Examining Budget Flexibility in Early Retirement

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Considering how much money we needed to retire early was a debate that stirred inside me since 2013, the year I discovered Mr. Money Mustache and the early retirement budget based on having $600,000 plus a paid off house. We achieved this number sometime between 2014 and 2015 depending on the housing requirement, but I continued to work for an additional four years. One of the biggest unknowns was how much money would we spend in early retirement? Where did we want to live? What exactly did we want that lifestyle to look like? How much flexibility is in our spending?

I saw people retiring at 32, 33, and 34 years old and was torn between envy and fear. Did we have enough money to do what they did? What if I didn’t like it and had to go back to work? How easy would it be to get employed at that same level? Ultimately we padded our FIRE fund to a level that could provide a higher level of security and flexibility in our spending level.

What is our target budget?

Expenses from a higher starting point have more flexibility. I discussed the mechanics of our accessing retirement funds and disclosed our target spending level of $6,000/mo. This may look low for some and approaching a fatFIRE number for others, but this is the amount we settled on including a bit of a paradise tax for living near the coast.

Where is the flexibility?

One thing that occured shortly after my debate of working one more year was the flexibility in expenses. The 4% rule should always work: If we started somewhere above the bare minimum to live, we aren’t going to dogmatically draw down your assets at an unsustainable rate. Many expenses have some flexibility! Lets take a look at our expenses in early retirement and examine each expense’s flexibility:

Housing: Currently we pay $2300/mo for a luxurious three bedroom rental that includes a two car garage and neighborhood pool. We also picked to live in a coastal city with access to a beach in about 15 minutes. Without having to change geographic locations, a quick search says we can save $600/mo ($7,200/yr) by downgrading to a smaller rental. This could be cut even further with an apartment or moving to a lower cost area.

Eventually we could replace the rental with a small single family home paid for in cash. Depending on the price of the house, this would convert a portion of cash subject to variable earnings in the market to housing with the guaranteed return that comes from rent replacement.

Transportation: We’ve driven the same cars for twelve and eighteen years respectively. They aren’t the most fuel efficient, but we don’t drive all that much. We could save a bit of money in downsizing to one vehicle, moving to one smaller vehicle, or getting a bike trailer and committing to using it more for errands. Taxes, maintenance, and insurance on the extra car easily costs us $1500/yr.

Food: We’re pretty efficient on our food expenses with the trio of Walmart, Costco, and Aldi in our rotation. We’re starting to spend some money at restaurants for things we’re not great at cooking at home. There are a few trade downs we could make and easily save $100/mo out of our food budget. ($1200/yr)

Travel: This expense is the most discretionary that we can cut. I don’t have a good run rate yet for these expenses but we budgeted $6000/yr plus what we can earn in travel rewards. Travel is also cheaper if we have a downturn since this is discretionary.

Health Insurance: My observation includes health insurance is there are two groups of people: Those who’ve always had employer based health insurance and are terrified of anything else, then those who say “self employed people have been buying their insurance for years”. The pre-existing condition clause through the ACA has been my biggest concern, but now eight years into the law with both parties having complete control, I’ve concluded this part is unlikely to be repealed. That means health insurance as a cost in early retirement

Originally we budgeted $900/mo for premiums and $4,000/yr for out of pocket expenses. This was based on our COBRA cost plus running estimates of ACA coverage. In 2019, our monthly budget was set based on paying the $900/mo in premiums. The ACA limits the premium expense to 9.5% of total income provided we earned less than $65,848. As a financially independent couple, we have control over how much income we realize from capital gains and IRA conversions and I realized we would be crazy to exceed that amount. If our income comes in right at the limit, we save $425/mo on premium expense ($5,100/yr).*

Other Expenses: In reviewing all of our other bills, the next three easiest to cut would be our Hulu subscription, reducing our cell phone bill, and cutting gas via a bike trailer for groceries. All in I think there’s another $150/mo ($1,800/yr)

What Is The Total Flexibility?

Starting Budget$72,000
Health Insurance-$5,100
Total Flexibility-$22,800
Total Flexibility (Percentage)-32%

After examining each line item in our budget, we could reduce our annual need by up to 32% before risking going back to work. If the market plummets and stays down for an extended period of time, we then start making expense decisions or go back to work.

What is the value of this exercise?

A fierce scarcity mindset helped us reach early retirement. I grew up with parents who were financially insecure (to put it nicely) and my wife is a natural saver. We spent more than a decade and a half bringing in more and more money while perfecting how to not spend it. When I left work, our mindset had to shift. Not only did all the cash inflows stop, but there were now cash outflows! Could we run out of money? Could something happen in the market that’s different this time? What if I had to go back to my old employer and ask for my job? All of these thoughts are real and likely drove me to work additional years that in hindsight I may not have needed to work. Examining the flexibility in our budget has been valuable in slowly relaxing that scarcity mindset!

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*I’ve actually elected to convert a small consulting gig for a friend into benefit-eligible, remote & part time employment. The company’s insurance and cost is similar to the subsidized ACA rate of $425/mo, but by purchasing it through an employer via a payroll deduction, the expense can be paid with pre-tax dollars which saves us $600/year.

5 Replies to “Examining Budget Flexibility in Early Retirement”

  1. Hi there! I am a long time reader but this is my first time to chime in. Very interesting exercise! My husband and I had also estimated $72k/year retirement spending but in 2016 dollars and have been adjusting the number for inflation every year since. I definitely need to go through similar calculations to see what our flexibility would be. For us, estimating post-retirement spending is somewhat complicated because we are assuming our two teenagers will be off our “payroll” by the time my husband retires in 2-3 years. We know our spending will be different just don’t know exactly how. I am wondering, did you have any surprises in your spending after you retired? Do you feel like you have significantly underestimated/overestimated in any particular area?

    1. Thanks for commenting.

      I wouldn’t call anything a surprise, but two things have been an evolution over time: Housing and Health Care.

      We lived in nicer in-town areas for the last five years. I always thought we could just buy a house for $250,000 and be set for retirement. That is looking unlikely and we may not necessarily want to live in a rural area, small town, or far suburb. This means we’ll eventually exchange our house for a small, mid century house that’ll cost us more up front and in maintenance.

      The second is healthcare. The unknown was outright scary, my corporate plan was decent and the ACA prices kept going up and up. A lot has eased those worries now. The plans are priced at the right number for the companies to have an appropriate loss ratio. While expensive, we’re probably past double digit price increases. Then there was the realization that if I’m spending $72,000, it’s near impossible to realize more than $65,000 in income because we’re always spending down a little bit of a taxable account. Once I get past the “moral argument” of taking a subsidy on the healthcare premium, it comes out to half of what I budgeted if we went that route.

      So I see housing being higher than expected and healthcare premiums being lower. Nothing else is a surprise on the expense side. On the revenue side I think it’s going to be incredibly easy to make $3,000 to $5,000 in bank account signup bonuses!

  2. I really like this article and going back and reading your blog from the beginning. Thanks for sharing actual values. For ACA purposes, what is considered income? Is it just W2 income? Are dividends, interest, and realized capital gains from equities included?

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