging through your pockets and wishing that they were just a little bit deeper.  Why? Because while 25x works most excellently for annual expenses, it falters when it comes to sporadic expenses.

 

When 25x is not enough

25x works well enough for expenses that recur, and for expenses that you expect to have your whole life. Groceries? Check. A Phone Bill? Check.

Sporadic expenses? Those are a whole different ballgame. Sporadic expenses don’t play nice with the 25x rule of thumb. For the purposes of this article I am defining sporadic expenses as:

  • Large expenses. The kind of expenses that you can’t just find room in your budget for by cutting down on other categories temporarily.
  • Expenses that occur only once or expenses that recur, but only a few times, such that applying the 25x multiplier to them would be overkill.
  • Expenses that are not unexpected. Sporadic expenses are not emergencies. They are expenses that one can foresee.

Here are some examples of kinds of expenses that you might not account for if you only employ the 25x method of calculating what you need.

 

Once in a Lifetime Gifts

In this category I include things like paying for the wedding of a child or celebrating your parents’ 50th wedding anniversary in style. Maybe you would like to help your child with the down payment for their first house. Perhaps you want to make a significant contribution to your grandchild’s 529 (college saving plan), and not just in the scenario where your portfolio happens to have thrived.

 

End of Life Care For Pets

Much like your own, your pet’s medical bills in their old age will likely bear little resemblance to their bills when they were young and spry. In the last year or two of your pet’s life you could end up having to shell out a few thousand dollars a year in vet bills.

 

Dental Work

When I was just yea high, my teeth were the stuff of nightmares. My baby teeth refused to fall out and my permanent teeth were determined to make an appearance in a mouth that had no room for them. My milk teeth and one permanent tooth needed to be extracted, and then I needed years of braces before I could smile and not cause people to run away humming the theme song from Jaws as they receded into the distance. Mr. BITA is blessed with a perfect set of pearly whites. If my genes won the battle, in a few years Toddler BITA’s mouth is going to help put some dentist’s child through college.

sporadic expenses
An approximation of my teeth before the orthodontist went to work

Oh and also, when my mother was around 55 she needed to have about half her teeth replaced with implants, and oh boy that was not cheap.

 

A Luxury Purchase

Mr. 1500 recently bought himself a very expensive Honda. Perhaps you have your eye on something similar, something that you may want to splurge on, truly splurge, just once in your life?

 

If Not 25x, Then What?

 

So how is one to deal with life’s sporadic expenses?

What we are planning to do is to modify our retirement formula a little bit. We are planning to use a 3.5% withdrawal rate, so our multiplier is 28 (instead of 25). Instead of:

Stash Size = 28 * annual expenses

 

Our formula is:

Stash Size = 28 * annual expenses + sporadic expenses

 

We have an excel sheet that lists as many sporadic expenses as we can think of, and an estimated budget for each. We then add a 15% buffer to the total and plug it into the formula above to yield our target Stash Size. Obviously, this isn’t foolproof. There may be sporadic expenses out there that we have not taken into consideration. The hope though, is that we have thought of enough of them and that the buffer will help cover for the ones we have forgotten.

For example, assume that our annual expenses are $60,000, and our excel sheet tells us that we want to plan for $70,000 worth of sporadic expenses. Here is how we would compute our target for early retirement:

Sample Stash Size = 28 * 60,000 + 70,000 = $1,750,000.

In this example, when we do have $1.57 million dollars saved, we don’t start drawing down 3.5% of $1.75 million. We draw down 3.5% of $1.68 million, because that is what we need for our regular annual expenses. When one of the sporadic events occur, we withdraw what we need for it, and that withdrawal is not based on the 3.5% withdrawal rate .

 

A final note about the Sporadic Expense Stash

It is important to note that as far as asset allocation and investments go, we treat our sporadic expense money like the rest of the money in our stash. It isn’t sitting isolated in an account somewhere. It is just a way of coming up with a target Stash Size that is based on more than just the 25x rule of thumb. Just as the 4% number is a rule of thumb that cannot be applied blindly irrespective of market conditions, similarly we can’t blindly withdraw for sporadic expenses either. We must take the overall health of the portfolio and market conditions into account before we make a big withdrawal.

What is your plan for sporadic expenses in early retirement? What kinds of sporadic expenses are you planning and saving for?

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11 thoughts on “Budgeting For Sporadic Stuff”

  1. Thx for sharing!

    We have not yet cracked how to deal with this type of expenses. In our regular budget, we have a monthly contribution to our life happens fund. That carries forward in the SWR we will use.

    Next to that, in my planning sheet, I tried to map the big expenses that I see the next 20 years. And Oh boy, I will be wrong big time!

    Keeps us posted after 2022!

    1. It is certainly a tough nut to crack, and short of having a crystal ball you just have to rely on your imagination and build it some buffer.

  2. This is so important and left out of many people’s “typical” budgets. The dental costs or extra costs for your children can really add up – and without adding this somewhere in your spreadsheets, it could catch you off guard. Great thoughts here!

    1. Thanks Vicki. When I consider how drastically my life and my expenses have changed over the last decade, I can only imagine what the next few decades will be like. I’ve tried my best to imagine some future expenses and build in buffers, and I can only hope that my powers of imagination don’t fall too far short of reality.

  3. Weddings, weddings! Very good point about these big expenses cropping up. Or, taking your whole family on a big trip. Our plan is to err on the side of caution, like you, and not retire until we’ve got more than enough saved. Because college is coming in 8 short school years, and several of our friends have just sent their kids off to college, we have big expenses on the brain. I think it will be harder for Mr. ThreeYear to retire than it will for me, because he is inherently more cautious. So he’ll probably work a lot longer than he needs to, to have an extra large safety net.

    1. It is a difficult line to walk. Our brains seem to find it so much easier to value money than to value time. We (I’m doing this too!) so easily trade what is arguably our most limited and valuable asset – time – for more money to feel more secure. I’m trying to find that elusive optimal spot – enough that we don’t end up regretting our choice to RE, not so much that we greatly regret the extra years we spent on the job.

  4. Love reading your blog Bayalis is the Answer. You are very witty and funny. Just a quick note – I think you have your calculation slightly wrong above – should be $1.75m. Cheers

    1. Thanks for your kind words and for catching the error. $1.57 instead of $1.75 – I must have been having a dyslexic day. I’ve fixed it.

  5. Mrs. PIE and I have been having similar conversations on and off on this subject recently. Our 529 plans are separate from our “number”. We also factor in having to supplementing the college fund stash with perhaps more money once kids hit college and unexpected things crop up. We have also realized that budgeting for major home maintenance is not really an annual thing (e.g. new boiler, new well water treatment system, new windows). Likewise, replacing car(s) has to be amortized over a period of whatever number of years (until they start to bloody cost more to keep them on the road than they are actually worth!). Kids, adult dental is a black box and very, very hard to predict. You never see a poor ortho- or perio-dontist…….

    Buffer is key. If we have over compensated, it will still be OK. I’ll still feel OK if our SWR plan has been a bit conservative. So much better scenario than major shocks occurring when you don’t have a regular paycheck.

    1. We’re dealing with the car issue by hoping that the final destination that we pick will be exceedingly walkable and we can simply stop owning those beasts. Home maintenance we’re dealing with by putting a line item in the budget for about 1% of our home value every year. The hope is that most years we won’t come close to that, and every few years we’ll have one big one that we will have enough funds put by for.

      The future is opaque, and frankly, that is a teensy bit terrifying. The hope is that the FIRE we light will be bright enough to keep those terrors of the night at bay.

  6. I early retired 10 years ago. I think unbudgeted, unexpected losses and expenses, and emergencies are a much larger cost than all of these. In the past two years I’ve had 2 minor surgeries including an appendectomy for mild appendicitis. The bills don’t look minor though. I’ve also had numerous sports injuries, one that required an emergency room visit. Helping out ailing parents may also produce unexpected costs. Early retirees should consider if they want (more?) kids or how to deal with unplanned pregnancies, which could change the entire financial picture. Also consider that you may make decisions for your child’s development based on a much lower budget than if you were working. I could not have predicted how much health insurance has risen (almost tripled in the last few years for worse coverage). A lot of early retirees get subsidized by Obamacare, but you have to live in a low cost area to live on the low income it would take to qualify for subsidies. The subsidy is not prorated, you either get it or you don’t. Yup, an extra $1 in income could wipe out thousands in subsidies, and the income bar is pretty low (I’ve never been under it).

    And I did not predict the paper losses from the financial crisis immediately after retirement. Hopeful early retirees are riding the crest of an 8 year bull market. We all know not to sell during a prolonged bear market, when that 30x annual spending goes down to 15-20x right? However it’s painful watching from the sidelines without being able to pour in new income with reckless abandon. It can be an extreme psychological mindgame.

    Disclosure: I originally left the workforce with 100+x annual expenses and my expenses went up a lot after retirement (I got married and had a kid)

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