There are two different questions here:
1. The logistics of paying of these irregular expenses. Lots of great ideas and practices, but I don't think that's the main question the OP has tried to answer
2. How do you factor in these expenses in planning and ensure they do not risk derailing your retirement too much
I struggled myself with this question and it is a bit daunting since being irregular and large by nature, they are hard to predict and most tools around do not make it easy to model. This is important, since if you are too conservative with how large they are it can increase the risk of having to work too much for a comfortable retirement.
For me, I found ProjectionLab and a little bit of simplification in assumption the best way to deal with this. Here is what I did.
There are a few "very large" irregular but required expenses that you know will come. For me, these were roof replacement and buying new cars. These can be predicted with relatively simple assumptions, looking at how much life I think my roof has left, how often I replaced cars in the past, and some assumptions on how often I will replace cars in the future. This includes the assumption that after age 80 we will not need two cars and that this would be the last car we buy. ProjectionLab allows you to model these expenses assuming a present value of the expense and setting the inflation rate you expect for that asset.
For smaller types of "irregular" expenses (water heater will break) I simply looked at the average housing expenses over the last 5 years and I used an average yearly cost, adjusted for inflation.
Then there were discretionary "larger" expenses, such as travel. Here I assumed a large value for the "go go" years, relatively comparable with the expense of a roof or car and then gradually decreasing as I would progress through life. This would allow me the flexibility to tradeoff travel vs. car replacement in some years if needed and market is down.
All other "required" expenses I modeled at the current value (average over the last 5 years), adjusted for inflation, with an extra bump for medical expenses.
With all these entered in ProjectionLab I felt a lot more confident of the soundness of my plan. I don't expect any of these to be 100% accurate, but they gave me comfort. Everyone's situation and comfort level are different, but what I liked about ProjectLab is that it allowed me to model these with simplicity and clarity. No other tool I tried made it easy to do that.
YMMV.
1. The logistics of paying of these irregular expenses. Lots of great ideas and practices, but I don't think that's the main question the OP has tried to answer
2. How do you factor in these expenses in planning and ensure they do not risk derailing your retirement too much
I struggled myself with this question and it is a bit daunting since being irregular and large by nature, they are hard to predict and most tools around do not make it easy to model. This is important, since if you are too conservative with how large they are it can increase the risk of having to work too much for a comfortable retirement.
For me, I found ProjectionLab and a little bit of simplification in assumption the best way to deal with this. Here is what I did.
There are a few "very large" irregular but required expenses that you know will come. For me, these were roof replacement and buying new cars. These can be predicted with relatively simple assumptions, looking at how much life I think my roof has left, how often I replaced cars in the past, and some assumptions on how often I will replace cars in the future. This includes the assumption that after age 80 we will not need two cars and that this would be the last car we buy. ProjectionLab allows you to model these expenses assuming a present value of the expense and setting the inflation rate you expect for that asset.
For smaller types of "irregular" expenses (water heater will break) I simply looked at the average housing expenses over the last 5 years and I used an average yearly cost, adjusted for inflation.
Then there were discretionary "larger" expenses, such as travel. Here I assumed a large value for the "go go" years, relatively comparable with the expense of a roof or car and then gradually decreasing as I would progress through life. This would allow me the flexibility to tradeoff travel vs. car replacement in some years if needed and market is down.
All other "required" expenses I modeled at the current value (average over the last 5 years), adjusted for inflation, with an extra bump for medical expenses.
With all these entered in ProjectionLab I felt a lot more confident of the soundness of my plan. I don't expect any of these to be 100% accurate, but they gave me comfort. Everyone's situation and comfort level are different, but what I liked about ProjectLab is that it allowed me to model these with simplicity and clarity. No other tool I tried made it easy to do that.
YMMV.
Statistics: Posted by idc — Mon Jul 15, 2024 11:41 am — Replies 28 — Views 1705