by Planning for financial independence and early retirement (FIRE) requires a clear understanding of your future expenses. In this post, we’ll dive into our process of estimating retirement expenses and share our journey towards achieving our FIRE goals.
The Importance of a FI Target Number
When we started our FIRE journey, setting a target number was crucial. It gave us something to aim for and helped us estimate how long it would take to reach our goals. Our initial target was based on living expenses of $35,000 per year, which would have allowed us to live comfortably in the Dominican Republic.
However, life is unpredictable, and our plans have evolved. We’ve realized that while we love visiting the Dominican Republic, we want to maintain our primary residence in the United States. This change has impacted our projected expenses, particularly when it comes to healthcare costs.
Our Current Financial Situation
We declared ourselves financially independent in January 2017, based on having enough income-producing assets to support $35,000 in annual spending using a 4% withdrawal rate. However, we’re continuing to work to accomplish other goals before retiring, aiming for a 2020 retirement date.
Estimating Retirement Expenses: Our Process
To project our future expenses, we analyzed our spending over the past three years (November 2014 through October 2017). Here’s a breakdown of our average annual spending:
- Food & Dining: $10,911
- Bills & Utilities: $2,075
- Auto & Transport: $2,659
- Travel: $5,796
- Health & Fitness: $821
- Shopping: $2,285
- Entertainment: $1,122
- Personal Care: $665
- Miscellaneous: $62
Total: $26,396 (excluding home expenses)
Projecting Future Expenses
For our 2021 projected retirement budget, we’ve made the following adjustments:
- Added homeownership expenses (property taxes, insurance, maintenance)
- Applied a 3% annual inflation rate
- Increased the Bills & Utilities category to account for additional expenses in our future home
Our projected 2021 retirement expenses total approximately $38,255 per year, not including healthcare costs and charitable donations.
| 2021 Projected Retirement Expenses | ||
| Category | Expenses | Comments |
| Home: Property Taxes, Insurance and Maintenance | $6,556 | No mortgage! 🙂 |
| Home: Other expenses, supplies, furnishings | $1,800 | |
| Food & Dining | $11,474 | This is trending down due to decreasing alcohol spending. |
| Bills & Utilities | $4,562 | Added $125 for water and increased electric by $50 a month. |
| Auto & Transport | $2,993 | |
| Travel | $6,523 | This is some fancy traveling. |
| Health & Fitness | $924 | |
| Shopping | $1,311 | We won’t need to buy work clothes, so will save a lot there. |
| Entertainment | $1,263 | |
| Personal Care | $748 | |
| Miscellaneous | $100 | We rounded it up to $100 per year. |
| Total | $38,255 |
Flexibility in Our Budget
It’s important to note that this is a “fancy” budget with room for adjustment. By reducing travel expenses, eating out less, and cutting back on entertainment, we could potentially lower our annual expenses to around $26,000 if needed. This flexibility prepares us for potential economic downturns or unexpected expenses.
Next Steps in Our FIRE Journey
In future posts, we’ll address:
- Expected portfolio withdrawal rates
- Strategies for dealing with lower market returns
- Our criteria and strategy for withdrawals
The Importance of Tracking Expenses
One key takeaway from our experience is the value of consistently tracking expenses. This practice has allowed us to:
- Identify spending trends
- Make more accurate projections
- Adjust our FIRE plans as needed
By tracking your expenses, you can gain valuable insights into your financial habits and make more informed decisions about your retirement plans.
Final Thoughts
Embracing Flexibility in FIRE Planning
Our FIRE journey has taught us the importance of being flexible and adaptable. While having a target number is crucial, it’s equally important to reassess your goals and adjust your plans as circumstances change.
We encourage you to start estimating your own retirement expenses, even if retirement seems far off. Remember, the earlier you start planning, the more options you’ll have in the future.
Hi,
Really interesting! What did you use to budget for health care? Your annual cost appears much lower than what we are projecting for 2019, and people were already telling us we were low. Wondering how you’ll do it. 😉
We didn’t really “budget” for health care here. I know, so irresponsible. 😉 Given how unpredictable health care costs are right now, we’ll explore our options once we get much closer to retirement. I’d say that in about a year we’ll examine our situation. I think it will cost more than what we have leftover from our budget (see part two of this series http://crucialwealth.com/blog/projections-withdrawal-strategy/, but we can trim down some expenses to make room for it and/or bring in some income to cover it.
I don’t think it will be hard at all for the two of us to bring in $500-$1,000 a month of additional income in early retirement by doing something we enjoy so I’m not too concerned. After all, staying active in some fashion will be key to a healthy retirement. Thanks for stopping by.
Got it – that makes sense, especially since the cost truly does change every year right now (up, up, and away!). I know it’s a great source of concern for all of us nearing FIRE. Thanks!
Yes. Hopefully there’ll be a tipping point soon and something will be done about it. There’s only so much we’d be willing to pay for a health care that is not so great.