The Race to FIRE - Financial Independence, Retire Early

Details of Our Retirement Budget

Details of Our Retirement Budget

The most critical step in planning FIRE (Financial Independence, Retire Early) is estimating your financial needs when you no longer have a day job. Paying careful attention to this step will provide the goal for how much money you need and how long it will take to get there.

Many people aim for a certain net worth before they FIRE. IMO however, a steady income stream(s) is more important than net worth. For example, if your net worth contains tax-deferred retirement accounts, those funds cannot be accessed without penalty before age 59 ½. The younger you are when you retire, the longer you’ll have to wait for the goods. BTW, that just gives the magic of compounding longer to work in your favor. If the equity in your home is included in your net worth, that’s awesome, but it doesn’t provide a steady income stream.

Estimating the amount needed in early retirement is difficult, especially if you have private health insurance through an employer and you will lose this coverage once you retire. Since Medicare doesn’t kick in until age 65, you’ll be responsible for the cost of healthcare in the interim. In this tumultuous political environment, who can say with any certainty what will happen with the Affordable Care Act?

Estimating the amount needed for early retirement is also difficult if you still have children at home. We have found that as our kids age, the cost to raise them has increased dramatically every year. Higher costs can be expected in almost every category: food, clothing, sports, electronics, automobile insurance, education, etc. Although parents of younger children may experience a decrease in costs when the kids are out of diapers or no longer need daycare, these cost savings are quickly replaced with other needs. For example, the sheer amount of food that teenagers, especially boys, consume is insane. Our household typically goes through at least 5 loaves of bread and 3 gallons of milk per week. I feel like I am constantly at the grocery store or farmer’s market because food literally seems to disappear once it hits the kitchen counter. The good news is that these expenses will likely decrease once the kids fly the coop.

We calculated our expected budget for FIRE based on our current household expenses. We then projected the effect that children gradually leaving the nest will have on these costs. As for healthcare, we estimated a monthly expense of $1500 per month or $18K per year. We have no idea if this amount is even close to the actual amount that will be required. This amount could change dramatically based on changes to ACA and could fluctuate as the kids have access to insurance through college or obtain their own insurance through an employer.

We estimated that to maintain our current standard of living, we would need approximately $100K per year. Here’s a breakdown of how we came up with that amount.

There are a few items to note on our budget. We have allocated $20K for income taxes, based on the current tax rate. Since our income will be mostly derived from passive investments, we expect our taxes will be lower, but we wanted to be conservative in the budget. We allocated another $20K for college expenses. Since our oldest son is already in college, we know that $20K is sufficient to cover tuition, room and board at a public university. Although we have 3 kids, we allocated college expenses for only one child. We plan to FIRE in 2020, and by then, the oldest kid will be out of college (let’s hope!) and the remaining 2 years of college for the middle child will be covered by a 529 plan (let’s hope!) The $20K in the budget will cover the cost of college for the baby. BTW, she hates it when I call her that! She is expected to enter college in 2020 and graduate 4 years later, at which time that expense will disappear (again, let’s hope!)

We also have a line item for term life insurance. This is the yearly premium for a $500K life insurance policy for my husband. It supplements the life insurance policy provided by his employer. We took out this extra policy to make sure he was always covered by life insurance, regardless of his employment status. The policy expires in 2025, exactly 1 year after the baby finishes college. The main purpose of the policy was to ensure that if anything happened to my husband, there would be enough money to pay for the kids’ postsecondary education.

There’s also an expensive line item for tax preparation. We are so fortunate that the United States is the only country in the world which requires its citizens to file income taxes, no matter where they permanently reside. Deep, deep sigh. April is not a fun month around here. This expense covers the professional preparation and filing for both countries. Deep, deep sigh.

We hope to return to the US when we FIRE. But if the Canadian dollar, a.k.a. the loonie – no joke, that’s what it’s called – is not on par or better with the US dollar, we may elect to stay in Canada for several months a year. In that case, our projected income taxes would be much higher, but our healthcare costs would be much lower. We consider this situation a wash, so the budget should hold either way.

Our total annual expenses are estimated to be $97,300, rounded up to $100K per year. We purposely have been conservative in our estimation (let’s hope!)

What do you think? Are there any items we have left out of the budget? If you have already retired, how well have your actual expenses compared to your estimations?

And one final thought. Perhaps I should have named this post, Let’s Hope!

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4 thoughts on “Details of Our Retirement Budget”

  • I have just looked at your budget and it has made me thankful I live in UK.
    No health insurance, Thank you NHS
    Our cable costs are about half your costs, as are utilities, car insurance, house insurance
    Our taxes are dependent on income, but if income is derived from investments that are sheltered in tax-free accounts, then our tax is down. If we were earning $100k, our taxes would be higher.
    You might like to consider travel/holiday costs, and money for work on your property. We have an allocation in our budget for 5 year expenses (house repair and replacement car costs)

    • Hi Erith,
      Thanks for your insight. I haven’t added in a line item for house repair and/or replacement car costs, something I definitely need to consider.
      I know that our taxes will be much lower than estimated, because passive income is taxed far more favorably than earned income. I calculated our tax percentage as if it was earned income, just to be conservative. I’m hoping that will give us a little padding in the budget for emergencies.
      Regarding travel…we know that at some point, the college costs will come out of the budget, which will give us an extra $20K per year. Since my husband is planning to work for another 2 1/2 years, we’re also hoping to build up a large cash reserve, just because there are so many unknowns when you first retire.

  • It’s awesome that you are paying for your kids’ college educations. I like that rather than budget for all the small miscellaneous items down the road, you’re assuming that $20k./year college cost drop off will cover it. I too was wondering about traveling and vacations, especially once your kids start having kids!

    • Hi Kristine,

      Thanks for the comment. You’re right that we don’t have a separate line item for traveling and vacations. We know that when all the kids finish school, there will be $20K extra in the budget which we plan to use for travel – approximately 4 years after we FIRE. Until then, we are working on building up cash flow to cover that expense for the first 4 years. And the $20K for college is right on the mark for our first kid. We have another one going in the fall and believe the costs are pretty close to $20K. That number includes tuition (about $8K) and room and board ($11K) plus $1K for miscellaneous expenses.

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